Company Valuation: Methods and Applications

This assignment delves into the realm of company valuation, examining diverse methods employed to determine a company's worth. It covers fundamental concepts such as financial analysis, market capitalization, and the application of various valuation models. The text also illustrates practical examples, like scenarios involving partnerships and initial investments, highlighting how these valuation techniques are used in real-world business situations.

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Equity Valuation
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Course
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City, State
Date of submission

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Introduction
This paper seeks to provide comprehensive analysis of four companies that are aerospace and
defence industry. The paper also aims to show how how the companies report their financial
staments using IFRS nad IAS guidelines. The companies in focus are; Rolls Royce
holdings,Cobham, Avon Rubber and Cohort plc. The following are some of the terminologies
that they use when preparing the financial statements.
net asset value :, the net asset value is used by their shareholders (of the four companies) to
know at the time of publication the price at which the companies can be liquidated or acquired.
Usually the fund manager publishes it every day, after the closing of the markets or at a specific
time if it includes stocks of markets from different continents (A Basic Guide for Valuing a
Company, 2002). For Rools roysce holding the net asset value is 16,5 pounds/share , Cobham is
12.93punds /share.Market value-This is the price that the asset would fetch in the Bourse, it is
also known as market capitalization and is obtained by multiplying the number of ordinary
shares by the share price currently(Britton and Waterston, 2013). The investor will calculate the
return on his investment by the difference between the net asset value at the time of purchase and
the net asset value at the time of his redemption, having to tax for the capital gains obtained
(Cragg and Malkiel, 2009). The market value for each of the four companies under review is
different.Discount cash flow- The investment managers at the four companies use the following
valuation method that helps the investor to estimate the attractiveness of an investment

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opportunity. This method uses future cashflow projections and then discounts them toarrive at an
estimated present value, which is consequently used to evaluate the potential of an investment. If
the present value is greater than the current cost then the investment opportunity is a good
one(Damodaran, 2013).
Dividend pay- This is a distribution of the earnings that a company receives in a particular year
to its shareholders. Dividend pay is dicided by the board of directors and is paid as either interim
or final at the year end. The dividend for the four companies vary depending on the performance
and companies policies and also industry’s performace.Dividend growth- This is the rate of
growth in perentage that a stock’s dividend undergoes over a period of time.
That is to say, since the net asset value represents the evolution of the value of the investment
fund, it will be a relevant indicator to know the performance that this product provides during the
period between the moment of its purchase and the moment of its sale or liquidation, as well as
the withholding that will be applied on the same from the tax point of view (ELLIOTT, 2017).
Analysis of the aerospace and defense industry
Britains aerospace industry is the second largest in the world. Failure to secure a good brexit deal
has hurt the industry and it is expected that aerospace companies turnover could decrease in the
near future. This means that dividends paid out, earnings per share and price of the share may
fall in companies in this industry. On the other hand, the defence industry is on a positive
trajectory, with many governments increasing their military wares, companies in this industry
have improved dividend growth as well as share price for their shareholders.
Methods of valuing a company

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The valuation of a company, whether we are talking about a company own or others, is a delicate
and crucial exercise in the world of investment. Calculating the value of your business is not
easy, just as it is not easy to determine the economic value of any tangible asset or service
(Fernández López, 2002) .
If we let ourselves be led by our intuitive knowledge and by framing any economic activity
within a market economy, we could conclude that any material good or any service has the exact
value that a hypothetical buyer is willing to pay for it
What is the value of a company?
It is true that any quantification of an economic value always entails some subjective component.
Everything will depend on what the good situation we are valuing and our intentions with that
good.
In the case of a company, it is not the same valuing it with intentions in mind or others. We can
value a company of our own because we want to get rid of it and put it up for sale. But also to
seek financing using its value as collateral, or because we want to take to market shares of our
company.In an opposite situation, we may want to value an outside company to acquire it, to
obtain part of its shares, to invest in it through other type of formulas, etc (Kimmel, Kieso and
Weygandt, n.d.). In this sense, our intention as investors is fundamental in determining the
procedure that we must use to value a company. And this procedure, in turn will drastically
change the outcome of our assessment.
Accounting valuation vs market valuation, market value per C/S

