Corporate Valuation

c. SDI’s officers have been under pressure from the board of directors to do something to improve the price of the common stock. Management is also concerned about the stock price personally because bonuses are based on the performance of SDI’s stock price relative to other firms in its industry. So, they would like a detailed explanation of how the market price is determined—what do investors look for, and what can management do to provide what investors want? Bob Wilkes also wants you to explain how stock valuation information be used to help estimate the company’s cost of equity. Tony Biddle provided some information that can be used in the stock valuation process. First, as background on what investors think about the company, here are some representative quotations taken from analysts’ reports issued during the past few years.

Cap Tell You? The recognition that Market Cap is a function of both share price and share volume is significant for this number tells you more about the real value of the company than just the share price alone. In the extreme a corporation could be trading at a huge P/E multiple but if it only had relatively few shares outstanding then the company would not be

The most obvious reason for the difference between the market value of equity and the book value of equity is the inability to record certain intangible assets such as brand value, customer loyalty, and perhaps most importantly, human capital. These intangible assets are likely to provide tremendous earnings growth in the future which determines the company’s market value. Notice also that the company’s choice of conservative accounting policies has the effect of depressing the company’s book value of equity.

• Valuation of the company—application of sophisticated quantitative valuation models, IRR, net present value and forecast of future cash flows.

A firm’s intrinsic value refers to the true worth of stock in that firm which is calculated on return data and accurate risks. On the other hand, a firm’s current stock price talks about its market price as a whole as perceived by an

Several internal factors can influence the valuation of a company, however, in the subsequent are some factors that will assist management in protecting its shareholders. The first reason is the desire to generate profits for the company, as a profitable firm will attract investors. Secondly, the need to improve the management of a company can lead to valuation as the information can be used to spur growth. Valuation will assist in understanding some of the factors affecting the value of the company such as client relationships, financials, image, technology employees, and marketing. Proper management is implemented after identifying the issues affecting the organization’s value. Thirdly, communicating to the public accurate and current information is essential in attracting investors and maintaining transparency, which builds the company image.

It is important to know the proper technique and method of valuing a company because different people may have different ways of assessing the value; it is also important in understanding the bank’s method of appraising and valuing a company or business

He can use two methods to determine the value of the company: discount cash flow (DCF) approach and /or comparison with similar companies, which are publically traded.

The Return on Equity ratio is a measure of the efficiency with which a company employs owners’ capital. It

in our calculations, as this company exhibited dramatic value differences to others in the sample, (likely to skew our results and prove misleading). Using the average of the revised sample field for each ratio, we inserted Torrington’s values where appropriate to generate an entity value. The findings generated two values for Torrington, 606 million and 398 million. Taking the average of these two numbers, Torrington exhibited a relative value of 502.41 million. Because of the lack of related information given in the case, and the often large differences in measures amongst competitors, different capital structures, internal management strategies, there remained many unknowns in our model. We decided it would be best to use this valuation to reaffirm our assumptions in our DCF valuation. (Please see exhibits)

Return on Total Assets was 4.43% which is below five percent. That indicates that the company is not accurately converting its assets into profit. The total for Return on Stockholders’ Equity was 8.89%, however financial analysts prefer ROE to range between 15-20 %. The company’s low ROE indicates that the company is not generating profit with new investments. Lastly, Debt-to-Equity ratio for the company was 1.01 which indicates that investors and creditors are equally sharing assets. In the view of creditors, they see a high ratio as a risk factor because it can indicate that investors are not investing due to the company’s overall performance. The totals of these three ratios demonstrate that the company’s financial state is not as healthy as it should be.

We valued the company using four different methods; Net Present Value, Internal Rate of Return, Modified Internal Rate of Return and Profitability Index. We began with the Net Present Value, or NPV, calculation. NPV values an investment’s profitability based on the projected future cash inflows and outflows of the investment, discounted back to present value using the WACC. The calculations for NPV are presented in Appendix 2. We started by separating cash inflows and outflows by each year. We used Bob Prescott’s estimates for the revenue per year and related operating costs of cost of goods sold as

It is determined that the company worth is $856,518 with a share price of $351.03 per value as per the discounting dividend cash flow valuation approach..In appraising the anticipated premerger performance of the company, the weighted average cost of capital is computed; the worth of the WACC for FVC is 9.2% as depicted in

It istaking the company’s stock price and comparing it to its earnings, cash flow, or book value (Nishi &Doering, 2000).

Valuation of Common Stock Ashok Banerjee  Common (Equity) Stocks • Because common stock never matures, today’s value is the present value of an infinite stream of cash flows (i.e., dividend). • But dividends are not fixed. • Not knowing the amount of the dividends—or even if there will be future dividends— makes it difficult to determine the value of common stock.