In: Finance
Q.4 (a)List and discuss four factors that derive value of corporations
(b) Briefly explain the concept ''Efficient Capital Markets'' stating its importance in valuation
(a) The factors that derive value of corporations are
1. Book value: It is the simplest method of determining. The book value takes into account Balance sheet, assets & liabilities. It is very commonly used method but it has some cons compared to others.
2. Comparing with public traded companies: This method of comparing stocks with similar companies provides a more accurate results by looking revenue, EBITDA,.
3. Comparing recent transactions: By looking at the last & next twelve months one would determine multiples. Applying those multiples to business would give value
4. Discounted Cash Flow: The methid derives the cash flows of the company and then discounts in today's currency rate. Cash flow is one of the good method to derive value of the company which is simple and consistent in providing results.
(b) Efficient Capital Markets: Is the investment theory which states that its impossible to outperform stock market. It states that the current stock prices are reflecting prices inclusive of all the information in the market. The theory argues that there are three forms of market situations weak, semi strong & strong.