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The market value on many occasions with the price and is that this is not only what is really
worth, but what some people are willing to pay for that company at any time of the timeline.
It is very interesting therefore in these moments, in which the company faces temporarily in a
moment of serious economic recession and crisis of values of many markets, considering an
extra differentiation between two concepts that are more different and at the same time diffuse of
what appear, market value and book value but with a clear objective point of view (Lin and
Wang, 2017).
The book value is an undeniable price, a so-called theoretical price that has both the company as
a whole and each of its parts in the so-called shares that correspond to its own owners,
shareholders. The book value or theoretical price is basically knowing the assets, liabilities and
net that the company counts as well as the synergies by know how and positioning of the
company in the market.
The book value may vary over time, but in a more measured and safe manner than the market
value. The market value is an very explosive value and depends directly on what happens along a
certain time line. If the company, for example, gives good news, although it is at that moment its
theoretical price has not risen, its market value because many people will start to buy shares of
said company and appreciate it will rise.
Under these conditions it is inevitable therefore that many oscillators indicate that we must buy
shares of companies, since we can buy them for a much cheaper price than what these shares
really are worth and also can contribute each year in the form of dividends. It is therefore very
significant the current situation of the markets in terms of market value and accounting value that

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certainly give meaning to the famous phrase that is always run between analysts(Koller,
Goedhart and Wessels, 2015).
Hitorical and Current figures
In financial accounting historical price of shares are important because they are used to show the
growth of the share in terms of both dividend growth and share price. On the other hand, current
figures are the ones that show the shares current price (Kurokawa, 2010).
Diffent methods of market valuation
These are methods developed by experts in business and finance, so that their implementation
involves a certain degree of complexity. But we can do a simplified approach to understand what
factors related to the company takes into account each one of them and which may be more
appropriate depending on what situations.
1. The book value
It is a valuation method based on the balance of accounts of the company and is one of the
simplest to calculate. It only takes into account the net worth of the company.
In this method, the assets of the company are taken, that is, the assets that it has at that moment
(contributions from different partners, movable and immovable property, retained earnings over
time of the company activity, etc. .) and then you subtract the liabilities (what the company owes
its debts) (Madden, 2003).As is assumed, this type of valuation method will be especially

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favorable in the case of companies with high assets (real estate, machinery, vehicles, furniture,
etc.) and not for other types of companies that base their business on other non-tangible factors
(Market capitalisation, 2009). The settlement value Through calculation of the settlement value,
what is done is an estimate of the value of the company at a specific time, if all its assets were
sold at market price. In this case, the cost prices of the assets are not taken into account, but their
value in a possible current sale, adjusting the prices of the goods to what the market dictates.
The multiple of sales
The multiple sales method is a valuation method that is often used with technology companies. It
is based on a guideline calculation that is obtained by multiplying the money contributed by the
sales of a company by a coefficient. This coefficient will be determined by a series of analyzes of
the activity of the company in a previous period, as well as to analyze other companies of similar
activity, so that the value obtained can be extrapolated at the time of valuation.
The value of profits (PER)
This method, also known as PER: Price-to-Earnings Ratio (Ratio) is often particularly useful for
valuing listed companies. It is a question of determining the relationship between what is paid for
each share of the company and the profit it brings annually.
The value of dividends
Through this method the company's value is calculated according to the dividends per share
expected to be obtained. To do this, we must calculate the dividend that each share of the
company contributes and divide it by the profitability demanded by the shareholder. For
example, let's say the case of a certain shareholder who has 50 shares of a company, at a value of

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10 pounds per share and dividends of 1 euro per share. Suppose that this shareholder demands a
return of 3% for their shares: The required 3% of profitability would mean minimum dividends
of 0.30 pounds per share. To calculate the present value of each share: formula-per-value Once
the value is calculated of each share based on the dividends it reports, we can calculate the total
value of the company multiplying it by the number of total shares (Dennis and Rendleman,
2003).
What method to use to value the four companies
As we have seen, there is no better or worse method that other. Everything will depend on the
purpose that we have in mind when valuing the company. What we should know is how the
different methods give us one type of information or another about the company, so that this
information will help us decide on our investments.
When we invest a part of our money in, say, a certain company, we acquire a part of it in the
form of shares, whose price fluctuates according to the evolution of the market. In this case, our
gains or losses will be given depending on the number of shares we have and the evolution of
their price. That is, if the value of them is less than when we buy them, we will have lost money,
and vice versa.
This obvious statement is not so obvious when what we are talking about is mutual funds. In this
case, since the results of the fund depend on the weighted evolution of the values that compose
it, the fact that it increases or decreases one or more of them does not necessarily imply that the
value of the fund will necessarily go up or down.

