Your Discussion should be a minimum of 250 words in length and not more than 450 words.

Please include a word count. Following the APA standard, use references and in-text citations for
the textbook and any other sources.

For this week's Discussion:

• Briefly explain business valuation and its purpose (also referred to as company
valuation). Select a valuation method from the introduction in the Learning Guide and
describe why you might use that method to value a business. Ensure you include your
own research on the method from 1-2 outside references to support your post.

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Business Valuation Approaches: The Discounted Cash Flow Method

Department of Business, University of the People.
BUS 5111: Financial Management

Introduction

Brown & Reilly (2015) asserted that "the value of an asset is the present value of its expected

returns"(p.224). This paper explains what company valuation is and why it is performed. In

addition, it describes the discount cash flow method of valuation and why it is one of the best

business valuation methods.

The What, How, and Why of Business Valuation.

Valuation is the process of determining the value of a business. No entrepreneur will acquire a

company without knowing its value. Likewise, a business owner needs to know their firm's

worth before attempting to liquidate it. So, investors and other valuation users engage in business

valuation for different reasons. Moreover, valuation analysts use a panoply of approaches

depending on specific goals, ultimately leading to different results. Essentially, owners, bankers,
and creditors want to know how a company's history, brand, and products are converted into

profit. According to Green (2022), accurately determining a business's economic "value is both

an art and a science." In other words, the process and the results of a business valuation are

incumbent on the valuation analyst and their goals. For instance, a business owner looking for

financing will calculate their firm's economic value to attract investors. In contrast, an

entrepreneur dealing with bankruptcy or divorce proceedings will do so to settle for legal

damages (Ward, 2021).

DCF, the most precise valuation method

The week's Learning Guide presents three generalized approaches comprising popular methods

employed in business valuation. Approaches include (Ward, 2021; CFI, n.d.):

• The Asset-Based, also known as the Cost Approach

• The Market Approach - to compute the relative value of a business compared to other

companies.

• The Discount Cash Flows Approach - to calculate the company's intrinsic value.

As a valuation analyst, the discounted cash flow matches my selection of the best valuation

method. The DCF method consists of finding the value of the business in relation to the present

value of future cash flow projections. The process is as follows:

1. Forecast the business's future financial performance for about five years.

2. Outline the main drivers of the free cash flows assuming a growth rate and a terminal

value.

3. Ultimately, discount all the assumptions about the company's future back to today's value

to determine the value of the business.

This clearly demonstrates that this method incorporates the Time Value of Money in its process

while examining the company in isolation. Arguably, the DCF approach is the most precise

technique of business valuation because it epitomizes the definition of value, which is "the

present value of expected cash flows" (Brown & Reilly, 2015, p. 228).

Words Count# 429

References

Brown, K. C., & Reilly, F. K. (2015). Analysis of investments and management of portfolio.
South-Western/Cengage Learning.

CFI. (n.d.). Corporate Valuation Methods. Corporate Finance Institute. Retrieved 16, 2022, from
https://learn.corporatefinanceinstitute.com/courses/take/busine ss-valuation-modeling-part-
i/8853

Green, J. M. (2022, March 17). Business valuation for investors: Definition and methods. The
Balance. Retrieved July 15, 2022, from https://www.thebalance.com/business-valuation-
methods-2948478

Ward, S. (2021, June 21). 3 business valuation methods: How to valuate a company.
TheBalance. https://www.thebalance.com/business-valuation-methods-2948478