Question

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) Net Income (NI) Stock Price (SP) EPS No. of outstanding shares Goodwill Intangibles Total Assets S1,500,000 S850,000 S50 S4 300,000,000 $100,000 $75,000 $3,000,000 1,500,000 Net Worth Method Net Income Method Price/Earnings Ratio Method Outstanding Shares Method IppAverage Method Net Income 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. Why is it important to have a reasonable knowledge of what the firm is worth?

The share price of the company may not always reflect the true value of the business and the value of the shares keep fluctuating frequently. We keep an assumption that in the long term the value of the shares will tend to move towards the true value of the business. By knowing the worth of the business it is easy to make investing decisions. Suppose if the current price is below the worth of the firm we can buy the stock in anticipation of it going upwards, and vice versa.

Net Income Method

850,000

Price/Earning Method

PE ratio = Value per share/Earning per share

50/4 = 12.5

Outstanding shares method

Shares outstanding * stock price per share

300,000,000 * 50 = 15000,000,000

Note : It is not clear what the [ppAverage method means

2. The best method as per me would be the Price/Earning method - It shows how much the shareholders are willing to pay for 1 unit of earning of the company. In this case it is 12.5. We can compare this figure by the industry standards and PE ratio of similar companies to decide whether the shares are overvalued or undervalued. Suppose the industry average is 10 so in that case the shares are overvalued as the shareholders are willing to pay a higher amount than the average. Similarly, the vice-versa can also be applied

3. The share price of the company may not always reflect the true value of the business and the value of the shares keep fluctuating frequently. We keep an assumption that in the long term the value of the shares will tend to move towards the true value of the business. By knowing the worth of the business it is easy to make investing decisions. Suppose if the current price is below the worth of the firm we can buy the stock in anticipation of it going upwards, and vice versa.

Apart from this we can evaluate the worth by discounting the future cash flows received from dividend on these shares. We will discount using the appropriate discount rate which will be the company's Weighted Average Cost of Capital. By doing this we will arrive at the present value of those cash flows and hence the worth of the company