Question

Briefly describe three methodologies that might be used to approximate the value of a company.  Be sure to include a general description of how one should perform the calculations and what relevant data should be assembled and used

Answer 1

The following are the Three methods which are mainly used by various companies for valuation

1) Asset Based Valuation

2) DCF Valuation

3) Relative Valuation.

Different parameters and different assumptions were considered for the above three types of valuations. Let us go one by one

1)Asset based valuation:In this method valuation of the company is done based on the Fair Market value of the Total Assets held in the company. The value for total assets will come after deducting the company liabilities.

2)DCF Valuation: This Method is also named as Intrinsic value approach where one person estimates the firm's free cash flow into future and converts it into today's value with a discount rate at the firm's WACC.

3) Relative Valuation: It is also known as comparable valuation method.In this method all the parameters related to financial statements are considered and compared with the market value in the same industry and then estimates the value of the company.

Among all the above method DCF valuation is the most commonly used approach for estimating the value of the company. The following are the things to be considered for any of the above valuations

1)Income Statement 2)Balance Sheet 3) Cash flow statement . All these statements should be taken for the last 3-4 years for valuation. Then only we can come to exact estimate.

Step 1: Using the above statements firstly we need to calculate the various types of ratios like Activity Ratios, Liquidity Ratios, Solvency Ratios,Profitability Ratios and some other ratios using cash flow(CFO to Sales,FCFF to CFO,Dividend Pay out, Dividend Distribution tax).

Step 2: After we need to make some assumptions that at which rate all the items related to the above statements are growing and we need to forecast the future income statement, Balance sheet and CF statement based on the assumptions taken.

Step 3:After that we need to find out the value of the company

For Asset Based Valuation we need to take PAT, Cost of Equity(Ke),Book Value of Equity,ROE.Next we need to calculate Growth in BV,EVA Growth,ROE growth. Then we need to calculate the PV of a share.

For DCf Valuation we need to take FCFF growth,Cost of capital, Cost of Equity,Outstanding shares.Then we need to calculate the PV of FCFF's and Present Value of Equity. Then value of the Share will be Division of PV of FCFF and Pv of Equity.

For Relative Valuation we need to compare the following ratios of the company with the industry ratios.