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To know, therefore, what is the evolution of the profitability of an investment fund, it is
necessary to have an indicator that values the assets of the same at a certain time of the time.
This indicator is known as the net asset value and gives us an idea of how the fund is behaving.
From a technical point of view, the net asset value is the price that is valid for each share of the
collective investment product. At first sight, the net asset value is very similar to the share price,
since the first represents the amount of a small part of the fund while the second represents the
value of a small part of the company.
Calculation of net asset value
The calculation of the net asset value of an investment fund is simple. It is calculated by
summing the value of all the assets that comprise it (including liquidity among them), subtracting
the expenses related to its management and dividing the result by the total number of shares.
Mathematically:
Net asset value = Value of the investment fund / Number of units
The value includes not only the amount of the portfolio but also the net returns obtained by the
same, that is, after deducting the Corporation Tax.

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With regard to the denominator, the number of shares of any investment fund is not fixed, but
depends on the manager's policy and the subscriptions or reimbursements made. Each person
will acquire a certain number of shares depending on the money he wants to invest and the net
asset value of the fund.
Company 1
Avon Rubber
Avon rubber is a company that deals with manufacture of rubber based products. The company is
a constituent of FTSE and its largest division. It has a division that produces equipment and
components for the UK armed forces which is known as Avon protection and Milk Rite. Some of
the products they produce include CBRN(chemical,biological,nuclear and radiological).
Net worth/ Net Asset Value 45 million pounds
Net Asset Value =(Assets-Liabilities)/total number of common shares
Assets and liabilities should be reported at fair market value
=(45,111,000-36,641,000)/770,000million shares=$11/share
Market value=$12.20/share as at 30/6/.2017
Source of data: http://www.marketwatch.com/investing/stock/avnbf/financials/balance-sheet
Company 2

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Cohorts Plc
Cohort is a parent company of four agile, innovative and responsive businesses that provide
defence and army products to countries like British, Portugal and other European Countries. The
company’s objective like any other company is to create wealth and deliver value to its
customers.
Net worth=15million pounds
(Assets-liabilities)/total number of common shares
=(53,145,000-40,120,000)/40.96million share=0.32p per share
Source of Data: https://www.google.com/search?
publisherid=51778&st=ds&combofeed=google&u_ip=154.76.19.200&q=Cohort+Plc+balance+s
heet
Net asset value
Cobham PLC
This is English /a British manufacturing company that is listed in the London Stock Exchange
and also a constituent member of the FTSE 250 Index. It is a defense company and the fifth
largest defense company in the UK.Its share price 136.5 pounds.
Net Asset Value (NAV) = (Assets- Liabilities)/ Total number of Common shares
Assets and liabilities should be reported at fair value (millions)
= (2,793- 2216.1)/44.6

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=12.93 pounds/ share
Source; http://www.cobhaminvestors.com/key-financials.aspx
Rolls Royce Holding
It is a British multinational company that designs, manufactures and distributes aviation power
systems and motor vehicles. It is also listed in the London stock exchange another markets in the
world.
Net Asset Value (NAV) = (Assets- Liabilities)/ Total number of Common shares
While its market capitalization stands at over 22 billion pounds, rolls Royce holdings includes
= (3,293- 1866.23)/ 86.42
= 16.50 pounds/ shares
Source; https://www.rolls-royce.com/investors/annual-report-2016.aspx
It means capturing what is happening, transmitting it, comparing it with what must happen,
deciding what is going to be done, converting that decision into information and transmitting it to
the executing agencies, ie financial reporting Information systems (O'Neill, 2014).
Starting from what Financial reporting can be defined as: The set of elements, rules, procedures,
that are interrelated with each other, with a logical and ordered sequence of steps to achieve a
result, they can issue particular criterion of Information Financial reportings, after having
reviewed a set of bibliography, and this is: entity, which after being processed, analyzed and
compared with what must happen, become information to be used internally or externally,

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allowing decisions. One of the issues that distinguish the management process is the constant
circulation of information, both within the entity and with respect to its external environment
(Ottoo, 2000).
The existence of a plan with defined and clear objectives will require a means to provide
information about what the company has planned and what it is doing. From Management
Financial reporting: Planning and Control, to Budget Financial reporting and Accounting. This
means that there must be information financial reporting that operate in the organization, which
allow to communicate both planned and realized from the largest financial reporting of
administration in the organization, such as the financial reporting of planning and total control of
utilities, to financial reporting budgetary control financial reporting and budgetary control
financial reporting (Pedersen, 2009).
Estimating the real value of assets incorporates difficulties and subjectivity Its drawback is that it
projects to the future, without nuances, the present profitability. The chosen discount rate
significantly influences the resulting value. According to Comparable Multiples, a company is
valued based on information available from other similar companies (in sector and size)
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Asset Valuation
Company’s assets are valued differently. Mostly they are the tangible and the non-tangible assets
including patents and goodwill. The company’s net assets are the difference between the assets
and the liabilities of the company.
For the four companies, there assets are

