Purpose -The paper aims to investigate the views of Estonian private equity and venture capitalists about the valuation of high-growth companies and compare these with theoretical recommendations found in corporate finance and venture capital literature. Design/methodology/approach -The analysis was carried out by using the case study methodology. Structured interviews were conducted in order to present the material for analysis. The dominant model of the case study analysis is exploratory, using an explanation-building and pattern-matching technique. Findings -Main findings of the empirical study show that Estonian private equity and venture capitalists make the valuation somewhat differently compared to Western European and American ones. Some findings do not confirm the suggestions made by scientists. Research limitations/implications -Some of the required data were considered to be a business secret. The research could be extended to a broader sample. Practical implications -The findings can be used by the managers of private equity and venture capital funds for choosing appropriate cost of capital and valuation model for venture capital projects. Originality/value -The paper is the first empirical paper, investigating how Estonian private equity and venture capitalists make the valuation of target companies.

Corporate value creation and management are one of the key issues for any business enterprise. A gap exists in research into the implications of the distributed profit taxation (DPT) system in Estonia for corporate value creation. Under the Estonian system of corporate taxation, companies need not pay income tax on undistributed earnings, allowing them to postpone income tax liability indeterminately. This theoretical paper compares the relationship between a company’s equity value and taxation of profits under traditional (or classical) (TPT) and DPT systems. A TPT system is a system where the amount of corporate income tax is determined by the profit the company earned during the taxation period. We show that fundamental equity value under a DPT system should be higher vis-à-vis equity value under a TPT system (ceteris paribus). To illustrate this, we use a dividend discount model and values from a hypothetical company. The equity value under DPT is also higher when financial leverage is considered. The results suggest that conventional valuation models and their inputs should be adjusted when valuing Estonian companies. Ignoring these adjustments runs the risk of undervaluing the equity of Estonian companies, as well as the equity of companies operating under similar tax regimes.

Abstract-The topic of corporate cash holdings has gained a lot of attention in academia recently. The current paper investigates the valuation of cash holdings under distributed profit-based corporate taxation. We show that the cash-to-assets ratio has increased considerably since the introduction of distributed profit-based taxation in Estonia. Almost 1/3 of all the companies in Estonia had cash-to-assets ratios above 50% in 2011. We argue that in order to value such cash holdings, a discount at a size of tax burden associated with profit distribution should be used both in case of cash as well as cash equivalents.

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