For anyone involved in the field of corporate finance, understanding the mechanism of company valuation is very important not only because of valuation of mergers and acquisitions, in choosing investment for a portfolio, in deciding on the appropriate price to pay or receive in takeover, but also in restructuring the corporation. The process of determining the present value of a company is called valuations.
There are different methods and techniques which can be used for valuation. These are: 1) Dividend Discount Model
2) Discounting Cash Flow Based Model
3) Balance Sheet Based Model
4) Income Statement Based Model (Relative valuation)
5) Valuation Using Multiples
6) Value Creation Methods
7) Option Pricing Methods
Dividend Discount Model
The Dividend Discount Model for valuing equity is the present value of expected dividends on the value of stock. When investors buy stock they generally expect to get two types of cash –flows: • Dividends during the period of the stock
• An expected price at the end of the holding period
Discounting Case Flow Based Model
These methods seek to determine the company’s value by estimating the cash flows it will generate in the future and then discounting them at a discount rate matched to the flows risk. Cash flow discounting methods are based on the detailed, careful forecast, for each period , of each of the financial items related with the generation of the cash flows corresponding to the company’s operations, such as, collection of sales, personnel, raw materials, administrative, sales, expense, loan repayments, etc.. In cash flow discounting based valuations, a suitable discount rate is determined for each type of cash flow. Determining the discount rate is one of the most important tasks and takes into account the risk and historic volatilities.
Balance Sheet Based Model
Balance Sheet based valuation methods are traditionally used to consider a company’s value lies basically in its balance sheet....
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