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Human resource Assets
The human resource is an asset that is so essential in a company. In aerospace and defense
companies like Rolls Royce, most of the human resource include engineers, designers, aero craft
experts, technologists and administrative staff. To get the value of your business or business
easily, fast and cheap, consult our professionals who will apply the most efficient and
appropriate business valuation techniques for your business. Valuation report: If you want to
know how much your company or business is worth in detail, our experts will prepare a
valuation report accurately (Damodaran, 2013).
The new regulations include cash flow amendments; deals with a key issue in financing
activities. The amendment calls for a reconciliation that allows you to see the movement of cash
flows and what is the movement of items that do not move cash to reach the balance sheet
balance, Clarifications help, but it remains a rather complex rule to apply (Weil, 2017).
Plant, Property and Equipment IFRS 15, IAS 16
IFRS 15 addresses issues such as the sale of goods and services, acting as agent or principal
subject to the existence of economic control of the transaction, without which cannot be main,
and licenses (access to intellectual property). Cohorts Plc,they also have made sure that IFRS
and IAS reporting standards is adhered to in reporting of financial statements of respective years,

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It has many nuances and can have very complicated operational effects." Changes to IAS 21,
IAS 12, IFRS 15 and IFRS 16 I then referred to the IAS 21 update . by the use of IAS and IFRS,
the four companies have been able to put their financial reports in order.
For Rolls royce, they have incorporated all their company subsidiaries into one financial report.
Cobham plc on the other hand, they have made full disclosure a mandatory practice in thei
financial statements in accordance to IAS 1.
Asset: Operation Financial lease
Also discussed is IFRS 15 using the expected value model, present in IAS 37; defined this model
as the sum of the product of the probabilities of outcome by the value of each probability.
Subsequently, it dealt with the new IFRS 16 - on leases - and explained that there are significant
changes with respect to the previous rule, in particular in the tenant's accounting(Fernández
López, 2002) ..
R&D- Goodwill
It contains 82 pages and was issued by the IASB this year, which was received with criticism
from users. "It is assumed that disclosures are necessary for the information to be sufficient to
allow decision making ... in practice what is has shown that many of these revelations are not
seen by anyone. The cost-benefit of collecting the disclosures has been greatly questioned. The
expert reviewed the document's structure and builds effective financial reporting, and reflected
on the inclusion of non-financial information according to local needs and the requirements of
current legislation. Some non-financial data have financial effects. Finally, he explained that the

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IASB could recommend to management to include integrated reports (Schmidlin, 2014). What
will be the role of financial information versus the integrated report? Is it an independent
element?
Hedging &Risk management
Hedging is the diversification of company’s assets in different portfolios, in order to minimize
the risk of loss making. On the other hand, risk management is the mitigating excessive damage
for the company not to go into deep losses.
Goodwill
According to International Accounting Standards (IAS) , goodwill happens when a company
acquires another business altogether which is the cost of business purchase less the fair market
value of the assets that are tangible. It is usually an intangible asset.
Financial management valuation method
In aerospace and defense industry, the company’s financial management valuation method is a
method of measuring the management of the companies. The asset base of the four companies is
almost equal while as members of the same industry, they produce and manufacture almost
similar things(Koller, Goedhart and Wessels, 2015)..
a) Discounted cash flow
This is the net present value and future present value of the company’s cash flows. Discounted
cash flows is a good method of measuring a company’s inflow and out flow of money.

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b) Dividend growth rate
This is the rate at which a company’s dividend policy increases with each payment and time of payment.
If the dividend increases in a positive manner, the growth rate is positive while if the company reduces
the dividend, the dividend growth rate will be negative.
Company Dividend growth rate 2015 2016
Avon Rubber p.l.c. Dividend Growth = Year
X Dividend / (Year X - 1
Dividend) - 1
1 x (1 + 3.56%) ^ 3 =
$1.489
1 x (1 + 3.56%) ^ 4 =
$2.43
Cohort p.l.c. Dividend Growth = Year
X Dividend / (Year X - 1
Dividend) - 1
1 x (1 + 3.56%) ^ 3 =
$1.57
1 x (1 + 3.56%) ^ 4 =
$2.15
Cobham Dividend Growth = Year
X Dividend / (Year X - 1
Dividend) - 1
1 x (1 + 3.56%) ^ 3 =
$1.75
1 x (1 + 3.56%) ^ 4=
$1.27
Rolls-Royce Holdings Dividend Growth = Year
X Dividend / (Year X - 1
Dividend) - 1
1 x (1 + 3.56%) ^ 3 =
$4.25
1 x (1 + 3.56%) ^ 4 =
$1.15
c) Comparisons with other companies in the industry
In aerospace and defense industry, the companies have the same and unique characteristics. New
trends in accounting standards and their relationship to sustainable development IFRS and its
volatility began his intervention by saying that one of the major drawbacks of IFRS is volatility,

