Question

1. Show competency in the basics of analyzing problems and making decisions
2. Employ relevant and legitimate information literacy to support an argument

ASSIGNMENT: Corporate evaluation methods

Specifically, the student will be assessed on the following assessment categories:

1. Explanation of issues
2. Evidence
3. Student’s position (perspective, thesis/hypothesis)
4. Conclusions and related outcomes

ACTIVITY:

*Determine the cash value of any business using four corporate evaluation methods.

The student will:

Corporate evaluation methods

*explain why is it important to have a reasonable knowledge of what the firm is worth?

*apply the problem data to the four corporate evaluation methods

*calculate and compile the results for each method

*evaluate and explain the results

*determine, prioritize, recommend, and defend the best corporate evaluation method

(20 points)

Complete the following corporate valuation methods (five) based on the following data:

Input Data
Shareholders’ Equity (SE)	$1,500,000
Net Income (NI)	$850,000
Stock Price (SP)	$50
EPS	$4
No. of outstanding shares	300,000,000
Goodwill	$100,000
Intangibles	$75,000
Total Assets	$3,000,000

Net Worth Method
Net Income Method
Price/Earnings Ratio Method
Outstanding Shares Method
Average Method

2. Determine, recommend and defend the best corporate evaluation method. Identify any concerns that you have about these methods

3. As a future decision maker concerned about either selling or purchasing companies, explain why is it important to have a reasonable knowledge of what the firm is worth. Besides these methods, what else could a decision maker do to obtain other data points on corporate worth on assets?

Answer 1

1) NET WORTH METHOD- In this method, we simply try to calculate the worth of the Company by checking what the Company owns (i.e. its Assets) and What the Company owes to outsiders (i.e. liabilities). Also, Understand

1) That this method is helpful to value those companies that are Asset Rich and

2) We try to ascertain the Fair Value of the Assets as the Current Market Value of the asset may be different from the price at which it was bought. The current Market price of the Asset is calculated using the help of a Registered Valuer.

3) We remove Intangible Assets in order to calculate Tangible Net Worth of a Company since it is difficult to place a value on Intangible Assets which includes Goodwill, Trademark, COpyright etc.

4) NET WORTH = TOTAL ASSETS - TOTAL LIABILITIES - INTANGIBLE ASSETS

5) Since No Liabilities have been given in the Question so our NET WORTH is 3000000 - 75000 - 100000 = 28,25,000.

6) NOTE Shareholders Equity is also known as NET WORTH of the Company i.e. $ 15,00,000.

_________________________________________________________________________________________________

2) NET INCOME METHOD - Net Income Method takes into account the Income that has been earned by the Company after meeting all its Expenses. GROSS INCOME - EXPENSES = NET INCOME.

2) If the Expenses exceed the Income generated by the Company during a particular year, it results in NET LOSS.

3) This is one of the most basic criteria to evaluate a company. A company is formed with the purpose of generating profits and Income.

4) DISCOUNTED CASH FLOW METHOD - is another advanced method in which we take into account the future Cash flow generating capability of a Company and discount it to the present Value to ascertain What the Company is worth TODAY.

5) In this case, since no expenses have been given, the NET INCOME of the Company is $ 8,50,000.

_________________________________________________________________________________________________

3) PRICE/EARNING RATIO METHOD -

1) P/E Ratio = Stock Price Per Share / Earning Per Share

Stock Price per Share = Market Value Per Share

2) 50/4 = $ 12.5 per share

This means that Investors are willing to Pay $12.5 of every dollar of the Company's earning.

3) P/E Ratio basically tells us what the market is willing to pay to buy the Share of the Company based on what the Investor thinks about the growth potential of the company in the future based on its past performance or future possibilities.

4) Thus, a higher P/E of a Company generally can indicate a Market Trend that Investors are hoping a higher potential Growth Rate for a Company and thus are willing to pay extra money to buy its stock.

__________________________________________________________________________________________________

4) OUTSTANDING SHARES METHOD -

1) Outstanding Shares - means Shares that has been Issued by the Company or we can say, Shares which are currently held by the Shareholders.

2)Investors are interested to know the Outstanding Shares of the Company as the Earnings of the Company would be divided amongst all the Shareholders to whom shares have been issued by the Company.

