Balance Sheet Method:
The balance sheet method is probably the easiest way to valuate a company. It is an estimate of the company’s assets. The plainest way of putting it is:
Assets - Liabilities = Company Value The information required are the values found in the balance sheet, although they may need to be adjusted depending on the valuation method. One of the main advantages of this method is, that it is very simple and uses information that is published anyway (statement of financial position). There are many disadvantages to this technique: it is static, so neither considers the time-value of money nor the industry’s current situation. Contracts or internal problems aren’t considered either. Another issue is that creative accounting can …show more content…
Basically, one assumes that certain income and operational measures are relevant for the pricing of the equity listed on the stock exchange. The most common multipliers are P / E (price-earnings ratio), EV / EBITDA (Enterprise Value / Earnings before interest, taxes, depreciation and amortisation) and EV / EBIT (enterprise value / earnings before interest and taxes).
The concept of the multiplier method is based on the Law of One Price, according to which two homogenous goods can not have a non-identical price. With the help of a multiplier the value of a comparative undertaking is transferred to the evaluation object. A correct application of the multiplier method presupposes that all valuation-relevant parameters are identical for both companies. In practice this does not occur. Therefore, this tool is often regarded as a proxy for estimating the present value of future net cash flows.
Discounting Cash Flows …show more content…
There are two approaches to differentiate: the equity and the entity approach.
The entity approach works in two stages: In the first step the total value of the company is specified by discounting the company’s expected free cash flows. The company’s total value is not dependent on the financing structure (i.e. equity, debt) and represents both the claims of shareholders as well as the debt givers. To the market value of equity - the actual value of the company - to determine the total enterprise value is reduced by the market value of debt in the second step. Common variants of the gross capitalisation are the approach of the weighted average cost of capital (WACC), the total cash flow approach (TCF) approach and the Adjusted Present Value approach (adjusted present value).
The net capitalisation (equity method) of the value of a company is determined in a step. The expected, the equity holders are entitled to cash flows are discounted to the valuation date using the capitalisation rate. As a capitalisation rate risk equivalent return requirement of the owner is taken as a basis. In principle, the equity method corresponds to the standard in Germany discounted cash flow method.
The balance sheet method is probably the easiest way to valuate a company. It is an estimate of the company’s assets. The plainest way of putting it is:
Assets - Liabilities = Company Value The information required are the values found in the balance sheet, although they may need to be adjusted depending on the valuation method. One of the main advantages of this method is, that it is very simple and uses information that is published anyway (statement of financial position). There are many disadvantages to this technique: it is static, so neither considers the time-value of money nor the industry’s current situation. Contracts or internal problems aren’t considered either. Another issue is that creative accounting can …show more content…
Basically, one assumes that certain income and operational measures are relevant for the pricing of the equity listed on the stock exchange. The most common multipliers are P / E (price-earnings ratio), EV / EBITDA (Enterprise Value / Earnings before interest, taxes, depreciation and amortisation) and EV / EBIT (enterprise value / earnings before interest and taxes).
The concept of the multiplier method is based on the Law of One Price, according to which two homogenous goods can not have a non-identical price. With the help of a multiplier the value of a comparative undertaking is transferred to the evaluation object. A correct application of the multiplier method presupposes that all valuation-relevant parameters are identical for both companies. In practice this does not occur. Therefore, this tool is often regarded as a proxy for estimating the present value of future net cash flows.
Discounting Cash Flows …show more content…
There are two approaches to differentiate: the equity and the entity approach.
The entity approach works in two stages: In the first step the total value of the company is specified by discounting the company’s expected free cash flows. The company’s total value is not dependent on the financing structure (i.e. equity, debt) and represents both the claims of shareholders as well as the debt givers. To the market value of equity - the actual value of the company - to determine the total enterprise value is reduced by the market value of debt in the second step. Common variants of the gross capitalisation are the approach of the weighted average cost of capital (WACC), the total cash flow approach (TCF) approach and the Adjusted Present Value approach (adjusted present value).
The net capitalisation (equity method) of the value of a company is determined in a step. The expected, the equity holders are entitled to cash flows are discounted to the valuation date using the capitalisation rate. As a capitalisation rate risk equivalent return requirement of the owner is taken as a basis. In principle, the equity method corresponds to the standard in Germany discounted cash flow method.