Business Project Valuation - Assignment Example

ASSIGNMENT, BUSINESS PROJECT VALUATION By Introduction This paper delves in the discussion of the various valuation techniques that are used in the determination of the value that are yield by the three companies that will be used for the case study. Valuation techniques therefore are what company to determine and estimate the appropriate value for which a company is worth. This could be in terms of the assets which tell much of a company’s larger percentage value. There are several valuation techniques that can be used by the companies: Discounted Cash Flow Analysis (DCF): this is a valuation technique whereby a the valuator makes use of the Net Current Value (NCV) and then compounding it at a rate considering various factors and then seeing the possible future value of the company (Ruth and Halperin, 2000). Leverage Buyout/“Ability to Pay” Analysis (LBO): in this case, the company is valued based on assumptions of company purchase through leveraged buyout. This again utilises the money that were borrowed during the acquisition of the company as well as considering the rates of return (Michael, 2012). Comparable Company Analysis (Public Comps): this is the estimation of the metrics or the terms that the other companies are using I valuing products. This requires a lot of market skimming to be as accurate as possible. In this, the various pricing mechanisms are key in coming up with the right techniques to establish a competitive advantage of the similar companies (Kiplingers Personal Finance, 2006). Precedent Transaction Analysis (M & A Comps): this is the reviewing of the past values and prices that were done by the previous similar companies. This gives room for a company to come up with several value multiples. 1. The paper has therefore chosen to discuss on the 3 companies: A & K Company, Toyland Company and Ramatex Company. One factor that is worth noting in each company is that A & K is the company that negative earnings Toyland company whose earnings or revenues are expected to grow more than 50% over the near future while Ramatex is the non-U.S. company. The factors below can therefore be used for the explanations on the possible reasons why a company can have negative earnings in a financial year or accounting period. They could be temporary or long-term problems (Ruth and Halperin, 2000). The temporary or short term problems in a firm can be as discussed. These could be problems that are either internal or triggered by external forces too. In this context, some of the factors can be strikes that are done by the employees in a firm thereby making them not to execute their duties in a firm despite having the skills that are needed to run the firm and in production process. Another one can be as a result of legal case that the firm has in a judicial institution that forces for the closure of the firm during the hearings or trial of the persons in question (Michael, 2012). Another cause could be external for the case whereby there is a reduction in the demand for a product that a firm is producing thereby forcing the firm to dispose of the products at a very low price hence the net outcome will be losses rather than the expected profit. However, such an effect is a one time or a cyclical one and cannot affect the future earnings of an organizations or a firm. In other cases, the negative earnings may come as a result of the shortage at the source of the raw materials that are used in the production exercise. In this case therefore, it can be clearly noted that a cyclical firm will only get good revenues during the boom while negative earnings will be realised a lot during the recession and contraction (Kiplingers Personal Finance, 2006). Long-term problems on the other hand can be triggered based on the marketing mix. If the 7Ps of marketing are not well placed and fused into the product marketing. A problem made during the placement of the product in the market as well as location are very key and are almost impossible to correct. It can also be caused by poor choice of product in the market with wrong target market (Ruth and Halperin, 2000). Another long-term problem can be caused by the employees that are in the firm lacking the skills that are required for the effective and efficient production of the desired output. The equipment that are used in the production process cold as well be ineffective thereby lowering the quality of the output hence the customers would choose to do purchase from other areas (Michael, 2012). 