Question

Question:

(a) " there are a number of instances when you may need to determine the market value of business".Identify and discuss five reasons for coming up with valuations.

(b) Discuss the following discounted cash flow approaches in valuing a firm

i) Adjusted present value approach

ii) Cost of capital approach

Answer 1

a)	The five reasons for valuing a business (finding the market value) may be:
	For selling a business:
	Owners may desire to value their business when they consider selling their business. They need to know
	what they will get if they sell their firm. Book values are not sufficient; they are historical.
	For mergers and acquisitions;
	In case of mergers, the market values of the merging companies are to be found out to work out the
	appropriate exchange ratios.
	For succession and estate planning:
	Valuing the business, before it passes on to successors, helps in planning for the tax effects of succession.
	Knowing the value of the business can help in carrying out the succession in the most tax efficient manner.
	Buying out another's share in the business:
	It may be necessary to buy the share of a partner in the firm, in which the worth of the partner's share has to
	be based on market value of the business.
	To judge the effect of financial stategies:
	Business valuation models can be used to estimate the value addition provided by financial strategies. It
	can be used for initial evaluation and performance evaluation.
b)
i)	Adjusted PV approach:
	In the APV approach, the FCFs are discounted using the cost of unlevered equity, assuming there is no debt.
	This will give the unlevered value of the business. To this is added, the PV of tax shield on interest on debt
	to get the Adjusted PV.