Reference no: EM131858398

First Post

Company executives must do their best to create the most value for all stakeholders within their company. There are both internal and external factors that can help build a company's worth and impact a company's stock price. Analysis and comparison among other companies is a tool used by financial analyst's in order to figure out these internal and external factors. Valuation by comparables is one of these tools that can be used.

Brealey, Myers, & Marcus (2018) defines valuation by comparables: "when financial analysts need to value a business, they often start by identifying a sample of similar firms. They then examine how much investors in these companies are prepared to pay for each dollar of assets or earnings" (p. 204). This is just one tool that is utilized to determine whether a company puts forth the highest value for stakeholders. Comparably Company Analyses or Comps is another tool that is also used to value a company. There are many advantages and disadvantages to using this tool.

Some of these advantages include: easy to calculate, easy to communicate across market participants, determines a benchmark value for multiples used in valuation, and provides a useful way to assess market assumptions of fundamental characteristics baked into valuations (Comparable Company Analysis, n.d.). However, there are some disadvantages to this tool, such as the fact that it is easily influenced by temporary market conditions and can be difficult to find appropriate comparable companies for reasons like too few companies to compare.

Utilizing these tools to build a company's worth is a smart and strategic move. Silva (n.d.) does a great job at providing insight on making strategic decisions as a business owner. He states "Obtaining a business valuation is one of the most important things you can do to gain a competitive edge and increase your company's current and future value." Using the tools to analyze the strengths and weaknesses of a company can provide a different perspective in order to ensure success.

References

Brealey, R. A., Myers, S. C., & Marcus, A. J. (2018). Fundamentals of Corporate finance (9th ed.). New York, NY: McGraw-Hill.
Comparable Company Analysis. (n.d.).

Silva, F. (n.d.). Business Valuation: The Strategic Decision Making Tool.

Second Post

While financial statements can give potential investors a great deal of information about the financials of a company, this information may or may not tell the whole story.

Yes, the financial statements allow investors to measure the performance of the company by evaluating different indicators such as the earnings per share (EPS) or the price to earnings (P/E) ratios but there are some cases where companies that do not have any profits or when there is a rapid increase in revenues which render certain simple valuation methods useless (Zarzecki, 2010).

For this reason, other aspects of the company must be examined as well. Information such as the size and quality of the company, common competitors, marketing strategies, management structure, type of customer base, and future outlook are all factors that play a distinctive role in the perceived valuation of the company by potential investors.

As we have learned, one of the main goals of a corporation's financial managers is to increase market value. Since there is no sure-fire way of increasing market value, implementing some fundamental strategies can prove to be effective in creating the greatest opportunity to increase the value.

While there are many decisions that executives face in terms of increasing a company's value, one of the most complex is when and where to invest their capital. In making these decisions, the opportunity cost of capital or the minimum acceptable rate of return must be considered (Brealey, Myers, & Marcus, 2018, p.30).

Risky investment projects can prove to be rewarding if the rate of return yields a higher rate than the cost of capital, thus increasing value. On the other hand, less risky investments tend to be safer and more stable but at the cost of a smaller rate of return. Although high risk investments can seem attractive, the goal of the company is to remain profitable and smart decisions must be made to balance the risks and ensure the survival of the company, not only in the short-term, but more importantly, the long-term.

References

Brealey, R. A., Myers S. C., & Marcus, A. J. (2018). Fundamentals of Corporate Finance. New York, NY: McGraw-Hill.

Zarzecki, D. (2010). Valuing internet companies. selected issues. Folia OeconomicaStetinensia, 9(1), 105.