B ) Valuation
1 ) Definition
The valuation of a company may be requested in several occasions:
- mergers and acquisitions
There are several methods of valuation which are used commonly:
- market approach (how much a buyer would pay for the company as a minority participation?)
This methodology seeks to price the Company’s stock relative to that of publicly-traded companies impacted by similar economic conditions and market factors as the concerned Company. Public valuation multiples, as determined by market forces, are then applied to the Company, while accounting for any operating or financial risk differentials.
- transaction approach (at what price similar companies have been sold at that time?)
This approach utilizes prices and financial data from companies that were involved in recent sales transactions and which could be applied to the concerned Company in order to reach a value indication. This approach develops an appropriate sale price for the Company based on actual sales of similar companies or offers for the concerned Company itself.
- income approach (projected cash flow)
This approach yields a valuation indication based on the predicted capitalization of the Company using its future projected free cash flows. This future value is then discounted to the present utilizing an appropriate weighted average cost of capital that accounts for the Company’s capital structure and cost of equity and debt, as well as the expected inflation rate and the risk of achieving the projected net income.