- This topic has 5 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
Hi john,
suppose we are buying a company in a service industry what could be the correct valuation method that can be used in assessing the value of the company?
My concerns on the theories: Dividend valuation could be misleading because the owner might have deliberately paid himself high dividend to gain tax benefits. Asset valuation would not show the true value as the company is not capital intensive but rather service offering and most of it’s value tied in individual loyalty. Earning valuation will not take into account those items that are not in the financial statements but desperately important to the company i.e brand awareness,skilled work force,strong management e.t.c.
just for great advice and more reasonable decision making, which one would we opt for?
Thanks.There is no ‘correct’ way, either in exams or in real life.
In practice all the different methods will be used to give a range of valuations and the final price will be subject to negotiation.
Dividend valuation will be questionable for the reason you state (and also because it is the purchasing company that will be able to determine the future dividend policy).
Asset valuations will include an estimate for goodwill which takes into account brand loyalty etc (even though it is obviously difficult to put a figure on it).
Earnings valuations are more useful than dividend valuations (because of the problems with dividend valuation). Items such as brand awareness are relevant for asset valuations but not for earnings valuations except insofar as a higher PE ratio may be used than that of similar companies if there is reason to expect higher growth than in similar companies.
In practice again there is no ‘best’ method – the purchaser (and the seller) will consider a range of values.
For calculations in the exam there is never a problem because the question will specifically state what method (or methods) to use.
thanks.
one more thing, throughout my studies and revision for this paper I have seen couple of assumptions on diversification of shareholders of the entity in question. If i may ask, what item in question signal the diversified nature of shareholders? is it the nature(quoted/unquoted) of the company or the activities and the industry traded in? or there is more.You will have to refer to a specific question where you have seen this because it can mean several things.
Most likely it refers to the diversification by the shareholders in that we assume (for CAPM) that shareholders are already diversified in that they already own shares in many companies and have therefore already diversified away the unsystematic risk and are thus only interested in the systematic risk (which is what is measured by the beta).
- The topic ‘company valuations’ is closed to new replies.