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>>Discounted cash flows method
This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value). This concept of discounting future monies is commonly known as the time value of money. For instance, an asset that matures and pays $1 in one year is worth less than $1 today. The size of the discount is based on an opportunity cost of capital and it is expressed as a percentage. Some people call this percentage a discount rate.
The idea of opportunity cost can be illustrated in an example. A person with only $100 to invest can make just one $100 investment even when presented with two or more investment choices. If this person is later offered an alternative investment choice, the investor has lost the opportunity to make that second investment since the $100 is spent to buy the first opportunity. This example illustrates that money is limited and people make choices in how to spend it. By making a choice, they give up other opportunities.
In finance theory, the amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. Classic economic theory maintains that people are rational and averse to risk. They, therefore, need an incentive to accept risk. The incentive in finance comes in the form of higher expected returns after buying a risky asset. In other words, the more risky the investment, the more return investors want from that investment. Using the same example as above, assume the first investment opportunity is a government bond that will pay interest of 5% per year and the principal and interest payments are guaranteed by the government. Alternatively, the second investment opportunity is a bond issued by small company and that bond also pays annual interest of 5%. If given a choice between the two bonds, virtually all investors would buy the government bond rather than the small-firm bond because the first is less risky while paying the same interest rate as the riskier second bond. In this case, an investor has no incentive to buy the riskier second bond. Furthermore, in order to attract capital from investors, the small firm issuing the second bond must pay an interest rate higher than 5% that the government bond pays. Otherwise, no investor is likely to buy that bond and, therefore, the firm will be unable to raise capital. But by offering to pay an interest rate more than 5% the firm gives investors an incentive to buy a riskier bond.
For a valuation using the discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the capital markets. Next, one makes a calculation to compute the present value of the future cash flows.
>> Guideline companies method
This method determines the value of a firm by observing the prices of similar companies (guideline companies) that sold in the market. Those sales could be shares of stock or sales of entire firms. The observed prices serve as valuation benchmarks. From the prices, one calculates price multiples such as the price-to-earnings or price-to-book value ratios. Next, one or more price multiples are used to value the firm. For example, the average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value.
Many price multiples can be calculated. Most are based on a financial statement element such as a firm's earnings (price-to-earnings) or book value (price-to-book value) but multiples can be based on other factors such as price-per-subscriber.
Topic starter
Posted : 20/04/2010 4:42 am
Re: Main business valuation Method
The current fiscal crisis is now providing test cases for bankruptcy courts and financial experts. These three (one is an outgrowth of the S&L scandal) provide a sobering look at what plagues the economy and how valuation analysts are critical to the ensuing litigation.Caught between boom and ****. After rapidly expanding during the housing boom, the TOUSA home building company made a last, disastrous acquisition in 2005, funded with over $675 million in secured financing. When the bubble burst in 2007, TOUSA defaulted and the bank (Citigroup) insisted that the company cause its subsidiaries to borrow $500 million secured by liens on substantially all their assets. According to court records:
1.The company’s restructuring advisor (Lehman Bros.) called the $500 million deal the “best alternative” for TOUSA shareholders, but declined to provide a fairness opinion.
2.An email from the CEO warned the company was “dangerously over leveraged” and in “desperate need” of equity. Even if de-leveraging was successful, he said, the company could probably not service its debts and would “crash and burn.”
3.Even Citicorp harbored significant doubts about TOUSA’s solvency, but pressed forward, “motivated by the prospect of substantial fees.”
4.The CEO’s multi-million incentive bonus was contingent on completing the refinancing, as was $2.9 million in Lehman Bros. fees.
5.The firm that provided a fairness opinion whipped up a draft in two weeks, relying heavily on management projections and the promise of a $2 million fee for finding solvency.
Thanks.
Posted : 26/04/2010 5:25 am
Re: Main business valuation Method
Hi
Asset Accumulation
The Asset Approach is based on the premise that it is generally possible to liquidate the property, plant and equipment (PP&E) assets of a company, and after paying off the company's liabilities the net proceeds would accrue to the equity of the company. Valuation of assets based on liquidity does not yield better results if the fair market value of assets is in excess of value of its assets on a liquidated basis.
Discounted cash flow method
This valuation method based on free cash flow is considered a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future free cash flow of the company (meeting all the liabilities) discounted by the firm's weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity), plus a risk factor measured by beta. Since risks are not always easy to determine precisely, Beta uses historic data to measure the sensitivity of the company's cash flow, for example, through business cycles.
Market Value
This valuation method is applicable for quoted companies only. The market value is determined by multiplying the quoted share price of the company by the number of issued shares. This valuation reflects the price that the market at a point in time is prepared to pay for the shares. This valuation method broadly takes into account the investors’ perceptions about the performance of the company and the management’s capabilities to deliver a return on their investments.
Thanks
Posted : 26/04/2010 11:34 am
Re: Main business valuation Method
For a valuation using the discounted cash flow method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the capital markets. Next, one makes a calculation to compute the present value of the future cash flows.
Posted : 01/05/2010 4:57 am
Re: Main business valuation Method
1)Cash Flow Method:Based on how much of a loan one could get based on the cash flow of the business. The cash flow is adjusted for amortization, depreciation, and equipment replacement, then the loan amount calculated with traditional loan business calculations.
2)Cost to Create Approach:Used when the buyer wants to buy an already functioning business to save start up time and costs. The buyer estimates what it would have cost to do the startup less what is missing in this business plus a premium for the saved time.
3)Debt Assumption Method:Usually gives the highest price. It is based on how much debt a business could have and still operate, using cash flow to pay the debt.
Thanks
Posted : 03/05/2010 4:52 am
Re: Main business valuation Method
Market Value
This valuation method is applicable for quoted companies only. The market value is determined by multiplying the quoted share price of the company by the number of issued shares. This valuation reflects the price that the market at a point in time is prepared to pay for the shares. This valuation method broadly takes into account the investors’ perceptions about the performance of the company and the management’s capabilities to deliver a return on their investments.
Posted : 05/05/2010 3:51 am
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