Valuation Methods in Financial Management

Financial Management

TABLE OF CONTENTS
QUESTION 2 – MERGERS AND TAKEOVERS...................................................................3
Calculating the value of Trojan plc using the following valuation methods.........................3
d. Critical evaluation of various valuation techniques...........................................................4
QUESTION 3 – INVESTMENT APPRAISAL........................................................................7
1. Application of different investment appraisal techniques..................................................7
2. Benefits and limitations of different investment appraisal techniques............................10
REFERENCES.........................................................................................................................14

QUESTION 2 – MERGERS AND TAKEOVERS
Calculating the value of Trojan plc using the following valuation methods
a. Price/earnings ratio
Earnings per share = Distributable earnings /number of
shares
40.4/147
0.27
Market price per share 2.05
Price earnings ratio = Market price per share/Earning per
share
2.05/0.27
7.46
Value of the firm 7.46*40.4
301.38
b. Dividend valuation method
Market price = D(1+g)/(Ke-g)
As per CAPM,
Ke=Rf+(Rm-Rf)ß
=5+(11-5)*1.1
11.6
Market Price =13(1+0.02)/(.116-
0.02)
138.125
Value of the firm = Market Price *
number of shares
20304.38 pounds
c. Discounted cash flow method
Discounted cash flow

Net operating profit 40.4
Add: depreciation 0
Add: change in working capital 0
Less: change in capital
expenditure
0
Free cash flow 40.4
Discounting rate = WACC = 9%
Present value of cash flow = Annual cash flow /
discounting rate
Cash flow growth rate 2%
= 40.4(1+0.02) / (0.116-0.02)
= 429.25
Value of firm 4769.44 pounds
d. Critical evaluation of various valuation techniques
Price/earnings ratio
The P/E ratio is the assessment of market price per share in proportion to the earnings
per share. The EPS is determined using the performance data of past four quarters of the
company. The higher ratio suggests the higher expectation by means of the investor with
respect to higher profits in the future period in comparison to low P/E ratio. The relationship
between those two shows what the market is inclined to pay primarily based on the current
income earning level and also indicates if the market is overvaluing or undervaluing the
company (Leibowitz, Kogelman and Bova, 2019). An upward push in the earnings per share
will lead to the rise in the market price and the lower earnings per share (EPS) shows fall in
market rate per share. This ratio is very useful in evaluating the companies within the same
industry. But the high price earnings ratio is taken into consideration to be the risky
investments in comparison to the lower ones and this is because of the reason that higher ratio
indicates higher expectations.
In mergers and acquisitions, it is essential to analyse the ratios of the organizations in
a similar industry. This ratio can be misshaped by the organization which is completely
relying on how the organization has represented the things and depends on the accounting