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Submitted by anushri.oswal on January 24, 2007
Category: Book Reports
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VALUATION OF FIRM
The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
For example, an analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of assets.
Judging the contributions of a company's management would be more of a subjective valuation technique, while calculating intrinsic value based on future earnings would be an objective technique.
MULITPLES
Multiples are used while relative valuations are done to estimates the value of the assets by looking at the pricing of the ‘comparable’ assets or the firms to common variable such as earnings, cash flows, book value or sales. Multiples like P/E, P/BV, P/Sales, P/Cash flow, P/Dividends, Market Value/Replacement Value (Tobin’s Q) are normally used in the market. For example industry P/E is used to value any firm in the industry, and assumes the other firms in the industry are comparable to the firm being valued and that the market, on average, prices these firms correctly. P/BV (Price/Book value) is used for firms selling at a discount on book value, relative to comparable firms, being considered undervalued. The multiple of price to sales is also used to value firms, with the average price-sales ratios of firms with similar characteristics being used for comparison. These multiples used to value and compare the firms which are comparatively undervalued or overvalued in the market.
It is assumed that the comparable multiples will help to know and identify the errors on pricing of the individual assets and the error will help to identify the stocks which will provide gains because of this error which is expected to be corrected over period of time. For example any cement company trading at a P/E of 12 while the Industry average P/E is 23 times...
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