Finance and Growth Strategies -MBA- - Essay Example

In a market where there is faultless information and perfect sureness, company share valuation would create not so many hassles, however, in the real world, assessment and projection issues connive to make the valuation process easier said than done. One recommendation is the employment of earnings approaches that take advantage of a firm’s net after-tax earnings at a suitable rate of return. In utilising an earnings-based method, at least three elements need to be established. The evaluator has to make an educated guess as to the amount and timing of future receipts and a suitable discount rate.

An option to the employment of net after-tax earnings is to base the analysis on earnings before interest and taxes (Feldman 2005; Pratt, Reilly and Schweits 2000; Pratt 1986). This procedure is fashionable and well accepted among leverage buyout groups and investors because it permits them to reach a value that defuse differences in financial structure. Essentially, substantial debate enfolds the choice of the discount rate used to get the most out of earnings or cash flows. This price stands for both the time value of money and the “risk” involved in cash flows.

As it is, the capital asset pricing model is a universally employed method. Nonetheless, speculative issues linked to the postulations of the appropriate market proxy, risk-free rate, and sample period have led valuation experts to reflect on different ways to work out an appropriate discount rate. Substitutes can include the application of historical market risk premiums and the employment of indices available from government or private sources (Koeplin, Sarin and Shapiro 2000, pp. 94-101; Brealey and Myers 1991; Weiss 1987).

Several valuation schemes acknowledge the fact that when purchasing a business enterprise, a buyer is actually making a speculative venture today hoping for