Business/company valuation
The process of figuring out a business's economic value is termed a business valuation, sometimes referred to as a company valuation. Assessing the present value of a business, an investment, or an asset is known as valuation. All aspects of a business are examined throughout the valuation process to establish the business's value as well as the value of its divisions or units. For a number of purposes, such as selling value, establishing partner ownership, taxation, and even divorce processes, a company valuation can be used to evaluate the fair worth of a the business.
The economic of value of a firm or business unit is determined via business valuation.
The fair of value of a firm may be established through business valuation for a number of purposes, such as selling value, determining partner ownership, taxation, and even divorce processes.
A business can be valued in a number of ways, including by taking into account its market cap, earnings multipliers, or book value, among other factors.
Compared to its cost or current market value, valuation is the process of finding a company's, investment's, or asset's theoretically correct value.
In M&A, strategic planning, capital financing, and securities investment, valuations are frequently performed.
The three most popular methods for valuing investments are similar company analysis, DCF analysis, and precedent transactions.
Determining the value of the stock of an organisation based on its financial performance, current market conditions, and other relevant information is called share/stock valuation. The method of assessing the economic value of a firm, on the other hand, is known as business valuation, also referred to as company valuation. The first step in valuing a firm is to value its shares/stock. Without taking into account the capital structure of the company, the enterprise or business value is the whole value of the company. The enterprise value, also known as firm value or asset value, is the total value of all the assets owned by the company, excluding cash. Enterprise or business value in the equation describes as, EV(Enterprise Value) = (share or stock price X number of shares) + total debt – cash. The traditional stock valuation methods include Net Asset Valuation , Earning Based Valuation, Dividend growth valuation and FCF(free cash flow) Valuation.
Example:
The finacial position as of 31 December 20x05 of XYZ Ltd is as follows ;
fixed Assets (Net book value) (£ million)
Land & Building 12
Plant and equipment 3
Vehicles 1 16
Current Assets 5
Current Liabilities 3 2
Total 18
Finance by
70million Ordinary share capital @ 20p 14
Reserves 2
Secured Loan 2
Total 18
Profit after interest and tax but before dividends are as follows;
20x00 (£Million) 3.5
20x01 3.8
20x02 4.0
20x03 4.2
20x04 4.5
Fixed assets have revalued (£ million) as Land & Building 16, plant &
equipment 2.5 and Vehicles 0.5. An annual dividend of 2 (£ million) has
been paid each year since 20x00. The company forecast an immediate
year-ending profit after tax is 5 (£ million) and a 5% increase each year
in the next 4 years. The comparable companies' most recent dividend yield
is 10% and the price-earnings ratio is 8.
Free cash flow that accrues to a purchasing company allowing for the taxation and capital expenditure requirement is as follows;
Year 1 (£ million) 5.5
Year 2 4.6
Year 3 3.8
Year 4 3.5
Year 5 5.2
The average after-tax WACC for the comparable companies is 11% which includes the cost of equity is 13%
Calculate ordinary share price is an appropriate valuation model.
Net Asset Valuation
Fixed Assets (revaluation 16+2.5+0.5) (£ million) 19
Net current assets (5-3) 2 Total Assets 21
Less : Log term liabilities 2
Net asset 19
Value per share = Net assets ÷ Number of share = 19÷70
= 27p per ord.share
Earning-based valuation
(i)Based on historical earnings
assumed Price earning ratio (PE) for XYZ is 8 as on the industry average, and average earning is 4 (£ million) i.e., = {(3.5+3.8+4+4.2+4.5) ÷ 5}.
Price earning ratio (PE) = Market price of share ÷ Earning per share (EPS)
or, Market price of share= Price earning ratio (PE) X Earning per share (EPS)
or , = Price earning ratio X {(Net earning ÷ Number of share )}
or, = 8 X {(4 ÷ 70) = 0.457 = 45.7p
(ii)Based on forecasted earnings
assumed Price earning ratio (PE) for XYZ is matched is 8 as on the industry average, and average earning is 5.54 (£ million), 5m +5% increase
= {(5+5.3+5.5+5.8+6.1) ÷ 5}
Market price of share= = 8 X {(5.54 ÷ 70) = 0.633 = 63.3p
Dividend growth valuation
(i) no dividend growth
Most recent dividend is 2 (£ million)as comparable industry average dividend yield is 10%, therefore stock price is
Dividend Yield = Current Annual Dividend Per Share ÷ Current Stock Price,
or Share or stock price = Current Annual Dividend Per Share ÷ Dividend Yield
or, Share or stock price = (Annual Dividend÷ number of Share) ÷ Dividend Yield
or , Share or stock price = (2÷ 70) ÷ 10% =0.285 =28.5p
(ii) with dividend growth
MV (total Market value) = {d X (1+g) ÷ (r-g)}, where d = Annual dividend ie 2m, g= growth rate ie 5%, r= rate of return or cost of equity ie 13%.
Therefore , MV = {2m X (1+5%) ÷ (13%-5%)}= 2.1÷ 0.08=26.25m
Value of per ord.share is = 26.25 ÷70= 0.375 or 37.5p
Free cash flow valuation
Year Cash Flow Discount factor present value
1 5.5 0.901 4.96
2 4.6 0.812 3.74
3 3.8 0.731 2.78
4 3.5 0.659 2.31
5 5.2 0.593 3.08
16.87
Value Per share = 16.87m ÷ 70m= 0.241 or 24.1p
Decision point
Valuation Method Value per share
Asset-based Valuation 27p
Earning based Valuation
Based on historical earning 45.7p
Based on earning forecast 63.3p
Dividend growth valuation - no growth 28.5p
Dividend growth valuation - with growth 37.5p
Free cash flow valuation 24.1p