BUS 5111 - Financial Management

Written Assignment Unit 5

24 February - 2 March

Dr. Kirk Fischer

Professor
Instructions for submission

Submit a written paper which is 3-4 pages in length, exclusive of the reference page. the Abstract is not required or needed. Papers
should be double spaced in Times New Roman font which is no greater than 12 points in size. The paper should cite at least one
source independent of the textbook.

In this paper, please discuss the major methods of company valuation that we have studied. In doing so, explain each method and
compare their advantages and disadvantages with the other methods you choose to discuss. Support your discussion with
references.

Papers will be assessed on the following criteria:

Explain the market capitalization.

Explain the book value.
Explain (expected) future earnings.
Provide a narrative on other methods (minimum of two).
Compare market capitalization, book value, and future earnings methods (and your other chosen methods) with each other to
include their advantages and disadvantages.
 Business valuation methods

The USPAP, or Uniform Standards of Professional Appraisal Practice, is a set of standards that are used to

perform appraisals on investigating a business's financial value, determining its tax and other legal requirements and

limits, variables that affect its sale and/or acquisition, and what it may do in terms of charity donations is all part of

determining its value (Elder, 2019).

There are numerous methods to value a company in part or as a whole. The selection of each method is

depending upon the valuation criteria fixed by the management.

Some of the methods known are as follows:

Discounted cash flow (DCF) method- The DCF technique is heavily influenced by the concept of time value of money.

Money today is more valuable than it will be in the future, and vice versa. The discounted cash flow model (DCF) is

used to evaluate the investment potential of a company by discounting future free cash flow forecasts (FCFs). When the

DCF value exceeds the investment's present cost, it indicates that the investment represents a good investment

opportunity.

Pros:

The DCF method is the most accurate way to assess the intrinsic value of a stock. When the analyst is confident

in his or her assumptions, it is considered to be the best way of valuation. In contrast to other valuation approaches, free

cash flow is believed to be a reliable statistic that avoids the need of subjective accounting principles in DCF values.

Market conditions and other non-economic factors have little impact on DCF's performance. It is advantageous to

employ DCF when there is a high degree of confidence in future cashflows, which is often the case.

Cons:

The assumptions and estimates made by the analyst are critically significant when performing a DCF valuation.

Adjustments of any magnitude can have a major impact on DCF valuation, which means that the fair value may not be

the actual value in some situations. DCF takes significantly longer to complete than other methods of valuation. If the

organization is not totally transparent, it can be difficult to predict future success using DCF. The fair value of a firm
fluctuates in response to changes in the expectations of its shareholders, which is why DCF valuation is a dynamically

changing goal.

Comparable approach- Using this assumption, the value of an equity should be equivalent to the value of other equities

when using the Comparable technique, according to the Comparable method. A shareholder can simply compare his or

her company to its competitors, or at the very least to those competitors who operate in a comparable industry, to see

how well it is doing. In some cases, disparities in the valuation of similar enterprises may present a window of

opportunity. If the equity being valued is undervalued, it may be viable to purchase it and hold onto it until the value of

the equity rises to a reasonable level. When this is the case, one can consider shorting the stock or arranging one's

portfolio to benefit from a decline in the stock's value.

Pros:

Making judgments is at the heart of valuation, and multiples give a valuable framework for doing so. The use

of multiples can be a dependable tool for disclosing information about the relative worth of different objects when they

are done appropriately. As a result of their simplicity and ease of calculation, multiples are a convenient and user-

friendly method of calculating value. Through the use of multiples, it is feasible that users would avoid using alternative,

more 'precise' approaches such as discounted cash flow valuation or EVA, which might offer the user a false sense of

security. Multiples are the primary source of information for other investors. The most frequently used statistics and

multiples will have the most impact on the markets when taken as a collective.