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as changes are constantly being made in its wording. He then presented a list of the amendments
published since the beginning of 2016: some are already in force and others will begin to do so
shortly. Later explained the draft changes to IFRS 3 and IFRS 11 on the definition of what a
business is and commented on the improvements to IFRS 8-interim financial information in
relation to operating segments (Kurokawa, 2010).
d) External environment to decide the market value
The discount rate applied influences the resulting value. The combined use of several valuation
methods is quite common. Thus, the cash flow discount is usually used and the value obtained
by the resultant is compared with other methods, usually that of the comparable multiples(Ottoo,
2000).. . According to the Capitalization of the Benefit, a company is valued at a rate of
actualization of its annual benefit. This method is already considering the current profitability
(usually the profit obtained in the last financial year closed).
How to know the valuation of companies?
To determine the value of our company, several techniques have been developed called valuation
methods (Schmidlin, 2014). Here are the highlights:According to the Net Book Value, the
company is valued for the difference between the sum of the book value of its real asset and the
sum of the book value of its liabilities. Its advantage is based on objective data, directly from the
Balance Sheet. It has as disadvantages both the neglect of the possible existence of latent capital
gains / losses, and the avoidance of present and future returns.
Company Assets value in pounds

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Avon Rubber p.l.c. 45.111 Billion pound
Cohort p.l.c. 53.145 B pounds
Cobham 27.93 B pounds
Rolls-Royce Holdings 32.93 B pounds
Why methods of Valuation differ significantly
According to the Net Asset Value, the company is valued for the net amount that would result in
the assumption of its liquidation, which requires an estimate of the realizable value of its assets
and a quantification of its liabilities (Stice et al., n.d.). It overcomes one of the drawbacks noted
in the previous method, butit does not consider present and future returns. Estimating the real
value of assets incorporates difficulties and subjectivity. According to the Capitalization of the
Benefit, a company is valued at a rate of actualization of its annual benefit. This method is
already considering the current profitability (usually the profit obtained in the last financial year
closed). Its drawback is that it projects to the future, without nuances, the present profitability.
The chosen discount rate significantly influences the resulting value. According to Comparable
Multiples, a company is valued based on information available from other similar companies (in
sector and size). The ratios between the price paid and various parameters (sales, EBITDA, BAI,
asset ...) are calculated, and these ratios are applied to the same variables of the company that is
being valued to obtain its possible price. Its advantage lies in the use of data from real and recent
transactions. Its drawback is that the data are not always available and that the comparability of

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the data is not always adequate. Currently, the method that is generally accepted for valuing a
company is the Cash Flow Discount.
Recommendation for Improvement
Based on the information available, net cash flows expected in the coming years (generally five)
are estimated and the residual value at the end of the estimated period (usually as perpetual flow)
is estimated. In use of a suitable discount rate, calculate the present value of the future flows
that represents the overall value of the company. It is deducted from this the amount of the
financial debt - Debt with cost -, the value of the shares of the companys is obtained (Weil,
2017). The discount rate is obtained by adding several risk premiums (due to the country, the
industry or the company) to the risk-free rate. Its advantage is its close relationship with the
aerospace and defense companies objective: to obtain future profits. Their drawback lies in the
subjectivity that requires the estimation of future flows. The discount rate applied influences the
resulting value.
The combined use of several valuation methods is quite common. Thus, the cash flow discount
is usually used and the value obtained by the resultant is compared with other methods, usually
that of the comparable multiples.
Anyone who has a certain level of accounting and financial knowledge can apply the valuation
methods to determine the value of a company (Weil, 2017). However, the correct application of
the valuation methodology to each case and the proper interpretation of the results obtained
require a considerable depth of accounting, financial and, especially, valuation techniques. There
are accredited knowledge and experience in the field (Westland, 2003).

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Conclusion
It is a valuation method based on the balance of accounts of the company and is one of the
simplest to calculate. It only takes into account the net worth of the company (Westland, 2003).
In this method, the assets of the company are taken, that is, the assets that it has at that moment
(contributions from different partners, movable and immovable property, retained earnings over
time of the company activity, etc. .) and then you subtract the liabilities (what the company owes
its debts).
If they have, for example, the companies have formed by three partners in which each
contributes certain pounds and in which at the time of the foundation they ask for a credit of
pounds to buy a local and begin to operate.
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