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Financial Analysis:Estimation of the equity value of the company - Essay Example

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PART A Answer to Question 1 Equity valuation can be defined as the process of identifying the current market value of the company which is also regarded as the current market capitalization of the company. There are several step of equity valuation process and it requires an adequate understanding of financial management techniques and acumen…
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Financial Analysis:Estimation of the equity value of the company

Download file to see previous pages... During this particular process, the analyst should consider the competitive environment as well which will be of great source in identifying which aspects of the company’s business presents the greatest challenges and opportunities. The analyst must have an understanding of the industry structure as well and basic economic factors such as demand and supply and what are its deriving factors. After obtaining an adequate understanding of the entity and its industry, the next step is to forecast the financial performance of the company in the foreseeable future. This can be define as forecasting sales, dividends, variable and fixed production costs, marketing cost and other related administrative costs. The main purpose of this step is to identify how much profit is the company going to make in near future, because in general terms, today a company can be valued by its investors based on how much money it is going to make in the coming years. There are two approaches through which this analysis can be made. The first approach is regarded as the top down forecasting approach which is based on the average industry performance to which that particular corporation belongs. ...
Based on these company specific figures, the earnings and profit of the company is forecasted. The most important step in equity valuation process is the selection of an appropriate valuation model. The following table presents certain valuation methods for this purpose Equity valuation Firm valuation (equity plus debt) Cash flow based valuation approaches 1. Dividend valuation model (DVM) 2. Free cash flow valuation model (FCFVM) Profit based valuation approaches 3. Abnormal earnings valuation model (AEVM) 4. Abnormal operating profit valuation model (AOPVM) Based on the above valuation models, an analyst predicts the equity value of the company by selecting any one of the above mentioned models which appears to be apt in the circumstances. Finally the investor must make an investment decision based on the calculated value of equity in the above step. This decision involves investment recommendation to the investor whether it is financially feasible to invest in the stock of the company being valued or not. If the analyst concludes that the equity value of the company is as such which is significantly greater than the current book value of the company, then it represents that the company will reap benefits in the future for the investors, thus the investment decision would be financially viable. Answer to Question 2 Ratio analysis is a very accurate and reliable tool when it comes to analyzing the financial outlook of an entity. The primary reason to conduct a ratio analysis is to quantify the results of the operations of a company and compare them with that of the prior year(s) in order to assess different aspects of ...Download file to see next pagesRead More
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