Manfred Krafft Markus Rudolf Elisabeth Rudolf-Sipötz
Abstract
In this paper, we evaluate growth stocks by modeling a company´ s customer equity. We start with the observation that the number of customers in successful start-ups increases very quickly (exponentially) in the first few years. Then the customer base converges towards an industry average. On the other hand, the number of clients in poorly performing start-ups rap-idly declines until bankruptcy occurs. These observations imply a "bathtub" shape to the probability distribution for the number of customers in the initial years, i.e., low probabilities for the number of clients close to average but high probabilities for extreme realizations. The valuation procedure we present here is based on a binomial scenario tree technique for the number of clients and the cash flow generated by each client. We show that the model can explain higher company values than can traditional net present value calculations. Further-more, and in contrast to traditional valuation models, increasing the volatility in the change of the number of customers increases the value of each customer.
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Volume (Year): 57 (2005) Issue (Month): 2 (April) Pages: 103-127 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: G3 - Financial Economics - - Corporate Finance and Governance M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising