Principles of Finance - Essay Example

When tax is reduced by some percentage it increases companys income by certain multiplier effect since tax is a leakage on income. When tax is reduced to 18%, the taxation will be 90.16pounds (Adams & Von, 2007). b) The assumption is subject to discussion in such a way that each of these methods has their strengths and weaknesses. Taking a case of dividend growth rate, empirical evidence shows that a company, which pays more dividends, has low growth rate. The main reason behind this is that most of its profits go to individual shareholders instead of being ploughed back to the business.

This is practical evidence. However, most of the methods are theoretical and lack practicality (Halsey, R. F, 2012). Considering the case of net asset valuation, the method does not consider the future prospects of the company. In fact, these valuation methods depend on historical data, but in a business environment, different environmental factors lead to different outcomes. This is a limitation that begs the question whether the methods are practical because the business environment changes every day and cannot rely on historical data (Halsey, 2000).

The book value approach in asset based method is practically unrealistic because the values of the fixed assets depend on sunk costs and relative depreciation. These values are of no relevance to any purchaser or seller (Von, et al., 2004). In considering replacement value, it is also of no practicality. This shows what it might cost to start a business, but this could be lower than the true value for successful business unless the estimation is also made for the value of goodwill and other current assets.

In considering the P/E approach, it is not somehow practical. When you are buying a company it is for the entitlement of its future earnings not past earnings. This approach does not take into account turbulent economic times which make them very