3) Outstanding Shares can change during the year depending upon any Stock Split, any buy back etc. A decrease in the number of outstanding shares would increase the Earning per Share of each shareholder and an Increase in the number of shares issued by the company would decrease the earning per share earned by each shareholder as it would be divided amongst more people.

4) Outstanding Share Method is used to calculate Market Capitalization i.e. Outstanding Shares * Current Share Price.

Market Capitalization - or Market Cap is the Current Market Value of all the shares of the Company.

= 300,000,000 *$ 50 = 15,000,000,000.

___________________________________________________________________________________________________

5) AVERAGE METHOD - This is Weighted Average Cost of Capital Method (WACC) that takes into account the

1) Cost of Debt- that is the cost we would have to bear in the form of interest expense etc, for raising the debt.

2) Cost of Equity - Since the Investors have purchased the shares of the Company. cost of Capital is the return the Inevstors expects from a Company for having bought their shares. Why it is Cost to Company ? Becase the Company would have to generate this much return to keep their investors stay invested in their Company or else the Investors would pull out their money from the stocks of the company and invest it elsewhere where they are able to earn more money on their investment.

3) CAPM (Capital Asset Pricing Model ) is used to calculate Cost of Equity.

___________________________________________________________________________________________________

2 ) WHY IT IS IMPORTANT TO HAVE KNOWLEDGE OF WHAT THE FIRM IS WORTH?

There are many stakeholders in a Company and they all would want to know what the Company is worth for different reasons

1) Bank - a Bank would want to know how much earning a company is able to generate to make sure that the company is able to pay off its loans in the future. So before making any lending decision, the banks would like to know the Net income of the Company.

2) an Investor - would like to know how much earning per share it can earn and what is the growth potential of the company so as to decide in which company he/she should invest their money.

3) a Buyer - a Buyer of a Company would like to know how much he/she should pay to buy the company taking into account all its liabilities, income, expenses and intangible assets.

Hence, different stakeholders have different reasons about why they want to know the net worth of the company.

_______________________________________________________________________________________________

3) BEST CORPORATE VALUATION METHOD -

1) Note that it depends on the type of Company i.e. the best valuation method is decided taking into consideration the Balance Sheet and Income Statement of the Company along with its Nature of Business, Industry in which operates etc,

For example, a Company that is heavily Asset oriented, then it would make more sense to use Net Asset Method to evaluate it.

__________________________________________________________________________________________________

2) BEST CORPORATE EVALUATION METHOD AND CONCERN ABOUT IT

The most Popular method is DCF (i.e. DISCOUNTED CASH FLOW METHOD) as it can be used to value both Private and Public Companies and is more real indicator of the future worth of the Company.

2) Concerns - it make predictions about the Future Cash Flow to be generated by the Company based on its past performance and it is discounted to its present Value. Please note that the Future Cash Flow Generating capabilities are at best, a prediction. They are not full proof and include lot of assumptions about the future. The circumstances in future can change and so will our prediction about the Company. Hence, it is a method based on prediction taking into account lot of reasonable assumptions.

________________________________________________________________________________________________

3) As a decision maker who is concerned about either buying or selling a company, it is imperative to know th worth of the firm. It is like before selling a product I should know what that product is worth and how much would be my profit margin on that product. and a buyer I should know, what product am i buying and Is it worth the price I am paying for it.

a reasonable knowledge of the firms worth would also help to ascertain the Purchase Consideration which is important for both the buyer and seller.

Besides these, a decision maker can also get a DUE DILIGENCE done of the Company that he/she intends to buy:-

a Due Diligence would ensure:-

1) There are no pending dues by the Company to any outsiders or Local or Government authorities other than those appearing in the Balance Sheet.

2) It will ascertain the Companies relationship with its Vendors, customers etc,

3) Off-Balance sheet items can also be taken into consideration.

4) The worth of Intangible Assets such as copyrights, patents, trademarks etc can be ascertained to a reasonable degree.

5) Market surveys can also be conducted to ascertain the reputation of the Company amongst its Customer base etc.

_______________________________________________________________________________________________

Hope this answers all your Question. GOOD LUCK :)