Question

Define the value of a firm. What are the factors on which the value of the firm depend on?

Answer 1

Value of a firm is defined as combination of its market value of the equity as well as the market value of the debt.

Value of the firm will be calculated after discounting of all the cash flows which are accruing to the companies in the long run and arriving at the intrinsic value of the firm.

Value of the firm will be dependent upon the following factor-

A.it will be primarily dependent upon the cash flows of the company which will be occurring in the future.

B. It will also be dependent upon the growth rate which is related to the company in order to maximize its overall cash flows.

C. Profits are another factor which are important in order to arrive at the value of the company because profits will be adding onto the overall reserve with the surplus of the company which is part of the equity shareholders fund.

D. Another factor upon which value of firm is dependent is whether the company is reinvesting its profit into the project of company or the company is paying out the profits on dividend so it will be dependent upon the reinvestment rate and the dividend payout ratio.

E. Value of the company is also dependent upon quality of the management and trustworthiness of shareholders on the management because it will be providing the company with an additional premium when it is listed in the market.

F. Value of the company is also dependent upon the debt repayment ability of the company and cost of financial distress of the company.

G. Value of the company will also be dependent upon past performance of the company with respect to payment of the debt obligation and other Iregulatory requirements.