VALUATION growth over the course of the

CONCEPTS previous years. Potential buyers

like to see that a company has seen
❖ What is Valuation?
regular, consistent growth as it
• Value is the monetary, material, or
ages.
assessed worth of an asset, good, or
• Mergers and Acquisitions
service.
- When a company goes for merger
• The analytical process of determining
or acquisition, the valuation of
the current (or projected) worth of an
business gains substantial
asset or a company is called valuation.
significance. As it assists in
• Determine the fair value of a security,
determining the value of assets,
which is determined by what a buyer is
current scenario of the company’s
willing to pay a seller.
growth going for merger/acquisition
and whether post-
❖ Importance of Valuation
acquisition/merger it possess
• Better knowledge of company assets
growth potential.
- Specific numbers need to be
• Access to more investors
gained from valuation processes so
- While seeking additional investors
that business owners can obtain
to fund company’s growth or save it
proper insurance coverage, know
from financial catastrophe, the
how much to reinvest into the
investor will demand for a
company, and how much to sell
complete company valuation
your company for so that you still
report. One should also provide
make a profit.
potential investors with a valuation
• Comprehending Company’s Resale
projection based upon their
Value
provided funding.
- If the management is
contemplating to sell the company,
❖ Types of Valuation
knowing its true value is necessary.
• Liquidation Value
This process should be started far
- The amount of money realized by
before the business goes up for
selling a firm’s assets and paying
sale on the open market because it
off creditors.
will have an opportunity to take
• Going concern Value
more time to increase the
- The value of a firm as an operating
company's value to achieve a
business.
higher selling price.
• Book Value
• Obtain a True Company Value
- The accounting value of a firm or an
- Knowing the true value of the
asset.
company is often a deciding factor
• Market Value
if selling the business becomes a
- The transaction price of the asset in
possibility. It also helps to show
the marketplace.
company income and valuation
 • Intrinsic Value to be paid out or the capacity to pay
- The true value of an asset. out.
- estimating the value of businesses
❖ Valuation Methods that are relatively large and
• Book Value Method businesses that have had a history
- based on the financial accounting of paying dividends to
concept that owner’s equity is shareholders.
determined by subtracting the
book value of a company’s ❖ Limitations of Valuation
liabilities from the book value of its • When deciding which valuation
assets. method to use to value a stock for the
- buy/sell agreements first time, it's easy to become
➢ Assets – Liabilities = Owner’s Equity overwhelmed by the number of
• Adjusted Net Assets Method valuation techniques available to
- used to value a business based on investors. There are valuation methods
the difference between the fair that are fairly straightforward while
market value of the business others are more involved and
assets and liabilities. complicated.
- estimating the value of a non- • Unfortunately, there's no one method
operating business. that's best suited for every situation.
• Capitalization of Earnings/Cash Flows Each stock is different, and each
Method industry or sector has unique
- used to value a business based on characteristics that may require
the future estimated benefits, multiple valuation methods. At the
normally using some measure of same time, different valuation
earnings or cash flows to be methods will produce different values
generated by the company. for the same underlying asset or
- valuing a profitable business where company which may lead analysts to
the investor's intent is to provide for employ the technique that provides the
a return on investment. most favorable output.
• Discounted Earnings/Cash Flows
Method
- the total value of the business is the
present value of its projected future
earnings, plus the present value of
the terminal value.
➢ PV of Annual Cash Flows + PV of
terminal value
• Dividend Paying Capacity Method
- this method of valuation is based
on the future estimated dividends