Table XIII shows the results of our transaction, including the analysis of the return on investment. The transaction of case B has an approximately gross profit of NT$92,300 and its return on investment is about 8 percent. The top three percentage gainers among these nine stocks are ELASER, BHI, and TRI, which rose 34 percent to NT$186.5, 10 percent to NT$146.5, 9.6 percent to NT$67.6, respectively. As for the stock performance in the investment, ELASER, VOLTRONIC, and BHI are the top three, accounting for 4 percent, 1.6 percent, 1.1 percent each. The fact that case B has lower return on investment yet generates more profits than case A is due to the initial investment.
Table XIV：the transaction and the results of trading strategy II (case B)
# stock
symbol
Company
value of position
on 2015/05/14 Shares value of position
on 2015/5/29 ROI
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forecasting the stock price. We can use the variable of cash reserves and its historical data like the mean and the volatility of its earnings to project its genuine value.
Nevertheless, the mean and the volatility of its earnings may be influenced by the size23, business cycle, loss from lawsuits, innovative technical breakthroughs, and even employee productivity24. For example, a company that get through radical changes by losing a lawsuit whose earnings volatility may vary extremely and thus the shareholder value computed from it would be abnormal and with no credibility. That’s why in trading strategy II, we only select stocks whose V(ML) to share price ratio or V(MC) to share price ratio intermediate between one and three; in other words, to detect outliers.
In conclusion, there are no significant differences between adapting the method mentioned in case A or case B. Furthermore, there is no assurance that V(ML) and V(MC), which is more accurate in deciding a firm’s value. Of course, case B seems to gain more money in two strategies, but it also bear more risks as well. In practical, case B would be a more appropriate method. Since when a firm is terminated, there are liquid and fixed assets left to be sold before dissolution. In that case, the firm value is not exactly zero when cash reserves decline to zero. The intractable thing lies in the evaluation of liquidation value because there is no precise formula to assess them. The liquidity of assets may vary from one industry to another.
23 Hall, M and Weiss, L. (1967) [11]
24 Kruse, D.L. (1992) [12] considers employee bonus will motivate employees, enhance their productivity and thus increase the company profits.
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5 Conclusion
In our paper, we have studied the method of shareholder value methodology, which is previously used to solve the problem of finding the optimal dividend-payout strategy for insurance company. Our main contribution is not to formulate and solve the problem within the mathematically more advanced framework of diffusion models.
Instead, we focus on the implement of the model. We employ two types of empirical models to evaluate a firm.
In general, there is inconsistency exists between the stock value and shareholder value. The empirical results indicate that most of the electronic listed companies keep too much cash reserves which may be the key reason to the overestimation of their stock prices. Additionally, the fluctuating incomes may cause the same problem as mentioned. This leads us to the following question: What can we apply the
methodologies to selecting stocks, with the aim of achieving a rate of return that beat
the market？In section 4, we show two short term trading strategies both work for making money. That is, we can distinguish the difference between a stock price and a stock's fair market value.However, many factors affect a company's state of operation that it is nearly
impossible to create a formula that will predict success at all times. In our simple model, we view cash reserves as the crucial variable, focusing on the impact of liquidation management. In fact, many other variables are needed to be taken into consideration, such as the financing and investing decisions. The further extension should allow companies to control their cash reverses through issuing new equity, capital reduction or even stock repurchase.
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