Corporate Valuation
Student’s Name
Institution
Corporate Valuation
Introduction
Corporate valuation is the act of finding out the worth of a company or a firm. To efficiently evaluate new projects, one must take into serious cognizance acquisition and mergers, or arrive at very strategic decisions. Furthermore, the analyst has to have good understanding of the various factors which drive the corporate value. Since almost all public companies are often valued based on the broader stock market, it is very crucial to keenly examine both the external and internal aspects that influences prices in the global economy context. Corporate valuation is therefore a puzzling course which combines an unbelievable fusion of applying both fundamental and technical analysis in order to come up with a clear view of the companies that would be best to invest in.
In corporate valuation, one must ask himself or herself very fundamental questions such as: What is the worth of my company? What ratios do professional analysts use in determining which stock is overvalued or undervalued? How effective is the discounted present value method? How does one value a firm in terms of a going concern, or rather, how does this actually change in the framework of a potential acquisition, or whenever a company undergoes financial stress?
Coming up with the value of a company is usually a daunting task. However, valuing a company is an extremely imperative aspect of ensuring effective management. This is because it is quite easy to rescind value with ill-judged investment, acquisition or financing methods. Also, the approach used in valuing a business solely depends on the purpose. Hence, seeing how the methods operate in different context is the most fascinating part of implementing the methods. The methods include valuing an acquisition target, valuing a private company, and valuing a company in distress. Valuations are very crucial for investment analysis, acquisition and meager transactions, capital budgeting, financial reporting, litigation, and taxable events to come up with required tax liability.
There are three common pillars in valuing any business entity: discounted cash flow analysis, comparable company analysis, and precedent analysis of transactions. Financial statements that are prepared in agreement with GAAP (Generally Accepted Accounting Principles) display several assets that are not based on their present market value but rather their historic costs. For example, the balance sheet of a company will always show the value of a piece of land owned by the company at the amount of money the company paid while purchasing it, and not its current price in the market.
According to requirements of GAAP, every company must clearly show their fair value, which should approximate the value in the market, of some kinds of properties such as financial instruments which are held for sale and not at their original cost. Market-to-market is the term used to refer to a situation whereby a company is required to show some of its properties at their fair value. However, reporting the value of assets at fair prices based on financial statement often provide business managers with an ample chance to inflate the values of the assets in order to boost their stock prices and profits.
Most business managers are usually persuaded to adjust earning upwards in order for them to earn bonuses. Notwithstanding the risk of biasness displayed by the managers, equity creditors and investors prefer knowing the market values of a company’s assets- and not their historic prices since current costs give them reliable information needed in making well informed decisions. This approach estimates the value of a property depending on its expected future cash flows that are often discounted based on the current value. This method of discounting future prices is usually termed as time value money. For example, a property which matures and pays 1 dollar after a period of one year has its worth being less than one dollar today. The percentage of discount depends on an opportunity cost of capital and is always expressed inform of a discount rate or a percentage.
For valuations that use discounted cash flow approach, one has to first estimate the expected future cash flows based on the existing investments followed with an estimate of a rational discount rate upon careful consideration of the riskiness of the said interest rates and cash flows within the capital markets. This is preceded by calculations aimed at computing the current values of expected future cash flows. The major methods used in corporate evaluation are:
Guideline Company Method
The method values a business by critically observing the costs of similar companies that are usually termed as guideline companies that operate in the same market. The sales can be of entire firms or just shares or a stock market. The witnessed prices are used as valuation benchmarks. Based on the prices, one is able to compute price multiples for example price-to-book or price-to-earnings which are then used to value the company.
Net Asset Value Method
This method values a company based on critical analysis of liabilities and assets of the business. A solvent company, at a minimum, can close operations, then sell off all the assets, and use the money to pay the creditors. The remaining amount of money upon completing this procedure can be used to found a floor value for the firm. This approach is called cost method or net asset value method. Generally, the value of discounted cash flows of a company that is well performing is always more than the floor value. This approach can be applied in valuing assorted portfolios of investments and of nonprofits where discounted cash flow examination is irrelevant. The valuation premise which is usually used is of a methodical liquidation of the properties. However, some scenarios of valuation such as purchase price allocation usually infer an ‘in-use’ valuation. An example is the depreciated replacement price new.
Conclusion
Corporate valuation analysis is necessary for many reasons including wills and estates, tax assessment, business analysis, divorce settlements, and basic accounting and bookkeeping. Valuations should be done periodically like at the end of every accounting period or quarter since there is a constant fluctuation in the values of items over times. It is very crucial to note that the valuation process requires assumptions and judgment. For example, every methods and models have limitations; there are different purposes and assumptions to value and asset. The differences can escalate to varying valuation approaches or different interpretation of the results of the methods.
References
Love, I. (2011). Corporate governance and performance around the world: what we know and what we don’t. The World Bank Research Observer, 26(1), 42-70.
Ma, Q., & Ukhov, A. D. (2011). Valuation of takeover targets and the market for corporate control throughout the business cycle. Insurance Markets and Companies: Analyses and Actuarial Computations, 2(1), 38-48.
Lin, C., Ma, Y., Malatesta, P., & Xuan, Y. (2011). Ownership structure and the cost of corporate borrowing. Journal of Financial Economics, 100(1), 1-23.
