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Management 5 Pages

Valuation Techniques

Question

Discuss the various valuation techniques available and their relative advantages and disadvantages. To what extent do you agree with this view?

Solution

Title: Valuation Techniques
Length: 5 pages (1474 Words)
Style: Havard

Preview

Methods of Valuation

Valuation is the process of determining the worth of a company in terms of the assets, liabilities. This is done through the calculation of the total number of assets in comparison to the total number of liabilities. Assets are the properties that are in the possession of the company (Adams, 2012, p.12). These may include parcels of land, shares in another company, vehicles, or machinery that is being used by the company. On the other hand, liabilities are the responsibilities of the company. This may include loans lent to the company by financial institutions, supplies that have not been paid for, services that have been given on credit and properties acquired on hire purchase terms (Andrew Ross, 2013, p.43). Analysts, who follow a given procedure to analyze various sectors of the given company, come up with a valuation report after carrying out the process of valuation. The main aspects that are considered during this process are the management structure; the composition of the capital structure, current market value of the assets in the company's ownership, and the targeted earnings of the company from is activities (Nicolus, 2010, p.72). Valuation can be done using various techniques, which include discounted cash flow analysis, comparable transactions method, multiples method and market valuation. 

Discounted Cash Flow Analysis

The discounted cash flow analysis method is the most frequently used method of valuation. It is considered as the most thorough method of valuation. There are two approaches in using this method (Andrew Ross, 2013, p.90). The first the approach on this method is the adjusted present value. This method calculates the net property value of a company. This is the total amount of the value of the properties acquired by an organization in the recent past. The calculations of the net property value are then adjusted for the benefit of financing. The formulae of APV is unlevered net property value of the free cash flows and terminal value added to the net property value of interest tax shield and the terminal value (Swanson, 2010, p.54). The discount rate is used in the return on assets on equity if it is unlevered. This valuation includes the aspects of cash flow discounts at the uncalculated costs of the equities of the company. The main advantage of using this method of valuation is the issuance of a tax shield that accrues from the interest payments that were deducted in the past. A tax shield protects the company from extreme tax deductions from the company. Another benefit of the valuation method is subsidized borrowing at the local banks (Nicolus, 2010, p.29). The second approach to the discounted flow analysis method is the weighted average cost of capital. This is a calculation that shows the total capital that has been put into a business. The calculation includes all sources of capital ranging from the money, vehicles, land, debts, and other forms of investments into the business. In calculating the weighted average cost of capital, each of the capital components is multiplied by its current market value and the sum is taken (Shaw, 2012, p.54).

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