Question

n this paper, please discuss the major methods of company valuation that we have studied. In doing so, explain each method and compare their advantages and disadvantages with the other methods you choose to discuss. Support your discussion with references. Papers will be assessed on the following criteria: Explain the market capitalization. Explain the book value. Explain (expected) future earnings. Provide narrative on other methods (minimum of two). Compare market capitalization, book value, and future earnings methods (and your other chosen methods) with each other to include their advantages and disadvantages

Answer 1

Number of ways are there to value a company. The selection of each method is depending upon the valuation criteria fixed by the management. However, the major methods include normalized profit method, market valuation method, market capitalization method, book value method, and future earning method.

Standardized profit method gathers financial information, particularly, profit of the company last consecutive years to find the average profit. This helps an investor to estimate average earning capacity of the company.

Market valuation method measures the value of a business and properties with respect to the selling price of the similar business or properties. It means this method takes ownership interest into consideration for valuing the business.

Market capitalization method is used to value the company based on the market value of its shares. The highest market capitalization indicates company performs well in the market.

Book value method measures the company’s net assets to find the value of the company. It is calculated by deducting total assets from intangible assets.

Future earnings method

Future earnings method (discounted cash flow analysis) is one of the most common methods used by all the company which helps to understand the present value of the company with the expected future earnings. This method includes adjusted present value and weighted average cost of capital.

All the above-mentioned methods for business valuation are significant when an individual invest in a particular company. However, no one method is better than the other. Normalized profit helps to understand the profitability, market valuation method is used to find the fair market value of the business, and market capitalization illustrates the market value of the company’s capital.

On the other, book value method indicates the net assets of the company, and future earnings method helps to estimates the present value of future earnings. All these methods considerably help an investor to make the best investment decision.