ENHANCING EQUITY VALUATION MODELS FOR JOINT-STOCK COMPANIES IN FRONTIER MARKETS: A DYNAMIC DISCOUNTED CASH FLOW AND MULTIPLES INTEGRATION APPROACH
Abstract
This study develops an enhanced equity valuation framework specifically tailored to the structural constraints of joint-stock companies (JSCs) operating in frontier financial markets. Conventional valuation tools - static Discounted Cash Flow (DCF) models and unadjusted relative multiples - systematically produce biased equity values in frontier economies due to severe illiquidity, thin trading volumes, macroeconomic volatility, acute information asymmetry, and a deficit of domestic peer comparables. To bridge this gap, this paper introduces a hybrid model that synthesizes a Dynamic DCF framework with liquidity-calibrated, sector-adjusted market multiples. The dynamic component models time-varying Weighted Average Cost of Capital (〖WACC〗_t) driven by rolling country risk premiums (CRP), sovereign yield spreads, and dynamic asset betas, while cash flows are estimated via multi-scenario Monte Carlo simulations. The relative valuation component incorporates an explicit illiquidity discount factor based on bid-ask spreads and the Amihud illiquidity ratio. Applied to cross-sectional empirical data from frontier equities, the proposed integrated approach reduces valuation variance by up to 28% compared to standalone static DCF models and dampens the pricing distortion typical of traditional multiples. The findings provide asset managers, corporate boards, and regulatory bodies in emerging capital markets with an empirically grounded valuation tool.