lecture_valuation_521_2011

lecture_valuation_521_2011 - ThreeGeneralApproaches...

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1 Three General Approaches  to Valuation   1) Cost Approach Adjusted Book Value 2) Market Approach Comparables 3) Income Approach Discounted Cash Flow Each approach has advantages and  disadvantages. Generally there is no “right” answer to a  valuation problem.  Valuation is very much an  art as much as an exact science!
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2 Adjusted Book Value or  Cost of Assets Technique Involves restating the value of individual  assets and liabilities to reflect their fair market  values. Useful for valuing holding companies where  assets are easy to value (for example,  securities). Less useful for valuing operating businesses.  The  value of an operating company (the present value  of the cash flows) is generally greater than that of  its tangible assets. 
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3 Adjusted Book Value or  Cost of Assets Technique Useful approach when the purpose of the  valuation is that the business will be  liquidated and creditors must be satisfied. Adjustments to book value that can be made: Inventory undervaluation Bad debt Market value of plant and equipment Patents and franchises Tax-loss carryforwards
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4 Evaluation of Comparables  (market approach) How to compute comparables: Start with a sample of securities whose business  characteristics are similar to the company being valued. Assume that the company has similar financial ratios to the  “comparable” companies.  A number of different ratios are  typically used:  Stock Price/Earnings, Market/Book, Total  Firm Market Value/Sales, Total Firm Market Value/EBIT. Total Firm Market Value = Debt + Equity Then back out the implied value of the company being  studied. Comparables Approach relies on key assumption: Comparable companies have future cash flow expectations  and risks similar to the firm being valued (easy in theory,  perhaps difficult to find in practice)
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5 Different ways of Doing  Comparables Comparable Company” – Uses a multiple calculated  from the trading values of firms in the same industry  as the firm being valued. “Comparable Transaction” – Uses a multiple or the 
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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.

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lecture_valuation_521_2011 - ThreeGeneralApproaches...

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