Question

Compare and contrast the different valuation methods. Describe all the possible sources of external funding, both formal and informal. Describe three ways in which an investment is exited.

Answer 1

There are usually two kinds of valuation methods and they are relative valuation methods and absolute valuation methods.

Absolute valuation methods will be calculating the share price of a stock by using absolute valuation methods like discounting of the cash flows in order to arrive at the intrinsic value of the share so this kind of valuation methods will be calculating the value of the share based upon its relative cash flow of the future and then those cash flows would be discounted at the present in order to derive at intrinsic value like discounted cash flows method or dividend growth model.

Relative valuation methods will be calculating the value of a share in relation to the the industry peers and it will be taking the ratios of the industry and then it will be computing the price of the share based upon those industry valuation like price to book valuation or price to earning multiples etc.

formal source of equity funding will be related to all those methods which are generally used by the companies order to generate the funding from the outside like equity financing for debt financing through commercial banks whereas informal source of funding will be related to generation of fund by informal sources like friends or families or retained earning of the individual itself.

Three ways in which the investment is exited as follows-

A. Selling of a share in the stock market

B. Exiting through offering them initial public offer.

C. Exiting the shares by entering into a proportional selling through private placement