Q

Assignment on Managerial Analysis- In context of business evaluation

Home, - Managerial Analysis

Managerial Analysis

Business Valuation

Introduction 

Capital budgeting techniques are used for evaluating individual projects as well as merger and acquisition targets and they provide an objective basis for financing if the target project or target company is worth investing in. the methodology of evaluation however differs in the way it treats the cash flows and the way discounting techniques are used. The current research is an attempt to find the methods which are used for making business valuation and to find if they are good enough in the long term (Matschke, April 2010). 

Body of the Review 

Two of the most used methods for evaluation of new projects is that of NPV and APV. While NPV is a method which finds the present value of all the cash flows involved by using the relevant weighted average cost of capital (both debts and equity costs) , the APV uses only the cost of equity. 

 

Define APV and a discussion of how it differs from NPV?

 

The NPV method is heavily used as it provides the user a single value to be compared. For example if a project has a positive NPV of $100,000 after the relevant cash flows are discounted with the WACC then it shows that the project shall be implemented forthwith without delay. As the NPV is $100,000 the same would lead to an increase of $100,000 to the market value of the firm if the  project is implemented (ROSS and Westerfield, 2012). 

On the other hand, APV can be defined as the NPV of the project if the relevant cash flows are discounted with the cost of equity. It is pretty similar to NPV with the sole exception of using the cost of equity as the rate of discounting in place of WACC as the rate of discounting under NPV method. APV analysis also would include the tax benefits generated by the Interest costs and thus are highly beneficial to be used in the case of leveraged projects. The APV method is quite the same as that of the discounted cash flows approach and is also found to be highly useful in the case of leveraged buyouts (Eugene Brigham & Michael Ehrhardt, 2010).

Discussion of other methods used in business Valuation 

One of the most used business valuation method is that of the asset based valuation method. Under this method the net value of the business (usually a corporate entity) is found out by subtracting the value of all its liabilities from the listed asset base. This is pretty simple method as under a corporate entity (balance sheet approach) all the assets and liabilities are more likely to be transferred. However, this method is not so useful for a sole praetorship and partnership firm as it would be quite a difficult task to separate the personal assets from that of the business. 

The other method which is sued quite frequently is that of the Earning Value Approach. Under such a method the value of a business can be determined using the capacity of the company (target) to generate earnings in the future. There can be many methods under this approach and the most used is the discounted value of the future earnings approach. This is also known as the DCF method or the discounted cash flow approach (ATRILL & EDDIE, 2012).

Under the DCF method the first things the management would do is to estimate the future cash flows that is expected to be generated by the target company and the probable rate of growth of the earnings etc. then a suitable discounting rate would be used to find the net present value of all the cash flows involved. The NPV of all the cash flows that are most likely to occur in the future is the value of the business (Matschke, April 2010). 

However, there are few challenges involved in the estimation of the cash flows associated with the target firm. Thus, a detailed analysis of the probable cash flows must be undertaken to ensure the cash flows are estimated with reasonable assumptions and probability of success. 

Conclusion 

Business valuation is a complex process and no single method can be advised to suit all types business and economic situations. For example, a DCF method might be more suitable to a company whose cash flows can be estimated with a fair degree of certainly. Similarly, a market value method can be easily computed but is misleading in many cases. Thus, while deciding the best method, a series of different methods shall be employed before reaching a target value (Haley, 2018). 

Leave a comment


Captcha

Related :-