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After studying this chapter you will be able to understand: Business valuation, reasons for valuation of a business, methods of business valuation, asset based valuation methods, earnings based methods of valuation, dividend based methods of valuation,. | Investment Analysis and Portfolio management Lecture: 32 Course Code: MBF702 BUSINESS VALUATION To estimate the potential value of another company. REASONS FOR VALUATION OF A BUSINESS To determine the price to be offered in a merger/takeover of a private company; To aid in decisions regarding buying or selling shares of a private company; To place a value on companies entering the stock market; To value shares in a private company for tax/legal purposes; To value subsidiaries/divisions for disposal, MBOs etc. METHODS OF BUSINESS VALUATION Range of values When a business/company/division is valued it is not a precise exercise and there is no right answer to the question of what it is worth. There are a variety of different methods of valuing businesses which will all produce different overall values. In any examination question it is likely that students would be expected to use a number of different valuation methods in order to determine a range of prices that could then be used | Investment Analysis and Portfolio management Lecture: 32 Course Code: MBF702 BUSINESS VALUATION To estimate the potential value of another company. REASONS FOR VALUATION OF A BUSINESS To determine the price to be offered in a merger/takeover of a private company; To aid in decisions regarding buying or selling shares of a private company; To place a value on companies entering the stock market; To value shares in a private company for tax/legal purposes; To value subsidiaries/divisions for disposal, MBOs etc. METHODS OF BUSINESS VALUATION Range of values When a business/company/division is valued it is not a precise exercise and there is no right answer to the question of what it is worth. There are a variety of different methods of valuing businesses which will all produce different overall values. In any examination question it is likely that students would be expected to use a number of different valuation methods in order to determine a range of prices that could then be used in negotiations. In the following paragraphs these methods of valuation will be considered: assets based valuation earnings based valuation dividend based valuation cash flow based valuation. ASSET BASED VALUATION METHODS Net assets = Assets – Liabilities. Option 1 – Net assets based on book values This option is not a very suitable basis since, it accounts for the historical cost of the assets and liabilities which are not relevant. The value obtained is also called the Breakup Value of the company. Option 2 – Net assets based on market values A more preferred method since gives almost the fair value of the share. This method is preferred when substantial acquisition is to be done. Moreover, it provides the Floor Value of the Business ASSET BASED VALUATION METHODS Historic cost = balance sheet value (book value) of the net assets Problems: - meaningless total as the balance sheet does not attempt to give any indication of value; - ignores unrecorded assets such
