Valuation Techniques in Financial Analysis

Financial

TABLE OF CONTENTS
Question 2..................................................................................................................................3
a)Price/earnings ratio.............................................................................................................3
b) Dividend valuation method................................................................................................3
c) Discounted cash flow method............................................................................................4
d) Critical evaluation of various valuation techniques...........................................................5
Question 3..................................................................................................................................7
1. Application of different investment appraisal techniques..................................................7
2. Benefits and limitations of different investment appraisal techniques............................10
REFERENCES.........................................................................................................................13

Question 2
a)Price/earnings ratio
It is the most common approach for valuing the business organization. The value is
calculated by identifying the price earnings ratio of another company within the industry. The
P/E ratio provides assistance to the management in determining how much amount the
investor is looking to make an investment in the company’s earnings. The businesses with the
greater growth prospect are usually having higher earnings and visa-versa (Batubara and et.al,
2019). This mainly because of the reason that the companies are in the position in respect to
giving rewards to its investors in the form of dividend or increase the share price. This
method has many imperfections but then too it is considered the most acceptable valuation
technique. It assists the investors in taking decisions with respect to whether to buy the shares
of the company or not. It is mainly done in estimating the market value of the shares of the
company.One of the important thing to be remembered is that it can bedistorted or
manipulated by themanager as per the need with the help of accounting practices.
Statement showing valuation using price earnings ratio
MPS £3.89
EPS £0.21
P/E ratio of Aztec (A) 18.52
Distributable earnings £40.4
number of shares 147
EPS of trojan (B) £0.27
Value per share of Trojan (A * B) £5.0004
Total market value £735.06
From the above computation, it can be seen that the market value the company is
£735.06 which is derived by multiplying the market price per share to the number of shares
outstanding.
b) Dividend valuation method
Under the dividend valuation method, the amount of dividend and the market value of
the stock is considered to be increasing at the constant rate, that is, the dividend will be paid
by the companies with the help of the constant rate. This approach is effective only for those
business organizations which increases their dividend amount by the fixed percentage each
year (Sharma and et.al, 2018). It is a very simple and easy to apply and mostly applicable to
the business entities with the constant growth rate. A proper comparison can be drawn by

comparing the business with the other companies within the industry using this technique.For
utilizing this model, current amount of dividend paid, the expected rate of return and the
growth rate is required. There is also an assumption that the financial burden of the company
also remains the same and the free cash flow of the company is utilized for paying dividend.
Statement showing valuation using Dividend valuation method
Current dividend (D) £0.13
Risk free rate of return (Rf) 5%
Return on the market (Rm) 11%
Beta (ß) 1.10%
As per CAPM, the required rate of
return = Rf + (Rm-Rf)*ß
= 5% + (11% -5%) * 1.10%
Required rate of return (K) 5.07%
Growth rate 2%
Market price per share = D*(1+g) / (K-g)
= 0.13 * (1+2%) / (5.07% - 2%)
MPS £4.32
Total market value £635.04
In above table, the expected rate of return is determined using the CAPM formula
after which the dividend growth rate model is applied. The value of eth firm derived under
this valuation method is £635.04.
c) Discounted cash flow method
This method is based on the cash flow of the business. This method is suitable for all
types of business entities as the main objective remains the same that is to receive the greater
return in the future for the amount which has been invested today. In case of M&A, this
valuation method is utilized for the purpose of determining the value of the company by
forecasting the future cash flows over a certain specific time period (Lynn, 2020). This
approach is a forward looking and rely less on the historical data and also it is less affected by
the external factors but it is very complex in nature and requires implementation of deep
understanding and knowledge.The weighted average cost of capital is taken as the
discounting rate. The main aim of this valuation method is completely based on the capability
and the ability of the business organization in generating more revenue and increasing its
cash flow for meeting the expectations of its investors.
Statement showing valuation using Discounted cash flow method
Discounted cash flow