Discounted Dividend Model- a Posible Valuation Base of Common Stocks

Author:Univ. prof., PhD Elena DOBRE, Univ. lecturer, PhD Irena MUNTEANU

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Keywords:common stocks, stock listed, fair value, discounted dividend, valuation techniques

Abstract:
In the last few years Romanian economy has been continuously growing, boosting at the same time the stock exchange transactions volumes. More and more companies are listed; new investors emerge determining an increase in the public’s interest in stocks and their prices. All these companies are regarded as of public interest, in the sense acknowledged by the European Directive concerning statutory audit, and national accounting rules request an application of international financial reporting standards and also audit.\r\nInternational financial reporting standards impose the valuation of financial instruments at fair value. This value can have multiple evaluation bases such as market value or valuation techniques, if there is a true liquid market, or only specific valuation techniques if there is no liquid market. The valuation of a public interest company’s share that has been registering loss cannot be made based on the stock exchange price, because it lacks liquid market or because the company might not even be listed at all.\r\nIn such cases, the valuation of shares at fair value can be performed by using valuation techniques specific to their nature. In this context, we acknowledge the fact that valuation technique for determining the fair value of shares is of great importance to financial auditors performing statutory audit.\r\nThe model presented can be adopted by certified public accountants in Romania who work for companies that use IFRS with the purpose of applying the fair value requests. Determining the fair value is valuable for the stakeholders in the financial environment but most importantly it is in the interest of investors.

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