Firm Valuation - Term Paper Example

Firm valuation Introduction Valuation refers to the process of determining the value of terms. This is in term of finance where this essay will entail information of valuation in terms of finance. Firm valuation therefore, refers to the process of estimating what items in an organization are worth. The items that are valued in this case are financial liability and assets. The estimation processes of items’ worth can be done on securities such as business enterprises, stocks and options or assets that are intangible such as trademarks and patents. This process of valuation can also be done on liabilities for example the bonds that are issued by an organization. There are various reasons as to why this type of process has to be carried out in an organization. These reasons include: Acquisition and Merger transactions. Investment analysis Litigation Determination of proper tax Capital budgeting. These are the reasons for carrying out this process as it is supposed to act as guide to enable the organization run its daily operations smoothly and effectively. For this valuation to be effective as well, there are various models that are used. The following models are majorly used during valuation of financial assets. 1) Single-period and multi-period models. These two models are used to determine the current worth of an asset’s anticipated prospect cash flows. They do not rely on observation of price but rather on mathematics. An example of the single-period model is the discounted currency flow while the multi-period model is the Gordon model. 2) Relative value. This is a model which is used to determine the item’s worth based on observing prices of other related assets in the market. 3) Option pricing. This third model is used for specific financial assets such as call options, put options, employee stock options and warrants. The most common types of these models are lattice and the Black-Scholes-Merton models. These models are usually known to be the complex type among all the models that can be used. The three common terms that are mostly used when valuating an asset are fair value, intrinsic value and market value. In this case, this essay will look at how various researchers carried out research on variation, their findings and the methodologies they implemented since they used various methods. The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. It is an article by Michael Jensen, published in the year 1993 where in this article; he tries to gather information on the internal control systems especially in the contemporary society. In this case, he aims at gathering information on three major areas of the control systems. These three areas are the industrial revolution, the exit and failure. In his suggestion, he points out that companies have to look for ways to deal with changes in the field of finance for them to achieve their set objectives. He points out that if effort is not put, there might be a major challenge in the near future extending to the western and political systems. He indicates that this challenge may become a problem later because these changes are affecting many parts of the world as years pass by. Jensen indicates that since the year 1973 regulatory, technological, economic and political forces have been experiencing changes. This is an issue that has been affecting the globe at large and it is related to changes in fashion that were experienced in the nineteenth century. During the nineteenth century declining costs, decreasing marginal and increase in production of labor was experienced. During this time there was excess capacity, reduced rate of growth in labor, and requirement for exit and downsizing. Research according to Jensen shows that within the last two decades, communal internal control systems have experienced failure in dealing with the various transformations (Jensen, 1993, 842). There are two main transformations that various corporate organizations have failed and have experienced difficulties in catching up with them. These two fields are requirement for exit and slow growth. Jensen in this case assumes that in the next decades, there might be a major challenge for the political systems and western firms. This is majorly because these forces continue to affect many nations worldwide as time goes by. The fact that most corporate organizations have not been able to deal with changes effectively, gives a clear impression that several organizations have not been able to catch up, adjust and move on with the changes that take place within the world of finance. It is therefore, clear that the transformations that have occurred in the finance organizations are diverse and most of them take place at the same time. If many changes take place at the same time and all of them tend to affect the organization in question negatively, apparently the organization is not able to achieve its goals. This is what has caused poor developments of economy in various countries. Fighting changes that do not lead to success has become a problem meaning that if the problem is not done away with, the situation gets worse that it was before. In such situations, most corporate companies experience losses and some of them end up being dissolved. Finance is the main thing that makes it possible for an organization to run smoothly and effectively. In this case it is not only money but enough money for that matter. It is essential because it is used for various purposes such as paying the employees, purchasing facilities for production, replacing facilities and repairing broken down factors of production in a company. All these features show that money is supposed to be there in order for an organization to undertake all its operations successfully. This means that without money, nothing effective can be carried out and in turn the organization is not able to achieve its set goals. Bankruptcy, Interest Tax Shields and ‘Optimal’ Capital Structure: A Cash Flow Formulation. It is an article which was written by Dr. Jacques Schnabel and was published in the year 1984. In this article he aims at explaining how managerial staffs in various organizations can have effective decision making in order to run operations effectively and find possible solutions to problems. In this article, Schnabel points out that most organizations are likely to suffer dissolution because of poor decision making. This article entails information on how cash flow is formulated. This means that the author provides information