THE FINANCE AND INVESTMENT

Running Head: FINANCE AND INVESTMENT
FINANCE AND INVESTMENT
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Corporate Valuation...............................................................................................................2
Company and Market Growth Forecast.................................................................................4
Total Value of Firm................................................................................................................5
Conclusion..................................................................................................................................7
Reference....................................................................................................................................9

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Introduction
The corporate valuation helps in answering the question that relates to how much the
company is worth of. There consist of standard tools, methods and ratios used by the
financial analysts for determining worth of company and overvaluation and undervaluation of
stock. The valuation of business is general process for determining economic value of the
company unit or whole business. It is the process and set of the procedures used for
estimating economic value of interest of the owner in business. The value of firm is
discounted value of its future flows of cash. The market value of firm is total value of the
outstanding securities (Hering, Toll and Kirilova 2015). Hence, this assignment includes
discussion on the extent to which industry or the business growth aids towards firms value
predictions and measurement.
Discussion
Corporate Valuation
The valuation is referred as process for determining present value of the asset or
company. This can be done by using different techniques. The analysts who wants to place
value on company, they normally look at management of business, its composition of capital
structure, market value of assets of the company and prospective earnings of future. The
valuation may be used for determining fair value of security. It depends on amount that buyer
is ready for paying seller. It is done with the assumption that both of the parties enter into
transactions (Farooq and Thyagarajan 2014).
It is during security trading on exchange, buyers and sellers dictates market value of
the stock or bond. The intrinsic value is referred as perceived value of security based on
future earnings or other attributes of entity, which are not related to the market value of
security. Hence, analysts’ work when doing the valuation of company. The company can be

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overvalued or undervalued by market. The valuations can be performed on liabilities or assets
such as bonds of company. It is required for various reasons such as financial reporting,
litigations, investment analysis, capital budgeting and transactions of merger and
acquisitions. The firm’s business valuation is significant exercise because it helps in
improving company. The reason for performing business valuation includes litigation, exit
strategy planning (Goedhart, Koller and Wessels 2015).
Knowing the worth of corporation and whether the stock is overvalued or undervalued
is vital, when it comes to acquisition, mergers, market instability and financial stress. One of
the common method for determining company’s value is also known as asset based method.
This method uses book value of firm’s equity. It determines value of firm’s assets minus its
liabilities. Regardless of whether it is tangible items, for instance working capital and cash or
the intangible items such as reputation and brand name, equity is considered as to be the most
vital factor (de Almeida and Eid Jr 2014). The equity is considered as everything, which is
possessed by company if they stop making money and doing business. Further, most of the
accountants prefers for using traditional method of balance sheet. It is the excellent method
for determining quickly if firm is having more cash on hand rather than the current value of
market (Goedhart, Koller and Wessels 2015).
Another popular measure of accounting value is the current working capital of
company in comparison to its market capitalization. The working capital is referred as what is
left after subtracting current liabilities from the current assets. The working capital are funds,
which firm can access quickly for conducting daily transactions of business. The knowledge
about accurate working capital amount is essential for the business that invest and trade.
Alternatively, equity of shareholders is the accounting tool, which encompasses liquid assets
of company such as retained earnings, property and cash (Hering, Toll and Kirilova 2015).

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The last method is free cash flow. Even though, most of the investors don’t
understand cash flow principles, it is considered as one of the most common tools of
measurement to value firms in investment banking field. The cash flow is referred to money,
which passes through firm minus all the fixed expenses during the period of time. It is the
firm’s income before taxes, amortization, depreciation and taxes. It focuses on operations of
business and not on the secondary profits or costs. For instance, taxes depends on current
regulations of taxation in give yea and can fluctuate dramatically. Further, it should be kept in
mind that the intangible assets such as brand loyalty and goodwill is having value but it
cannot get quantified (Korenková and Urbaníková 2014).
Company and Market Growth Forecast
The financial forecasts are basis for the fundamental valuation of equity based on the
discounted cash flow or multiples of market. The effective model of forecast should be based
on thorough understanding of the firm’s management, business, external environment,
historical results and strategy. Therefore, analysts begins with review of firm and its
environment, its strategic position, industry, competitors, customers, suppliers, management
and key products (Popovic, Majstorovic and Grubljesic 2015). It is with the help of these
information, key cost drivers and revenue can be analyzed and assessment can be done on the
likely impacts of the relevant trends, for instance technological developments and economic
conditions. The understanding of fundamental drivers of business and assessment of the
future events helps in providing basis for the development of inputs to forecast model (Sander
et al. 2014).
The company and industry analysis are important tools for the fundamental analysis.
The approaches such as hybrid, bottom-up and top-down are used for forecasting expenses
and income. Usually the top-down approach begins at overall economy level. The bottom-up
approach begins at level of individual unit or company within firm. The time-series

