Case Study Questions

It should be noted that an income approach could have also been used. Using a determined market discount rate of 6% and current year revenue of $3,028,000 at a four year discounted rate, the value would have been $12,040,548. Because adequate market information was available to make a more accurate estimate of the fair value, this is the estimate that was chosen.

Estimate the value of Mercury using a discounted cash flow (DCF) approach and Liedtke’s base case projections. Justify any additional assumptions that you make. In answering this question you should provide a quantitative and detailed analysis of the following parts of the valuation:

Assuming the value of a dollar is worth more today than in the future, the net present value of a multi-year project should be _______ than the sum of its cash flows.

Concepts of business valuation – Critical review of the Discounted Cash Flow (DCF) analysis and its applicability in today’s business world

When first analyzing the cash flows of Victoria Chemical’s it is necessary to adjust the cash flows to recognize the expected 3% inflation in both sales and costs each year.   Also, the added cost of GBP 2 million needs to be accounted for since the added rolling stock of the transport division is directly related to the increased output of the project.   Once these two items have been accounted for, it is assumed that the added output could be sold at current prices of GBP675 per ton.   The following data is obtained from Exhibit 2:

In financial management, we recognize that value occurs when there is a positive gap between return on invested capital less cost of capital. Additionally, we recognize that earnings can be judgmental, subject to accounting rules and distortions. Valuations need to be rooted in "hard numbers." Therefore, valuations tend to focus on cash flows, such as operating cash flows and free cash flows over a projected forecast period.

The subject organization to which the valuation model stands applied in this scenario, that of Berkshire Hathaway, has a measurable debt load of 61.8 billion dollars and a level of equity at, as of March 2012, 176 billion dollars (Morningstar, Inc., 2012). Given a continuation of the assessed results over the course of the example five year period, an investor would return a substantial profit from an investment in Berkshire Hathaway. A valuation as taken from a discounted cash flow analysis concerning the company, Berkshire Hathaway, returns an indication of profit, thereby validating the existing debt to equity ratio of 0.35% over the same covered period for March of 2012 (Morningstar, Inc., 2012).

Owers, 1997, p. 34). The discounted value of future cash flow (FCFi), expected of a project

Under non-ideal conditions, it may be difficult to write down a complete set of states of nature and associated cash flows. Even if these can be written down, difficulties remain because objective state probabilities are not available. This is perhaps the most fundamental difficulty, since these probabilities must be subjectively estimated. Also an interest rate is not necessarily given. All of these difficulties lead to reliability problems of lack of representational faithfulness and possible bias. The expected present value calculation can still be made, but it is an estimate because the probabilities and other values that go into it are estimates.

When conditions are not ideal, a good amount of subjectivity and estimation is used to find the different sets of states of nature. These states of nature have different subjective probabilities that are estimated by the preparer. In order to discount future cash flows, an interest rate must be specified. All of these estimations of probabilities are subject to errors and different bias, therefore reducing the reliability of these estimates. This creates the need for relevant information to be unreliable.

Within the financial sector, there are many different types of valuation methods in which their purpose is to receive the share price of a company. Throughout this paper, I will discuss the various methods and the factors that contribute to the outcomes of each one. The context of this paper will be discussed in the manners of both the positive and negative aspects of each method. With each method, I will also explain the factors that significantly influence the price of each method used. Currently, Cenovus is trading on the Toronto Stock Exchange at a value of $17.83. One of the key aspects that I will acknowledge is that they currently have a long-term growth value of -108% and their target price is $18.55. Other factors can be

Investment appraisals are an integral part of the business industry. Every sector of business and government utilizes it to some extent. Investment appraisals are defined by The Business Dictionary as “An evaluation of the attractiveness of an investment proposal, using methods such as average rate of return, internal rate of return (IRR), net present value (NPV), or payback period”. This can be used for a wide range of areas. Even where the returns are less visible such as personnel, marketing, and training. Investment appraisals are used by nearly everyone who utilizes capital. Private businesses are the most common; however it is an important tool to governments as well. There are many steps involved with Investment Appraisals because of the nature of it. One wrong investment could bankrupt a company or government. One such government that used Investment Appraisals and grew as a result is Suwanee, Georgia.

1. This first question is a net present value calculation. The future cash flows must be discounted, because of the effects of interest and inflation. Those two factors reduce the value of cash flows in the future, so that money received or paid in the future is not worth as much as the same dollar amount paid today. In this example, there is a project, and the cash flows associated with the project need to be discounted. If the final value, the net present value (NPV) is greater than zero, the company should undertake the project. This is because the discount rate should reflect the risk of the project or the company's cost of capital. The formula for discounting is Cash Flow / (1+ discount rate)^time. The NPV calculation is best done on Excel, and here is the output:

THE PRACTICAL APPLICATION OF DISCOUNTED CASH-FLOW BASED VALUATION METHODS Publication: Studia Universitatis Babes Bolyai – Oeconomica, LII, 2/2007 Author Name: Takács, András; Language: English Subject: Economy Issue: 2/2007 Page Range: 13-28 Summary: Valuation methods based on Discounted Cash-Flow (DCF) play a major role in the field of company valuation. The current literature contains a reasonably deep and detailed theoretical basis for DCFbased valuation, although, when starting to apply the techniques to evaluate a real company, some practical problems may appear. This study summarizes the most important practical difficulties which may hinder the valuation process and proposes different ways of solving these. Beyond the

Hence we can conclude that market valuations incorporate market expectations regarding future cash flows in an efficient and unbiased manner (Hitz, 2007). It can also be argued that fair value