Purposes of valuation: 1.

For the buyer to know which price to pay; for the seller to know which price to charge 2. Valuation of listed companies: used to compare the value obtained with the shares price on the stock market and to decide whether to sell, buy or hold the shares; Valuation of several companies is used to decide the securities that he portfolio should concentrate on: those that seemed to be undervalued by the market; Valuation is also used to make comparisons between companies. 3. Identification of value drivers 4. Strategic decisions for the future related to the decision of continuing in the business, sell, merge, milk, grow or buy other companies 5. Strategic planning related to what products/business lines/countries/customers to maintain grow or abandon Balance sheet-based methods (shareholders equity) Estimates the value of a company by estimating the value of its assets; Determined the value of a company from a static view point; it doesnt take into account the firms possible future evolution, moneys temporary value It doesnt take into account factors which might affect the value of the company such as, industry situation, human resources or organizational problems, contracts etc. that dont appear in the accounting statements There are several methods: book value, adjusted book value, liquidation value, substantial value; 1. Book value Book value of a company = the value of shareholders equity stated in the balance sheet (capital and reserves) T assets T liabilities It only measures the book value and not the market value; book val is different than market val 2. Adjusted book value - it adjusts the assets to their market value, therefore the company is evaluated at the market value 3. Liquidation value the companys value if it is liquidated (assets sold and debts paid off) Calculated by deducting liquidation expenses (redundancy payments to employees, tax expenses, etc) from the adjusted net worth This method is useful only if the company is bought with the purpose of liquidating it later It represents the companys minimum value (company value (assuming it operates)> liquidation value) 4. Substantial value (assets replacement value) Represents the investment that must be made in order to create a company similar to the one evaluated It doesnt include the assets not used for operations (unused land, holdings in other companies, etc) 3 types: o Gross substantial value: assets value at market price o Net substantial value / corrected net assets gross substantial value less liabilities (adjusted book value) o Reduced gross substantial value the gross substantial value reduced only by the cost-free debt (acc payable) 5. Book value and market value The relationship between book value and market value of equity

Income statement based methods Determine the companys value through the size of its earnings, sales or others.

1. Value of earnings. PER Equity value = PER x Earnings 2. Value of the dividends Equity value = DPS(dividends per share distributed in the last year) / Ke(required return on equity) (assuming the company pays constant dividends every year) Equity value = DPS1 (dividends per share for the next year) / (Ke g) (if the dividend is expected to grow indefinitely at a constant annual rate g) 3. Sales multiples Multiplying sales by a number Price/sales ratio; price/sales = (price/earnings)(PER) x (earnings/sales)(return on sales) 4. Other multiples Value of the company / EBIT Value of the company / EBITDA Value of the company / operating cash flow Value of the equity / book value

Goodwill-based methods Goodwill = the value a company has above its book value or above the adjusted book value - perform a static valuation of the companys assets - quantify the value that the company will generate in the future 1. The classic valuation method - value of a company = value of net assets + value of goodwill; V = A + (n x B)(mostly used for industrial comp( or V = A + (z x F)(mostly used for retail) A=net asset value; n=coefficient between 1.5 and 3; B=net income; z=percentage of sales revenue; F=turnover 2. the simplified method V=A + an (B iA)