Company Valuation

Paper Summary:

This paper describes and analyzes some of the different methods for appraising the value of a company that is being sold. The paper looks specifically at methods such as net-asset valuation, price-to-earnings ratio and discounted cash flows. It also describes the goals and the conditions surrounding the selling business, as well as the goals of the purchasing company.

Table of Contents:
Net-Asset Valuation
Price-To-Earnings Ratio
Discounted Cash Flow
Conclusion

From the Paper:

"The U.S. economy is arguably the most diversified in the world, and this allows for many different types of businesses to flourish. Companies that supply raw materials, manufacture goods, distribute items, or provide services are all part of the American economic landscape, and these businesses are regularly bought and sold. Because of the variety of businesses that can be purchased or acquired, there are several different methods for arriving at a proper valuation. Three of the common valuation methods are net asset, price-to-earnings ratio, and discounted cash flow. Each of these methods is appropriate for given situations - net asset, for example, may be the only reliable way to valuate a business that is focused on assets, such as real estate. However, all three of these methods have their limitations. Price-to-earnings, for example, rewards stock speculation and can lead to overpaying. But, taken together, these three valuation methods provide a useful suite of tools that can handle many different situations."

Sample of Sources Used:

• Berry, T. 2004, "Planning for Purchasing a Business," Bplans.com, viewed 20 May, 2007 at http://www.bplans.com/bb/article.cfm/138.
• Bizquest Staff, No date, "Valuation Methodologies," BizQuest.com, viewed 19 May, 2007 at http://www.bizquest.com/resource/valuation_methodologies-18.html.
• Brooks Barristers No date, "Key Questions When Purchasing a Business," LexisNexis, viewed 20 May, 2007 at http://business-law.lawyers.com/Key-Questions-When-Purchasing-a-Business.html.
• "Business Valuation Methods" No date, Second Venture Corp., viewed 20 May, 2007 at http://www.secondventure.com/business-valuation-methods.asp.
• "Calculating Discounted Cash Flow" 2005, Industry Canada, viewed 20 May, 2007 at http://strategis.ic.gc.ca/sc_mangb/stepstogrowth/engdoc/step3/ssg-3-8.php.

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