MBA-520 ACCOUNTIN - 78646

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  • From: Business, Accounting
  • Due on: Thu 28 Apr, 2016 (04:00pm)
  • Asked on: Thu 21 Apr, 2016
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In this module, we will learn about the final stage of prospective analysis: valuation. What we

learn from the valuation process is how to convert the forecast that we perform into real value.

All business decisions that we make as managers, especially ones that involve estimating

future value, present value, and capital costs, have a direct effect on the value of the firm.

From previous modules, we learned that internal strategic planning usually focuses on how

actions impact the value of the firm performing analysis. External analysis assists us with our

decision valuation (should we buy, sell, expand, acquire a firm, merge with a firm?).

How do we set the price of our IPOs? How do we assess the firm’s credit-worthiness? The

firm’s value? In real life, we have an assortment of valuation approaches that could be

employed. These include:

1. Forecasting future dividends at present value to evaluate the firm’s equity

2. Using the discounted cash flow analysis

The process of business valuation could be done in three different ways:

1. We can use the income approach by forecasting the future cash flow depending on

the economic conditions. Applying the income approach involves the following steps:

o Realizing the earnings and cash flow of our firm

o Using the discounted cash flow model to forecast future earnings and cash


2. We can use the market approach by comparing the sales of our firm to similar firms in

its industry. This can be done through:

o Using ratios to compare the firm to its market

o Comparing stock prices of similar firms and their earnings

3. We can also use the asset-based approach by valuing the assets of our firm. This is

done by:

o Proper valuation of the net asset value (such as inventories, equipment, etc.)

o The liquidity of the firm






Previous modules introduced us to discounting methods; in this module, we use this

technique but we have to figure out the proper discount rate used in the discounted cash

flow (DCF) model. The way we do it depends on our firm’s capital and the expected level of

earnings growth. We always have to assume that risk is a factor and account for it and also

be aware that cash flow changes periodically.

Usually risk reflects lack of control within the firm (higher risk means higher discount).

Basically this module helps us apply the techniques developed earlier, techniques that allow

us to forecast financial performance and devise a solid business strategy. Capital structure

is essential for success, as in how much debt? How much equity? How much stock? Are you

paying the proper interest on each? Are you overpaying?

A process of valuation allows you as a business owner or manager to understand the factors

that are impacting your profits, sales, or market size. You also need to realize the value of

your firm to be able to properly formulate a plan to lead you in the future and to maximize the

value of your firm. You need to find your firm’s net worth by evaluating all the factors

mentioned earlier.

Another important factor for valuation is gaining a competitive advantage. It allows us to find

out our business’s positive and negative aspects and what factors are impacting them.

Consider when you decide to buy a car or a house. How do you determine that the interest

rate offered is the proper one for you? Why are you given a high or a low interest rate? Are

your income and expected (forecasted) future earnings sufficient to cover these payments?

Banks (creditors) use all these techniques to assess your risk, your future performance

based on your past financial history (credit report).

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