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Corporate Valuation - Book Report/Review Example

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Asset in place are tangible assets in an organization. Examples include building machines and inventory. Growth options; Non-operating assets refers to marketable securities or ownership of non-controlling interest in other companies.
a) Net operating working capital is…
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Corporate Valuation
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Corporate Valuation Number: Lecturer: Asset in place are tangible assets in an organization. Examples include building machines and inventory. Growth options; Non-operating assets refers to marketable securities or ownership of non-controlling interest in other companies.
a) Net operating working capital is computed by subtracting non-interest bearing liabilities from current assets. NOWC is used to access liquidity of a company because it only looks at current assets and liabilities for operating a business. Operating capital is the capital available for the operation of a firm for instance manufacturing and transportation. NOPAT = Operating Income multiplied by (1-tax rate).
Free cash flow is found by subtracting capital expenditures from operating cash flow.
b) Value of operations is equal to cash flows multiplied by (1 + current growth rate). Horizon value is the value after which the terminal cash flows are constant; Corporate valuation model is the model used by business appraisers to determine qualification for loans, the cost of disposing the company and improve its status.
c) Value-based management is an approach geared at maximizing shareholder value by creating, managing and measuring value in an organization. Value drivers increase the value of a product by enhancing its perception e.g. cutting-edge technology; EROIC refers to the returns expected out of a new investment or venture.
d) Managerial entrenchment is the basis for establishing managerial efficiency. A company whose managers cannot be replaced or be judged by their performance will cost less and vice versa is true. Non-pecuniary benefits refer to those benefits that do not consist of monetary compensation.
e) Greenmail is the money paid to a party to stop an aggressive behavior e.g. during mergers and acquisitions, poison pills refer to a strategy used by companies to discourage hostile takeovers , restricted voting rights refer to restrictions of voting base on powers vested on an individual (Bauer, 2005).
f) Stock option is a mechanism of allowing employees to reap the benefits of their company’s growth. ESOP is used to provide a share market for departing owners of successfully closely held companies.
2. How to use corporate valuation model to determine price per share of common equity
The corporate valuation model allows determination of the value of an asset in the organization. For instance, the value of machinery, property and inventory is established and compared to similar items the company is selling.
3. It is possible for sales to decrease the value of a profitable company
This is possible if the company makes some trade-offs in order to sell more product. The trade-off will reduce the amount it earned on each product and though revenue is high, its worth is low.
4. There are some actions entrenched managers may undertake that may affect shareholders. For instance, if management procure goods from a supplier at a higher price or sell at a lower price than the norm, the company will incur losses and affect shareholders. Also, management may collude and engage in fraudulent activities or corrupt dealings and improper financial reporting (Bauer, 2005).
5. How possible is employee stoke options to be valuable even if the company stock price is short of shareholder expectations
Stock options do have associated risks and in case the company is not successful, they are not better than cash. However, they are highly discounted by the company and this becomes a motivation to employees. Usually if the company stock price is not performing well, the employee can convert the options to stock and sell it immediately (Akbar, 2013).
References
Akbar, S. &. (2013). Deflators, net shareholder cash flows, dividends, capital contributions and estimated models of corporate valuation. . Journal of Business Finance & Accounting, 30(9‐10), 1211-1233.
Bauer, H. H. (2005). Customer-based corporate valuation: Integrating the concepts of customer equity and shareholder value. Management Decision, 43(3), 331-348. Read More
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