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FM Written Assignment#5

UNIT 5

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19 views5 pages

FM Written Assignment#5

UNIT 5

Uploaded by

imbukahmesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Company Valuation Methods

Market Capitalization

Market capitalization is one of the most effective ways of evaluating the value of a company

since it provides a real-time estimation depending on the market (Edge, M., 2023). The method

considers various factors like financial efficiency, tangible and intangible assets, brand image,

and company reputation to determine shareholders' value creation. Market capitalization entails

selecting multipliers, choosing a comparison group, designating multipliers, calculating the

company's value, and adjusting discounts and bonuses—valuing a company based on the total

value of its outstanding shares of stock. The value of a company using this method is determined

by the formula; Market Capitalization = Share Price × Number of Outstanding Shares.

Book Value Method

The book value approach is a method of valuing a company based on its balance sheet. The book

value is based on the net asset value of a company, which is calculated as the difference between

its total assets and total liabilities. This approach is grounded in accounting principles and

reflects the value of a company's assets as recorded on its financial statements. It represents the

historical cost of the company's assets and may not reflect their current market value. Book value

is often used as a conservative measure of a company's worth, especially for companies with

significant tangible assets.

Book value = total assets – total liabilities

Where;
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 Total Assets include all the resources owned by the company, such as cash, inventory,

property, equipment, and investments (Jonick, 2017).

 Total Liabilities include all the obligations the company owes to others, such as loans,

accounts payable, and other debts.

Expected Future Earnings

Valuing a company based on its expected future earnings involves estimating the company's

future cash flows and discounting them to their present value. This method considers the

company's potential for generating profits in the future and is commonly used in discounted cash

flow (DCF) analysis (Trugman, 2016). It provides a forward-looking perspective on the

company's value.

Other Business Valuation Methods

EBITDA Multiple

The EBITDA multiple method involves using a company's EBITDA (earnings before interest,

taxes, depreciation, and amortization) to determine its value. This method is popular in industries

where capital expenditures and financing decisions significantly vary among companies. It

provides a quick and simple way to compare companies' values.

Comparable Company Analysis (CCA)

CCA involves comparing the valuation multiples (such as P/E ratio, and EV/EBITDA) of the

target company with those of similar publicly traded companies. This method relies on the

assumption that similar companies should have similar valuation multiples. CCA provides a

relative valuation perspective.


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Advantages and Disadvantages of Different Valuation Methods

Valuation Method Advantages Disadvantages

Market  Simple and easy to  It ignores the company's debt

Capitalization calculate and other financial factors

 Reflects market  Valuation may be influenced

sentiment and liquidity by market fluctuations

of the company's stock

(Edge, M., 2023).

Book Value  Provides a conservative  Does not consider the

estimate of a company's company's future earnings

worth potential

 Based on historical data  May not reflect the true market

value

Future Earnings  Considers the  Relies on accurate future

company's future cash earnings projections (Trugman,

flows 2016).

 Provides a forward-  Requires discount rate

looking perspective estimation

EBITDA Multiple  Useful for comparing  Ignores the impact of taxes and

companies with capital expenditures

different capital  Does not consider the

structures company's growth potential


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 Focuses on cash

earnings

Comparable  Provides a relative  Relies on the availability of

Company Analysis valuation perspective comparable companies

 Considers industry-  Assumes similar companies

specific factors have similar valuation

multiples
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References

Edge, M. (2023, May 25). What is market capitalization? Why does it matter? Retrieved from

Merril Edge: https://www.merrilledge.com/article/company-size-why-market-

capitalization-matters-ose

Jonick, C. (2017). Principles of financial accounting. Georgia: University of North Georgia

Press Dahlonega.

Trugman, G. R. (2016). Understanding business valuation: A practical guide to valuing small to

medium-sized businesses. Hoboken: John Wiley & Sons.

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