2. Discounted Cash flow Valuation This is a valuation method that is commonly used in the approximation of the extent to which an investment opportunity can stimulate more demand from the other consumers or companies. The focus of this method is on the monetary value of the future mobile cash flow that is projected and then discounts are offered on them (Kiplingers Personal Finance, 2006). From this, it can be noted that division of debt with the sum of debt and BVE is the measure of the leverage of a given firm in a period of one year while the product of kink and debt gives the target market. Z on the other have is the vector that is subject to control. It is also important to highlight that the various variables to assist in the determination of their impacts on the leverage away from its focus thereby giving room for conducting tests. The partial adjustment model approximates that α1,t is positive while α2,is negative. These therefore are used in the measure of the velocity of the adjustment made. These are clearly shown below (Ruth and Halperin, 2000). 3. Value relative to comparable Where Ri,t+1 denotes the one year buy-and-hold return beginning at the start of the fourth month after firm i’s fiscal year-end t.1 When doing comparable analysis, it is important to consider the following mnemonic which is C.V.S. Confirm the peer inverse that is ideal, Validation of the vibrant principle issues and metrics and finally select carefully the suitable multiples for the valuation process to be very effective. In the selection of the peer inverse, it is quite important to be very keen and careful since this will be crucial and essential in the estimation of the value of the target company that id to be purchased. In business, a decision that is made on location will be almost impossible to correct faster and so one has to be quite cautious when making moves on the peer inverse (Michael, 2012). Having a well set target is the key to the success of the business; provided the products that are offered satisfy them based on the valuation or pricing. Me businesses may be secluded out of the market because of the factors that could be due to the running of several types of business in in different lines, that is to mean general ,merchandise business persons that have covered almost all the sectors in the market set up. This could therefore call for the adjustment of the business or the industry (Ruth and Halperin, 2000). PV EB/EBITDA price ($) share mkt cap ($) EV 2011 2012E 2013E 2011 2012E 2013E Company 1 16.95 60.2 1032 1905 13.6x 11.7x 10.9x 4.4x 3.8x 3.70% company 2 5.26 1730.2 9257 19047 15.8x 15.2x 14.5x 4.4x 4.6x 4.70% company 3 7.57 382.7 2632 5190 18.5x 13.8x 11.1x 5.2x 4.5x 4.20% company 4 11.07 456.6 5014 10033 12.8x 12.6x 13.5x 5.7x 5.8x 6.10% company 5 17.88 77.5 1398 3611 14.0x 13.2x 12.1x 5.9x 4.9x 4% company 6 15.03 30.2 422 417 10.4x 10.0x 8.0x 6.0x 5.4x 4% company 7 3.28 201.1 640 2777 7.7x 7.5x 6.9x 6.0x 6.1x 6.10% company 8 1.49 63.1 95 78 17.5x 12.4x 9.9x 8.9x 8x 6.20% company 9 1.6 200 318 470 10.7x 8.9x 7.3x 7.9x 6.9x 6.50% median 13.6x 12.4x 10.9x 5.9x 5.4x 4.9x mean 13.4x 11.7x 10.5x 6.1x 5.4x 5.2x mv 7.7x 7.5x 6.9x 4.4x 3.6x 3.7x max 18.5x 15.2x 14.5x 8.9x 8.0x 6.5x The calculation is as follows: The Comps set given is trading at 12.4x (median value) 2012E Earnings Per Share. 12.4 × $1.50 = $18.60. (P/E multiples therefore this is the Market Value Per Share) Company f has an estimated EBITDA of $77 (million) in 2012. How much is its stock worth using the comps given? The calculation is as follows: The Comps set given is trading at 5.4x (median) 2012E EBITDA. 5.4 × $77 million = $415.8 million. (This is the Enterprise Value; we need to back out Net Debt to get to Market Capitalization. The difference between the EV and Market Capitalization given for Company F which is the company must equalize Net Debt.) $415.8 million – ($417 million – $422 million) = $415.8 million + $5.0 million = $420.8 million. (This is Market Capitalization; we need to divide by Shares Outstanding to get the Share Price which is as shown below.) $420.8 million ÷ 30.2 million = $13.93 4. Final Value Estimate and Recommendation From the formula, the firm can only be undervalued only if the assets are less than the earnings but from the case, assets are more than the earnings. It is important to highlight that the owing to the price per share, it can be clearly noted that the company was overvalued. This shows that the future value of the company will be higher compared to the current value (Kiplingers Personal Finance, 2006). Recommendation I can therefore recommend that the valuators that are called or employed to assist in the valuation process by the various companies should possess the right skills that are required for the process to ascertain the accurate value upon estimation. This will therefore help in the prevention of the possible losses that the companies can incur due to undervaluation (Michael, 2012), References Kiplingers Personal Finance,(2006). Volume 60, Kiplinger Washington Editors, Incorporated, Michael K., (2012), Ruud Debt, Taxes, and Banks (PDF Download), International Monetary Fund. Ruth A., and M. Halperin,(2000),. International Business Information: How to Find It, How to Use It Read More