Corporate Valuation Techniques & Applications: A Case Study

Abstract

The primary concern of financial analysis is the operating performance of a firm when they consider investing in a firm. Due to recent several corporate bankruptcies, the financial analysts and Finance Managers are using different valuation methods in order to achieve more accurate results out of their analysis before deciding upon further investments (Beneda 2003). Sofat et al. (2011), in their book Strategic Financial Management, described the valuation of a firm as a combination of theory, judgments, and experience. Bradford Cronell (cited in Sofat 2011:275) expressed the same view about the corporate valuation “Valuing a company is neither an art nor a science but an odd combination of both. There is enough science that appraisers are not left to rely solely on experience, but there is enough art that without experience and judgments, failure is assured.”

Business valuation is done for a different reason i.e. acquisition & disposal, stock market floatation, share disposal or purchase in unlisted companies, internal trading of employees’ shares or options, assessment of an owner’s tax liabilities, and establishing collateral for a loan (anon 2008). In this case study, we will explore different corporate valuation techniques and identify the strengths and weaknesses of those techniques. Furthermore, we will perform the valuations on a publicly listed company to determine whether this company is a worthwhile investment. As the Free Cash Flow (FCF) basis valuation produces a most accurate assessment of economic worth (anon 2008), we will perform this valuation first and later we will carry out the Dividend basis and Earnings basis valuation in order to determine whether our selected company is worth to be invested in.

Keywords: Corporate valuation, free cash flows, growth companies, operating performance, start-up companies

JEL Classification: M, G