Question

Valuation is considered as science or art ? Explain in detail and illustrate with a senerio.

(1500words)

Answer 1

We will not be able to help you writing 1500 word essay. However, we can help you out with a construct or skeleton. Please put your thought around it, add some more meat and prepare your report.

This is a very subjective and debatable topic. Arguments can be produced in favor of or against either of the two choices science or art. However, if I have to conclude, I will say valuation is a science.

• A company or a stock may be valued for a variety of reasons. Depending upon the objective underlying the valuation, methodologies will change. However, there are methodologies in place for valuation.

• But under the most general purpose, a stock or a company is valued on a steady state going concern basis. And when we talk about valuation, we refer to the valuation of the business underlying the stock or company. Under this assumption, variables (drivers) of the valuation are:

  • Current cash flows (or earnings)
  • Expected growth in cash flows (or earnings)
  • Riskiness of the future cash flows

Then there is a well laid down procedures and methods to achieve valuation. Needless to say, a valuation will be an interplay of numerous  assumptions about future. It's the lack of objectivity around the assumptions, that adds the angle of art to the valuation. Assumptions may differ from person to person and from time to time. Assumptions will have biases, in either direction. It will involve discussion and subjectivity. And that's why people say that valuation is a science based on the art of making assumptions.