please discuss the major methods of company valuation, explain each method and c
ID: 2806602 • Letter: P
Question
please discuss the major methods of company valuation, explain each method and compare their advantages and disadvantages with the other methods you choose to discuss. Support your discussion with references.
Provide a narrative explaining the market capitalization method.
Provide a narrative explaining the book value method.
Provide a narrative explaining expected future earnings method.
Provide a narrative on other methods.
Provide a narrative that compares market capitalization, book value, and future earnings methods (and other methods mentioned) with each other.
Explanation / Answer
Market capitalization method : The market capitalization calculation is an important and useful stock valuation formula for investment analysis. Market capitalization (a.k.a. market cap) is the total market value of all the company’s outstanding equity shares. This represents the total value the market has placed on the value of a company’s common stock.
Market Capitalization = Number of shares outstanding multiplied by the price of the stock. (shares outstanding X stock price)
Book value method : Book value, a multiple of book value, or a premium to book value is also a method used to value manufacturing or distribution companies. Book value is total assets minus total liabilities and is commonly known as net worth.
Book value = Net worth = Total assets – Total liabilities
Expected future earnings method : Capitalization of earnings is a method of determining the value of an organization by calculating the net present value (NPV) of expected future profits or cash flows. The capitalization of earnings estimate is determined by taking the entity's future earnings and dividing them by the capitalization rate (cap rate). This is an income-valuation approach that determines the value of a business by looking at the current cash flow, the annual rate of return and the expected value of the business.
value = earnings in future years/d-g
where d=discount rate and g= growth rate.
The other methods used are:
asset accumulation method
excess earnings method
multiple of discretionary earnings method
comparitive transcation method.
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