Question

In: Finance

In 200 words or more : How does one understand the valuation process? How is one...

In 200 words or more : How does one understand the valuation process? How is one able to do a valuation?

Solutions

Expert Solution

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

Fundamental analysis is often employed in valuation, although several other methods may be employed such as the capital asset pricing model (CAPM) or the dividend discount model (DDM).

A valuation can be useful when trying to determine the fair value of a security, which is determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction willingly. When a security trades on an exchange, buyers and sellers determine the market value of a stock or bond.

The concept of intrinsic value, however, refers to the perceived value of a security based on future earnings or some other company attribute unrelated to the market price of a security. That's where valuation comes into play. Analysts do a valuation to determine whether a company or asset is overvalued or undervalued by the market.

Valuation Methods

There are various ways to do a valuation. The discounted cash flow analysis mentioned above is one method, which calculates the value of a business or asset based on its earnings potential. Other methods include looking at past and similar transactions of company or asset purchases, or comparing a company with similar businesses and their valuations.

The comparable company analysis is a method that looks at similar companies, in size and industry, and how they trade to determine a fair value for a company or asset. The past transaction method looks at past transactions of similar companies to determine an appropriate value. There's also the asset-based valuation method, which adds up all the company's asset values, assuming they were sold at fair market value, and to get the intrinsic value.

Sometimes doing all of these and then weighing each is appropriate to calculate intrinsic value. Meanwhile, some methods are more appropriate for certain industries and not others. For example, you wouldn't use an asset-based valuation approach to valuing a consulting company that has few assets; instead, an earnings-based approach like the DCF would be more appropriate.


Related Solutions

In 200 words or more How does one understand basic capital budgeting? How is it used?...
In 200 words or more How does one understand basic capital budgeting? How is it used? Give an example
in 200 words or more, How does one understand the various sources of capital, including debt...
in 200 words or more, How does one understand the various sources of capital, including debt and equity financing?
In 200 words or more: What does valuation mean in reference to a firm? What is...
In 200 words or more: What does valuation mean in reference to a firm? What is the process to determine valuation of a firm--start up, small, larger firm? Is there a difference?
in 200 words or more How does one distinguish between the different types of ratios and...
in 200 words or more How does one distinguish between the different types of ratios and their purposes? Give an example
In 200 words or more, How does one analyze cash flow from operations?
In 200 words or more, How does one analyze cash flow from operations?
in 200 words or more how would a person understand the importance of the financial section...
in 200 words or more how would a person understand the importance of the financial section and its connectivity with the business plan.
In 200 words or more, Indicate how a journal is used in the recording process in...
In 200 words or more, Indicate how a journal is used in the recording process in Accounting
in 200 words or more How does a person foster an understanding of how financial documents...
in 200 words or more How does a person foster an understanding of how financial documents are used in entrepreneurial ventures?
In 200 words or more how does a person evaluate finance as it relates to entrepreneurship.
In 200 words or more how does a person evaluate finance as it relates to entrepreneurship.
in 200 words or more, what are some ways in learning to understand revenue and cost...
in 200 words or more, what are some ways in learning to understand revenue and cost relationships? What is the different between the two? Give an example
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT