Valuation Of Listed Security Firm With Improved FCFF Discount Model

With the rapid development of both regulations and market efficiencies in Chinese capital markets,domestic and foreign markets were bonded together more and more closely,and the activities among markets were more and more diversified.An effective valuation methodology can lead to better evaluation of a company’s intrinsic value,thus guide investors to better decisions and management to better strategies.Security Brokerage Firms,as major market participants,play a vital role in economic development.Firstly,security brokerage industry is indivisible with the development of real economy;secondly,our security industry’s mode of development are becoming more and more versatile and professional;thirdly,the growth of security industry has direct impact on the market capitalization of those listed security brokerage firms and is an indication of the market’s trends.Thus,a research on the valuation of security firms has very practical and important meanings.This Essay started from understanding various corporate valuation methodology proposed by researchers across the world.Via thorough analyzing both advantages and disadvantages of those methodologies,as well as security firms’ business profile,Free Cash Flow to the Firm(FCFF)Discount Method was chosen as the base model of this essay.However,current researches touch little on valuations tailored to security firms.Considering the unique nature and business model of a Security Firm,I made several key moderations to the FCFF Discount Model(Improved Model).Starting from discussions on the components of a Security Brokerage Firm’s FCFF,I laid out clear formula for FCFF calculation,and the financial accounts involved,to increase the usability of this model.I then proposed using moving average method to forecast future FCFF.Later,I put forth the replacement of the static Weighted Average Cost of Capital(WACC)with dynamic WACCs,enabled the model to better value a Security Brokerage Firm.The last part of this essay managed to validate the Improved Model by valuing the CITIC Securities,a famous Security Brokerage Firm listed in Shanghai Stock Exchange(SSE),then comparing the results between vanilla model and improved model,between PE method and improved value.The validation results showed the validity of the Improved Model,but the limitations were also discussed in the essay.