APPROACH TO STOCK VALUATION
Back then in 1950s,
stock valuation and its process caught various analysts’ interest and made them
wonder about the basic approach to it. Since then we have come a long way in
this field and this research paper throws light on the working towards basic
stock valuation in the mid 20th century and the various assumptions taken.
The author starts with
the most appraised theory then, that “a stock is worth the present value
of all future dividends” can be derived
in 2 simples steps being: 1. Calculation of all future dividends 2. Discounting
it to its present value.
Various assumptions are
Life span of a company that is finite
and declines as it approaches towards its end.
Rate of growth on a comparative basis wrt
the time spam of the company
Discounting rate keeping in mind the
risk and market premium.
The basis of the
assumptions regarding the life span of the company happens to be very
subjective that cannot be justified with an accurate justification. Also,
asusmptions regarding the growth rate, etc is also depended on the discretion
of the analyst, again not a universal approach towards stock valuation. However
it led to a spur of interest leading to detailed study of the same leading to
the current models of dividend, Cash flow Discounting Method for valuation
which are highly reliable as of now.
Valuation Methods of Sports Companies
Valuation in simple
words is the price or the worth of a company based on its various features, attributes
and possessions. Talking in terms of sports companies, it’s an prerequisite for
various internal and external business transactions.
Methodologies used to
derive at a company value are: assets-based, income-based, market-based and
mixed valuation approaches.
Asset based model states that: business worth= assets-debts; with assets at
its revalued amount. Preferable for companies with low profitability but an
sometimes also lead to undervaluation of the business (in case of high intangibles)
Income based method: Valuation based on
the prediction of current value of future cash flows. Capitalized profit and
discounted cash flow valuation approaches can be used.
Market based model states that a
business’ valuation can be made on the premise of market information w.r.t. to
sales transactions and stock prices.
Mixed valuation method is used when the
outputs from the asset based, income based and market based varies more than
25%. It averages out the outputs that we get from the 3 approaches to come at a
final valuation of the business.
The valuation from the
4 methods as prescribed is not very accurate and differs from company to
company & industry to industry. However it helps the business to take
better informed decisions and increases management efficiency.
Multiples Used to Estimate Corporate Value
-Author(s): Erik Lie and Heidi J. Lie
valuation of companies has remained one of the most important factors relevant
to the analysts and other stakeholders for which DCF and multiples like PE ratios
are used frequently. In this research paper we will have a look at various
aspects of valuation techniques based on sales, earnings and book value of assets
methods and how to go about it?
Flow Techniques takes into account the future cash flows of the business and
derives its present value by discounting with the relevant rate considering the
risk factor as well. However the drawback that lies is that neither the cash
flow nor the rate can be accurately derived. As a substitute often ratios and multiples
multiples: P/E ratio also known as price multiple that shows how much an investor is willing to pay
per dollar of earnings, enterprise value as to EBITDA and EBIT, etc
multiples considering the present and future values of its assets
many different approaches to value the companies, there exists a wide range of
differences amongst various companies too, based on its asset size, its
industry, its earnings, its intangible holdings, its sales, maturity of the
company and its industry, etc. making the company valuation using any method
instances: Any company going with IPO shouldn’t be using the DCF technique as
for a starter company estimating cash flows can be cumbersome OR valuation of companies with high
R&D activities may be hard as a major portion of its value lies in
intangibles and future growth opportunities OR financial companies has major proportion of liquid assets than
the non financial companies making the former easier to value.
Some other insights:
happens to distort the earnings, as a result under earnings based ratios, EBITDA
must be preferred instead of EBIT.
P/E ratio provides
more accurate information when based on expected earnings instead of historical
of Unrecorded Goodwill in Merger-Minded Firms
Ronald M. Copeland and Joseph F. Wojdak
of the problems under contemporary book keeping practice that of goodwill
valuation. In this research paper we will learn about the initial value of
goodwill arising during the transactions and it’s recording.
purchase can be stated as a business combination of more than one companies
where part of ownership interest in the acquired company is eliminated. Under
such circumstances if the acquired price is greater than the market value, then
it is Goodwill. Whereas Pooling of interests is where all the holders become
owners of one single company. Here since the net assets are brought forward to
the new corporation, goodwill doesn’t arises as it does in a purchase.
accounting treatment so used for Goodwill greatly depends on the MV and BV of
the subsidiary and acquired firm’s net assets respectively.
BV>MV negative goodwill
will arise where this Goodwill should be amortized leading to purchase
MV>BV positive goodwill
arises; preferring pooling method as to
of the companies engaged in exchange of stocks are accounted as poolings of
interests or as purchases. During times when book value is less than the value
of consideration given most combinations are accounted for as poolings. In most
mergers the purchase and pooling methods would each value acquired assets quite