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
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
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).
|$20.00||Business, Cost Accounting||Bilbo||1 time(s)|
|$15.00||Business, Managerial Accounting||kelvin777||0 time(s)|
|$15.00||Business, Administration||deepeyes||0 time(s)|