Valuation Techniques in Financial Management

Financial Management

Question 2
a) 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
Statement showing valuation using price earnings ratio
b) 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
Statement showing valuation using Dividend valuation method

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%
PV of cash flow = Annual cash flow/discounting rate
Cash flow growth rate 2%
Market value per share = 40.4 / 9%
£448.89
Total market value £65986.67
Statement showing valuation using Discounted cash flow method
d. Critical evaluation of various valuation techniques
Price/earnings ratio
This ratio explains the comparison of MPS to the EPS. The EPS is calculated using
the last four quarters performance of the company. The higher ratio indicates the greater
return prospect by the investor in regard to the greater income in the coming years in the
future. in comparison to low P/E ratio. The relationship between these two indicates what the
market is willing to pay based on the current level of earnings and also shows if the market is
over or under valuing the company (Alim and Maqbool, 2020). A rise in the EPS leads to the
rise in the market value and the lower earnings per share shows fall in MPS. This ratio is very
useful in comparing the companies in the same industry. But the high price earning ratios is
considered to be the risky investments as compared to the lesser ratio and this is because of
the reason that rise ratio signifies high prospects.
In the situation of M&A, it is very important to compare the ratios of the
organizations within the same industry. These ratios can be distorted by the company
depending upon the how company has accounted for the items and is based on the accounting
principles and practices which varies from country to country which adds another problem
(Janda, 2018). In case of cyclical business entities, it requires a more detailed investigation
and the less P/E ratio would might mean low-priced that is all wrong because it is precisely
the wrong time to buy these types of firms. The earnings per share calculated includes a lot of
noises and might not represent the actual performance of the corporate. It also ignores the
impact of liability while focussing on price capitalization. This method is used mostly used