Managerial Economy

 

ASSIGNMENT-VALUATION OF COMPANIES

Submitted to- PROFESSOR BISHNU PRASAD KARA

26/12/2020

SUBMITTED BY -KIRAN KUMAR JENA.

Click on the link for notes 👇🏿

Semester 1 notes

NEED TO VALUATION OF COMPANY

A  company or business valuation is a general process of determining the economic value  of a whole business or company unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business.

KEY TAKEAWAYS

Business valuation determines the economic value of a business or business unit.

Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings.

Several methods of valuing a business exist, such as looking at its market cap, earnings multipliers, or book value, among others.

DIFFERENT APPROACH TO EVALUATE

When valuing a business or asset, there are three different methods or approaches one can use. 

• The Cost Approach looks at what it costs to rebuild or replace an asset. The cost approach method is useful in valuing real estate, property, or an investment security. It is not typically used by finance professionals to value a company that is a going concern.

• Next is the Market Approach, which is a form of relative valuation and frequently used in the industry. It includes Comparable Analysis Precedent Transactions.

• Finally, the discounted cash flow (DCF) approach is a form of intrinsic valuation and is the most detailed and thorough approach to valuation modelingl describe the methods used in the Market and DCF approaches below. 

Primary method or approach to evaluate  valuation  of  company. 

 

ASSETS VALUATION METHOD

In  assets based valuation method  we need to find out Net asset of company by following steps. 

If  value is not proper than…   

Comparable Analysis (“Comps”)or earning based valuation method. 

Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method .The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current

Steps to calculate. 

DCF Analysis

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC).

A DCF analysis is performed by building a financial model in Excel and requires an extensive amount of detail and analysis.  It is the most detailed of the three approaches and requires the most estimates and assumptions. However, the effort required for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different

 scenarios, and even perform a sensitivity analysis.