Cons:

It is known as a multiple when a vast amount of information is condensed down to a small number or series of

numbers, rather than a single number. As a result of the fact that many value drivers, such as growth, can be bundled

into a single estimate, it is impossible to separate out the impact of each driver separately. As a result, there is a danger

of encouraging an inaccurate interpretation through simplification. The ever-changing and dynamic character of

business and competitiveness is captured more effectively by a multiple than by a single point in time. When comparing

the relative importance of two objects, multiplies are utilized. Multiple comparison is considered an art form because

there are so many different reasons why multiples can differ, and not all of these reasons equate to true differences in
merit between the multiples. Diverging multiples can be created by a variety of accounting techniques for firms that are

otherwise identical in nature. A multiples analysis, in contrast to discounted cash flow evaluations, only shows trends

in relative values rather than absolute values. Consequently, the succeeding multiples will be mispriced as well, if the

stock market experiences a "bubble" in its valuation of its peers as a whole. Data from the past, as well as estimates for

the near future, are used to determine the multiples. Therefore, cyclical enterprises might be difficult to effectively assess

using various valuation methods, which are unable to account for variances in predicted future performance because of

the subjective normalization adjustments necessary.

Cost approach valuation - When using the cost approach, it is assumed that the purchase price of a property is the

same as the cost of constructing a comparable structure in the same location. Depreciation is taken into consideration

while determining the market value of a property using the cost approach assessment method. When a property is brand

new, it delivers the most precise market value estimate available.

Pros:

It is most typically used for new construction to estimate costs. When a newly constructed building is planned

with standard building features, workmanship, and materials, it is usually possible to estimate the cost and market value

of the structure. It is possible that the cost approach will be wrong for structures with a significant level of depreciation.

The cost approach is the most effective method of determining the value of sites with minimal marketability, such as

public buildings, churches, and highly specialized industrial facilities. When assessing market value using the cost

technique, the appraiser has only a few options available to him or her. The cost technique can be used to estimate the

cost of repairs, modernization, and remodeling in a building. Both the capitalization of net income and the market

approach are used to enhance the cost approach to valuing a business.

Cons:

In some cases, depreciation can be difficult to calculate, particularly in older structures. Despite the fact that

building prices appear to be easy, they are anything but. There are a variety of approaches that can be used to complete

the task, each with its own price tag. The cost of constructing a home is constantly changing.
Other Methods of Valuation

When determining the average profit of a corporation, the normalized profit method takes into consideration

the financial data from the previous three fiscal years. This method of estimating the average earning capability of a

company is advantageous to investors since it allows them to predict the company's typical earning capability.

Business and asset values are calculated through the comparison of the selling prices of similar enterprises and

properties. To put it another way, this approach of valuing a business takes into consideration the company's

ownership stake.

In order to estimate the company's worth, the market capitalization approach is employed in conjunction with

the current share price. The market capitalizations of the largest companies are doing exceptionally well.

The book value technique determines the worth of a company based on the value of its net assets. In order to

arrive at this figure, intangible assets are removed from the overall amount of assets.

The future earnings approach, which is one of the most often used by all businesses, helps to understand the

current value of a firm in relation to its expected future earnings. It is one of the most common methods used by all

businesses. You can use this method to compute net present value, weighted average cost of capital, and other

important financial variables.

Investing in a company necessitates the application of all of the valuation approaches listed above. The fact is

that there is no one way that is superior to the others. Understanding the profitability of a company can be

accomplished through the calculation of normalized profit, the determination of the fair market value of the company

using the market valuation approach, and the determination of market capitalization.Finally, the book value

methodology reveals the company's net assets, whilst the future earnings method determines the current values of the

company's future earnings, respectively. Using any of these ways, an investor can make a more informed investment

decision.
 References

Corporate Finance Institute (CFI), Valuation Methods,

https://corporatefinanceinstitute.com/resources/knowledge/valuation/valuation-methods/

Hill, R.A. (2008). Strategic Financial Management. Bookboon.com Macabacus, Valuation Methods,

http://macabacus.com/valuation/methods

Street of Walls, Valuation Techniques Overview, http://www.streetofwalls.com/finance-training- courses/investment-

banking-technical-training/valuation-techniques-overview/

Wikinvest, Valuation Methods, http://www.wikinvest.com/wiki/Valuation_Methods

Fernández, P. (2007). Company valuation methods. The most common errors in valuations. IESE Business School,

449, 1-27.

Steiger, F. (2010). The validity of company valuation using Discounted Cash Flow methods. arXiv preprint

arXiv:1003.4881.

Elder, J. (2019, January 30). The importance of business valuation. The M&A Source. Retrieved March 2, 2022, from

https://masource.org/the-importance-of-business-valuation/

Ward, S. (2020). 3 business valuation methods. Retrieved March 2, 2022, from https://www.thebalance.com/business-

valuation-methods-2948478