Question

Please provide a discussion of basic corporate value components and how we go about valuing these various components of value. Discuss the constant growth model and how we utilize WAAC in that valuation technique.

Answer 1

Corporate valuation is done in order to determine the intrinsic value of the shares so that investment in those companies can be made by shareholder after knowing the true valuation of those shares.

Basic corporate value components are as follows-

A. Profits or earning after interest tax and depreciation-profits are one of the major components in valuation of the company and their use by various analyst in order to determine the true value of the company e through adoption of various methods like price to earnings or price to book value.

B. Dividend payments-dividend payments are another important factor in order to determine the intrinsic value of this year because models like dividend growth models are generally focused at finding out the intrinsic value of the company after ascertainment of the present value of the future dividend associated with the company.

C.cash flows of the company are another component because majority of the companies who are into their initial stages are not able to generate a large amount of profits so they are accordingly valued with cash flows associated with the company so cash flows are another important component in order to determine the value of the company.

There are many other components related to corporate valuations like taxations or present value of abnormal gains aur asset valuation methods Residual Value methods.

Constant growth model is used to find the value of the company through adoption of a frequent growth in overall payment of dividend so these constant growth model will be determining the value of the company after a certain amount of the future value of dividend associated with the company.

Weighted average cost of capital is used as a required rate of return while adoption of constant growth valuation method and that weighted average cost of capital is used to substract the the growth rate of dividend in order to find out the price of the share.