Taking the highway out: exiting the stock market to maximize results
Authors: Silva Joao Carlos Marques , Pereira José Azevedo 
Published: December 2021

Theoretical basis

The essence of discounted cash flow valuation is simple; the asset is worth the expected cash flows it will generate, discounted to the reference date for the valuation exercise (normally, the day of the calculation). A survey article was written in Parker (1968), where it was stated that the earliest interest rate tables (use to discount value to the present) dated back to 1340. Works from Boulding (1935) and Keynes (1936) derived the IRR (Internal Rate of Return) for an investment. Samuelson (1937) compared the IRR and NPV (Net Present Value) approaches, arguing that rational investors should maximize NPV and not IRR. The previously mentioned works and the publication of Joel Dean’s reference book (Dean, 1951) on capital budgeting set the basis for the widespread use of the discounted cash flow approach into all business areas, aided by developments in portfolio theory. Nowadays, probably the model with more widespread use is the FCFE/FCFF (Free Cash Flow to Equity and Free Cash Flow to Firm) model. For simplification purposes, we will focus on the FCFE model, which basically is the FCF model’s version for the potential dividends. The focus is to value the business based on its dividends (potential or real), and thus care must be taken in order not to double count cash flows (this matter was treated in this case) and to assess what use is given to that excess cash flow – if it is invested wisely, what returns will come of them, how it is accounted for, etc. (Damodaran, 2006). The bridge to the FCFF model is straightforward; the FCFF includes FCFE and added cash that is owed to debtholders. References: Parker, R.H. (1968). “Discounted Cash Flow in Historical Perspective”, Journal of Accounting Research, v6, pp58-71. Boulding, K.E. (1935). “The Theory of a Single Investment”, Quarterly Journal of Economics, v49, pp479-494. Keynes, J. M. (1936). “The General Theory of Employment”, Macmillan, London. Samuelson, P. (1937). “Some Aspects of the Pure Theory of Capital”, Quarterly Journal of Economics, v51, pp. 469–496. Dean, Joel. (1951). “Capital Budgeting”, Columbia University Press, New York. Damodaran, A. (2006). “Damodaran on Valuation”, Second Edition, John Wiley and Sons, New York.

Research methodology

All information is taken from public sources and with consented company interviews.

Case overview/synopsis

Opportunities for value creation may be found in awkward and difficult circumstances. Good strategic thinking and ability to act swiftly are usually crucial to be able to take advantage of such tough environments. Amidst a country-wide economic crisis and general disbelief, José de Mello Group (JMG) saw one of its main assets’ (Brisa Highways) market value tumble down to unforeseen figures and was forced to act on it. Brisa’s main partners were eager in overpowering JMG’s control of the company, and outside pressure from Deutsche Bank was rising, due to the use of Brisa’s shares as collateral. JMG would have to revise its strategy and see if Brisa was worth fighting for; the market implicit assessment about the company’s prospects was very penalizing, but JMG’s predictions on Brisa’s future performance indicated that this could be an investment opportunity. Would it be wise to bet against the market?

Complexity academic level

This study is excellent for finance and strategy courses, at both undergraduate and graduate levels. Company valuation and corporate strategy are required.