There are two main methods for valuing a business: the assets-based method which focuses on the net value of assets, and the earnings-based method which correlates the firm's value to its potential future earnings or cash flow generating capacity. The earnings-based approach can be based on accounting earnings or cash flow. Valuation can also use the assets-based approach by determining the value of assets to arrive at equity share valuation. A key earnings-based approach is calculating free cash flows to the firm (FCFF) by taking after-tax operating earnings plus non-cash items, less investments in long-term assets and working capital. The value of the firm is the present value of FCFF, using the weighted cost of
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
0 ratings0% found this document useful (0 votes)
35 views7 pages
There Are 2 Methods of Valuation of A Business
There are two main methods for valuing a business: the assets-based method which focuses on the net value of assets, and the earnings-based method which correlates the firm's value to its potential future earnings or cash flow generating capacity. The earnings-based approach can be based on accounting earnings or cash flow. Valuation can also use the assets-based approach by determining the value of assets to arrive at equity share valuation. A key earnings-based approach is calculating free cash flows to the firm (FCFF) by taking after-tax operating earnings plus non-cash items, less investments in long-term assets and working capital. The value of the firm is the present value of FCFF, using the weighted cost of
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 7
There are 2 methods of valuation of a business
1. Assets based method which focuses on net value of
assets. 2. Earnings based method correlates the firms value to its potential future earnings or cash flow generating capacity Earnings based on accounting basis Earnings based on cash flow basis
Assets based approach to valuation Value of assets determined to arrive at equity share valuation NAV per share could be arrived on 1. Book value basis 2. Market value basis 3. Liquidation value basis Earnings Based approach to valuation 1. Earnings measure based on accounting capitalisation method 2. Price Earnings Ratio 3. Earnings measure on cash flow basis(DCF method) 4. Earnings measure on free cash flow basis(FCFF) Earnings measure on free cash flow basis(FCFF) 1. This method reflects the cash flows generated by a companys operations for all the providers of capital(debt and equity) 2. This method takes into account after tax non operating income as well as adjustments for non operating assets. Calculation of Free Cash Flows After tax operating earnings Plus: Depreciation, amortisation and other non cash items Less: Investment in long term assets Less Investment in operating net working capital =Operating free cash flows Plus: After tax non operating income Plus: Decrease in non operating Assets,eg investment securities =Free cash flows to Firm(FCFF)
The value of the firm: Present value of FCFF FCFFs are available to all the capital providers of a corporate enterprise, the discount rate applied would be the weighted cost of capital. The equity valuation can be deducted by subtracting the total external liabilities from the value of the firm.
Value of a firm= present value of cash flows during explicit forecast period + continuing value of the firm
Continuing value of a firm=Free cash flow (T+1) k 0 - g
g = expected growth rate in normal level of net operating profits less adjusted taxes