Question

1. Briefly discuss two assumptions that underlie the valuation of equity per share of a company?

2. Valuation is both an art and a science. Discuss two reasons that qualifies a valuation assignment as being an art?

Answer 1

1.

Many assumptions are undertaken while valuing a company. The assumptions generally arise from the model chosen for valuation purposes. Other assumptions include:

• Going concern: It is assumed that the firm will be a going concern entity. It means that the firm will continue doing business as usual in the forseeable future.
• Macro-economic assumptions: Assumptions are made based on reports provided by recognised bodies such as IMF, etc. The analysis is done on the basis of current or near future macro economic conditions.

2.

Valuation of a business is both an art and a science. There are many components to which a tangible value cannot be ascertained. For such situations the skill of the individual valuing the company is important. Valuation qualifies as an art because:

• Many businesses deliver extraordinary results because of the effective top management. The effect that the top management has on the company's performance or non-performance cannot be captured in numbers alone, thus capturing that value comes in as an art.
• Another reason to call valuation as an art comes from estimating its risk and future cash flows. The growth and risk parameters are not hard coded numbers and they are quantified on the indivudal's understanding of it.