Question

1. What are the approaches to firm valuation?

2. What are the traditional tools of macro policy?

Book- Essentials of investments by bodie kane

Answer 1

1. What are the approaches to firm valuation?

First of all, we'll see what is a Valuation is all about. To bring you an example in real business life, let's say you'd try to buy a mobile phone and you'd check it's color, features, popularity, whether it's the most preferred and also if it has the highest camera capacity. If you're into all this while choosing a phone, how much should you be wondering about investing into a stock/bond/any other investment? That's where Valuation comes to use. We may value a firm, a stock, a bond, asset, equity, anything along with some help of tools techniques. We mostly rely on Financial Modelling to get the valuation done.

Although there are many popular approaches available, we'd consider these 4 most popularly:

1) Discounted Cash Flow : Here we make assumptions based on growth and trendlines over Sales, Revenue and Expenses. We can't assume that firm will run long to arrive terminal value, so this residual value along with the year ending value we'd assume as the Terminal Value. Discounting the forecast earnings and terminal value together gives us the present value of the Business. This is called as Intrinsic Value. Market Value is a value traded over the stock exchange and subtly traded by the traders and investors. Market Value may be under or over the weights compared to the Intrinsic value.

2)Trading Comparables : These are helpful in deciding which company among the other competitors are performing better in an Industry. With the same resource and different management and expenditure levied on, the performance of the company surely get's to differ. EBITDA , EPS, P/E Ratio,etc are used to compare in between the companies. Peer universe needs to be relevant for accurate comparision.

3)Precedent Analysis : This is another method and approach to where past Merger and Acquisition will be considered and valued against the market value.Merger and Acquisitions are what is referred when we talk about "Precedents".

4)SOTP (Sum of The Parts) Analysis : A firm can have many different business's involved and we can compare the main business with the other minority business's with respect to the company's performance.

2. What are the traditional tools of macro policy?

To promote a sustainable economy, keeping the history in mind, government implements two significant policies such as

Fiscal Policy: Takes care of government spending and taxation.

Monetary Policy: Central Bank control of the money supply

Both the above tools are meant to achieve macroeconomic equilibrium.