Question

Explain the valuation errors in relation to valuing equity shares

Answer 1

The few common errors in valuation on valuation of the equity shares are as follows:

-- Confusion of equity value and enterprise value will cause an inflated value

-- Failure to an accurate consideration of the normalizing adjustments can cause over or undervaluation of a company

-- Discounting / Capitalization of net income rather than the net cash flow can cause the overvaluation

-- Unsustainable relationship between capital expenditures and depreciation if there is not a supportable relationship can cause the undervaluation or overvaluation

-- Dismissal of tax-affecting for flow-through entities it will cause a significant overvaluation

-- If the consideration is not given to market approach there will be no check on the income approach value, thus causing a more opportunity for manipulation for the amount

-- Inaccurate reconciliation of multiple valuation approaches will not be appropriate when both the market and income approaches are higher