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

ANS : Valuation methods are methods by which value of business can be determined. As there are many types of Valuation methods such as Assets valuation, Earning valuation, Discounted cash flow valuation etc.

But there are three major types of valuation methods-

1. Discounted cash flow (DCF) Analysis : This method used to find the value of investments based on its future cash flows. This is the best valuation method as the business ultimately derive its value from future cash flow.
2. Comparable Company (CC) Analysis :This method used to evaluate the value of a company using metrics of other company commensurate with their size & nature of Industry.
3. Precedent Transaction : It is a valuation method in which price paid for similar companies in the past is considered as indicator of company's value.

Sources of External Fundings are :-

• Equity financing
• Debt Financing
• Fixed assets financing
• Working capital financing
• Loan, Debentures, Overdraft
• Venture Capital etc.

The 3 ways in which investments are exited are :-

1. Employee Stock option Plan (ESOP) - It is an employee benefit plan given by the company to gain their loyalty towards company & its also a major option amongst exit strategies
2. Initial public offer (IPO) - In this company issues their shares to Public to accumulate fundings & raise their share capital
3. Management Buyout or tranfer ownership to the family etc.