Free Essay Sample «Corporate Valuation»

«Corporate Valuation»

One of the most important questions asked by company owners today is what their company is worth, and this is the basic information that any financial manager should know where and how to find out. This is especially important to big corporations that get more and more difficulties to manage their business, as long as the scale grows. Corporate valuation is not bounded by the company estimation but includes evaluating every new investment project. It is not an easy task set for a manager or an investor but still this is an essential element of effective business decision making. Probably, the most interesting part here is the method that every financial manager is going to use during corporate valuation (Levine, and Schmukler, 2005). Surely, there are many options, but still each of them works the best in its narrow context; for example, the indicators and ratios may be very different in quantitative and qualitative characteristics for a growing business, a company that is meant to be purchased, and a distressed business. This essay is divided into 2 sections: company evaluation and project evaluation.

The asset-based methods of corporate valuation consider the book value of the business equity meaning all the assets of the company minus all its debts. This feature includes not only tangible assets, like equipment, machines or materials, but also intangible assets, such as license, intellectual property, copyright or logotype. One of the methods recommended for those, who would prefer fast product developments or strategic steps is judging the business by the amount of available cash – either cash itself or assets that can be quickly converted into cash (short-term liabilities, cash equivalents).

Working capital is the difference between current assets and current liabilities – it represents the means of the company’s budget that are easy enough to access. The higher value of working capital brings the company the same advantages as the cash does. If one takes a decision of buying a whole company and needs to find out its real price, one of the good methods is the operating leverage. The degree of operating leverage shows what influence the receipts’ change make on the operating profit. It is a quantitative estimation of the shift of profit depending on the changes of sales’ volume.

The most popular way of corporate valuation is the application of discounted cash flow models. The essence of this concept is in valuation the entire project or business, basing on the expected cash inflows and their net value at the present time. The method embraces the payback period, which can be calculated in two ways: simple and discounted. Simple payback period is the number of years needed for the sum of expected cash inflows to be equal to the original investment. Discounted payback period uses the same logics of calculation, but each expected cash inflow is divided by the discounting rate. Discounting rate is the factor that considers time value of money, because usually each new project requires involving borrowed capital, and it is worth some money to be paid back. Payback period generally matters when the liquidity is the main focus of the investor or financial manager. Shorter payback period makes any project less attractive for potential investors; on the other hand, longer payback period is also connected to less risk, though it depends on the branch of industry. The problem aroused by the simple payback period – the ignorance of the salvage value that stands for the cash flows coming after the project is over. Due to the lack of argumentative support from the added value of a budgeting position, payback period is usually not taken into consideration as a reliable indicator (Torrez et al, 2006).



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