that can help various managerial staffs to carry out their daily activities effectively by making sure that they have knowledge on how to control currency flow. He provides information on how to formulate this cash flow in relation to currency structure problems with the presence of corporate taxes (Schnabel, 1984, 117). One of the challenges faced by most corporate companies is payment of taxes. This is one issue that brings about confusion in the organization when money matters are not handled with care. In this case, every managerial staff is expected to make certain that money matters are looked into properly to avoid experiencing losses. To avoid experiencing losses therefore, Schnabel chooses to write and provide information that can help managers to formulate their currency flows. This formulation process is intended to help them monitor all the activities that highly need financial support and how the money is used. Having in mind money that is spent to pay expenses and revenues, it is easier to plan on how to operate with cash without wastage. In this case, an organization is able to carry out all activities effectively avoiding shortages or surplus production of goods and services. It is clear that planning is a significant procedure because for all operations to run smoothly and successfully there should be a plan to act as a guide to avoid inconveniences. Corporate Governance and Firm Valuation is an article written by Lawrence Brown. What matters in corporate governance? This is the research question in this article and the op objective is to find out more about corporate governance and equity prices. In this article Brown points out that in organizations there are several measures that are used to administrate every activity that takes place. He goes ahead to explain that corporate organizations that end up successfully are those that take up responsibilities to make certain that all operations are well governed and that every duty is done to completion. This article entails information on how governance is practices in various corporate organizations. Research shows that many communal organizations are more valuable. There are other firms that allow external governance for them to work best. Brown tells that there are several provisions that are meant to represent both the internal and external governance. In this case he concentrates on the Gov-score and the firm value were he says that here there are seven provisions for representing the relation between the two intangible assets. Findings from his research show that only a small section of provisions marketed by communal governance information providers are related to firm valuation (Brown, 2006, 129). Evidence clearly shows that both the external and internal governance are linked to the firm value. Brown talks of a 51 governance provision strategy where he takes 5 to be relevant to public policy and accounting and four that are related to audit. He documents that only one of the seven provisions which are significant to fir valuation was mandated by Sarbanes-Oxley Act of 2002 or three key United States stock exchanges. Brown provides researchers with a substitute measure of administration to G-Index which has three major advantages. The advantages are: a. Cover more firms. These measures are able to cover many firms making it possible for them to determine their valuation which in turn helps the managerial staffs to carry out their duties effectively. This means that if more firms are covered, the more their operations are run effectively making production of goods and services in the contemporary society smooth ad effective at the same time. b. Broader in the scope of governance. In the role of administration, there are many things that are supposed to be taken into consideration so that governance can be helpful enough. c. More dynamic. This means that these provisions are able to reflect transformations that take place in the communal governance environment. Noticing these changes makes it possible for organizations to undertake operations according to the nature of the environment. It is clear that for an organization to achieve its set objectives, good governance should be practiced. Organizations that have significant administration bodies and strategies always have a chance to do the best making their organization earn more profits. The aim and dream of any financial organization in the contemporary society is to make profits and improve the situation of the economy. This is the reason why there are many firms that deal with finance are many in number and all of them strive to make sure that they are the best. That is why even if they face many challenges such as competition from firms that offer similar products, low demand in the market, decline in prices and other challenges, they still face them with courage. With these challenges most for them do not tend to give in so easily as they implement strategies that can help find possible solutions for problems. Breaking Into Business Valuation: Steps for small firms to consider when entering the valuation market. This is an article by Eddy Parker. It was published in the year 2010 and in his research; his objective is to determine the issues that are supposed to be taken into consideration before entering the market. This means that he is investigating on firms and he specifically deals talks about small firms. His aim is to provide information on what it requires for small firms to enter into the market and carry out their operations successfully. In his article, Parker talks of population where he points out that in the recent years there has been an increase in population. This has in turn led to increase in demand for valuation services across the globe. In his research, he finds out that there are various approaches that are meant to make individuals who operate small firms successful (Parker, 2010, 136) Begin with the current client base: This is the first step which is significant when giving clients advise on estate and tax planning. Business valuation is needed. Good first-period valuation is significant as it can be used for projects for small firms or family partnerships. Plan on taking more time concentrating on the first valuations: This is the second step in preparation of starting up an entrepreneurship for small business activities. Here an individual is supposed to learn about how to use software valuation packages. This is because issues like preparation of checklists and time taken to set up