Methods to Valuation
Business Valuation has become an intrinsic part of the corporate scenery. The corporate scenery has viewed dynamic changes in the recent years as acquisitions, mergers, share repurchases and corporate restructurings are encountering in record numbers. At the essence of the dynamics of all these actions stands some opinion of valuation. The valuation methods are not only necessary for accounting intentions but they to a very great extent serve as guidelines for the angel investors, corporate acquirers and venture capitalists in order to know the true value of assets of the company.
even though there are numerous individual valuation techniques, these are categorized into four standard business valuation methods applying standard formulas :-
i) Build-Up Method
The Build-Up Method is, to a great degree, distinguished method of determining the after tax net cash flow discount rate, which in turn concedes the capitalization rate. The figures employed in the Build-Up Method are derived from various sources. This method is known as "build-up" method as it is the sum of risks linked with various classes of assets. It is established on the preception that investors would expect a greater return on classes of assets that are involving more risk . The first element of a Build-Up capitalization rate is the risk-free rate, which is the rate of return for long-term government bonds. Investors who purchase large cap equity stocks which are, in an inherent manner more risky than long-term government bonds, needs a bigger return, To a very great extent the next element of the Build Up method is the equity risk premium. In ascertaining a company's value, the long-horizon equity risk premium is employed as the business firm's life is accepted to be infinite. The sum of the risk-free rate and the equity risk premium concedes the long-term average market rate of return on large public company stocks.
Total Cost of Equity (TCOE) = risk-free rate + total beta*equity risk premium TCOE = risk-free rate + beta*equity risk premium + size premium + company-specific risk premium
The only unknown in the two equations is the company specific risk premium.
ii) Discounted cash flow method
This valuation method based on free cash flow is a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future free cash flow of the company meeting all the financial obligation discounted by the business firm's weighted average cost of capital the average cost of all the capital employed in the business, letting in debt and equity, plus a risk factor measured out by beta. Since risks are not always easy to determine precisely, Beta employs historic data to measure the sensitivity of the company's cash flow, for instance , through business cycles.
iii) Price Earnings Multiple Valuation
The price earnings ration also known as P/E is merely the price of a company's share of general stock in the public market divided by its earnings per share. By multiplying, P/E value by the net income, the value for the business could be found out. This valuation method renders a bench mark business evaluation as the non listed companies bidding to employ this method, a comparable quoted company or sector should be employed.
Financial experts believe that business valuations employing any method should not be too low or too high as that could be high-priced, resulting in either lost opportunities or over-payment. The business firms that face important investment, acquisition, or growth decisions, particularly in a rapidly changing competitive environment, effective management requires an in agreement with the of value creation and a command over valuation analysis.
iv) Market Value
This valuation method is applicable for quoted companies only. The market value is influenced by multiplying the quoted share price of the company by the number of issued shares. This valuation speculates the price that the market at a point in time is prepared to pay for the shares. This valuation method in broad manner, takes into account the investors' sensing about the performance of the company and the management's potentialities to deliver a return on their investments.
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