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approaches are being considered as top-down (Georgios and Chris 2015). The hybrid
approaches are consists of bottom-up and top-down approaches. In the approach of growth
relative to the GDP Growth for forecasting revenue, the forecasting is done on growth rate of
the nominal gross domestic profit and the company and industry growth relative to the
growth of GDP. In the approach of market share and market growth for forecasting revenue,
analysts helps in combining forecasts of growth in the particular market with the forecasts of
market share of the company in individual markets (Schmidlin 2014).
The operating margins are correlated positively with the sales, as it helps in providing
economies of scale evidence in the industry. Some of the line items of balance sheet, for
instance retained earnings, directly flows from income statement. However, inventory,
accounts payables and accounts receivables are linked closely to the projections of income
statement. The most common ways for modelling the accounts of working capital is using
efficiency ratios. The persistent and higher ROIC level are associated often with having
competitive advantage. The inflation or deflation affects the strategy of pricing, depending
upon consumer demand nature, competitive forces and industry structure (Damodaran 2018).
When development of technology results in new product, which threatens for
cannibalizing demand for existing product, the forecasted unit for new product combined
with the expected factor of cannibalization can be used for estimating impact on the future
demand for existing product. The factors influencing choices of explicit forecast horizon are
consists of employer preferences, company specific factors, cyclicality of industry, average
portfolio turnover of investor and projected holding period (de Almeida and Eid Jr 2014).
Total Value of Firm
There are various investors who get confused between various metrics that helps in
representing total value of company. These includes book value, market capitalization and

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enterprise value. The book value is accounting value of firm as determined by balance sheet
of firm’s financial statements. Although, stated values on balance sheet might be different in
comparison to market value (Damodaran 2016).
The market capitalization is true measure of value of the company. There has been
common misconception that firm’s per share price of stock holds as much significance as its
total market capitalization, when it comes for choosing the stocks to purchase. It occurs in
case of the new investors. The market capitalization of company should be the key
consideration when stock is evaluated. It is because it helps in telling the value of firm (Culík
2014). The per-share price of the given stock is having no virtual meaning to investors when
doing the fundamental analysis except for its uses in some of the isolated calculations. In
case, if one follows route of technical analysis for selection of stock then it is having different
story. The per-share price should not be always concerned (Georgios and Chris 2015). It is
because this always change and each of the firm is having different numbers of the
outstanding shares. In this particular case, it does not gives the clue as to value of firm.
Hence, for that particular figure, market cap number or market capitalization is required
(Brotherson et al. 2014).
The market cap of firm is easily determined by the help of multiplying per share price
by the total outstanding shares. Hence, this particular number helps in giving total company’s
value or stated another way. This would cost for buying whole firm on open market. There
are some analysts who uses different set of numbers and there are others, who add mega caps
and micro caps. One could discuss with the financial experts regarding their particular
preferences. However, the most important point is that one should understand value of the
comparing firms of similar sizes, during the process of evaluation. The market capitalization
is used in screens, when certain company sizes are looked for balancing the portfolio
(Berzkalne and Zelgalve 2014).

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While making the investment, stock per share’s price should not be used, instead the
focus should be on market cap of company for getting bigger picture of firm’s value in
marketplace. The balance does not helps in providing financial services, tax, investment and
advice. The presentation of information without considering objectives of investment,
financial circumstances or risk tolerance of any of the specific investor would not be suitable
for all the investors (Aliu, Knápková and Mohammed 2016).
Lastly, enterprise value best represents total value of firm because it is consists of
debt capital and equity and it is calculated by using current valuations of market. The firm
having more cash in comparison to debt will be having greater enterprise value in comparison
to its market capitalization. The firms with similar market capitalization can be having
radically different values of enterprise. The value investor should be having the mindset that
when stock is purchased, one is purchasing share of whole company. The enterprise value is
current price of market if entire company is purchased (Abhayawansa, Aleksanyan and
Bahtsevanoglou 2015).
The enterprise value helps in measuring value of asset, which produces service or
product of company. It is the economic value that includes debt capital and equity capital of
enterprise. The enterprise value makes the allowances for debt and cash helps in providing
neutral metric for the calculation of EV ratios. The enterprise value ratios helps in providing
greater insights and the comparisons between firms, despite of the fact that firms may have
larger differences in the capital structure.
Conclusion
Therefore, this report concludes that business valuation is process to determine
economic worth of company based on the model of business and external environment and it
is supported with the empirical evidence and reasons. The corporate valuation is dependent

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upon stage of business, past financials, scenario of industry, purpose of valuation and
expected financial results. Further, corporate valuation can be performed through different
techniques, for instance, firm’s current working capital, asset based method, free cash flow
and others. The total value of firm can be represented through various metrics, which is
consists of book value, market capitalization and enterprise value. Lastly, it can be said that
corporate valuation is most important aspects as it forms basis of the activity of corporate
finance such as fund raising, M&A, sale of the business and for meeting requirements of
regulatory and accounting.

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