models may be more meaning times consuming activities can lead to delay. It is therefore important to use the software model but after knowing how it works. This is basically because some of the software packages are known to have errors with their writing modules. In this case, individuals who understand how the software works are those that are in a position to use them effectively. Offer services of valuation to local organizations that are not in a position to undertake valuation processes for their clients: Most small organizations do not have the ability to undertake valuation process. One an individual offers such a service; it is one that can become a good source of revenue. Pursuing this route for small entrepreneurial organizations is the best thing to do as it will end up increasing revenue earned in the firm. Make sure that engagements are undertaken according to the given applicable guidance: All members who undertake financial operations and business valuation activities are expected to follow rules and regulations that are pointed out in a statement issued in the year 2007. This statement is the AICPA which was issued in the year 2007, is a statement on Standards for Valuation Services no 1 (SSVSI). The rules in this statement were supposed to be effective as at 1st January 2008. This mean that these rules are supposed to be followed to date and for individuals who intend to undertake small businesses, they have to check on their state licensing agency to see which standards have to be followed. Get a seasoned valuation specialist to review the first reports: The report is usually the end product that is viewed by clients. This means that a nice report can leave an impressive image of the firm enabling it to maintain and even attract more. A nice report can take up to six hours to do it properly. In this case it is important to find a specialist to do it having in mind that it has to be paid for. Get a credential for valuation: The National Association of Certified Valuation Analysts (NACVA) and the American Society of Appraisers (ASA), are among the bodies that offer these credentials. For one to acquire this credential, it is important to prove that knowledge on valuation work is present. In this case an exam is done to determine those who have knowledge on this work for them to be offered the credentials. That is why it is important to hire an expertise for valuation incase of any problems. Market the valuation Practice: This is the very last step where the practice is marketed. During marketing, presentations to local organizations should be done in order to make them understand what valuation is and why it is important to hire an expert. Valuation of Closely Held Firms: A Survey. It is an article by Dukes William. He intends to find out how closely held firms manage their operations. He points out that such firms do not engage in several operations mostly because they tend to follow on instructions of the managers only. In this case, it is clear that such organizations wait to be guided by the managers for them to carry out undertakings on what they have been assigned. With these types of firms, they mainly specialize on particular fields of operation as the bosses are the ones that decide on what to be done (Dukes, 1996, 426). Duke therefore, implies that these firms are different because they only work under orders from the managerial staff where they are not given opportunities to speak out their minds and offer contribution to what can be done in a firm. This means that for such firms there is no freedom of speech as they are not able to run the firm their own way. This gives a clear impression that it is only with orders from the managers that operations can be undertaken in such organizations. Conclusion In conclusion, valuation process is important as it enables firms to know their financial status making them to operate carefully to avoid losses. There are various firms in the contemporary society that use this valuation process to determine the worth of their products. This enables most managerial staffs to know the worth of all their products so as to know how to work with them in the market. This majorly deals with the distribution process because it is the worth of the product that will determine how much it will e sold when taken in the market. It is therefore a process that generally helps firms to avoid losses as they are able to sell products in regards to their worth. Recommendation For firms to be successful generally there are various issues that are supposed to be taken into consideration. First of all the issue of valuation is important as it enables the firms to make profits as they intend because they are able to sell products in accordance to their worth meaning they cannot experience loss. The other thing is that for a company to make more profits, it is necessary for the reputation of the company to be pleasing in the eyes of the client. This is a feature which should start from the firm itself. For effective undertaking of operations, employees and the managerial staff should get along well. This will make sure that there is no misunderstandings and that every operation can be done to completion. The employees should therefore be hard working to play their part and the managers should also give a helping hand when needed by making sure that all the facilities required for production are available. The other party is the relationship between the clients and the employees. In this case, employees should treat clients in a manner that will make them feel appreciated and offered services to satisfaction. Generally employees should have the following characters so as to get along well with the clients. They should be patient, committed, caring and understanding. Bibliography Brown, L. D. (2006) Corporate Governance and Firm Valuation. Journal of Accounting and Public Policy. 25 (4), 120-138. Dukes, W. P., Oswald D. B. and Christopher K. M. (1996), Valuation of Closely Held Firms: A Survey. Journal of Business Finance and Accounting, 23 (3) 419-438 Jensen, M., (1993). The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. The Journal of Finance, 48 (3) 831-880. Parker, E. (2010). Breaking Into Business Valuation: Steps for small firms to consider when entering the valuation market. Journal of Accountancy. 24 (3), 126-147 Schnabel, J. A. (1984). Bankruptcy, Interest Tax Shields and ‘Optimal’ Capital Structure: A Cash Flow Formulation. Managerial and Decision Economics, 5 (2), 116 -119. . Read More