Valuation Techniques in Financial Management

Financial Management

Table of Contents
QUESTION 2...................................................................................................................................1
a) Price earnings ratio (PER).......................................................................................................1
b) Dividend valuation method.....................................................................................................1
c) Discounted cash flow method (DCF)......................................................................................2
d) Critically discussing the problems associated with using the valuation techniques...............3
Question 3........................................................................................................................................5
1. Presenting investment appraisal techniques............................................................................5
2. Critically evaluating different investment appraisal techniques.............................................8
REFERENCES..............................................................................................................................12

QUESTION 2
a) Price earnings ratio (PER)
The PER is most popular method which is utilized for the purpose of valuation of the
company as it considers the current market share price of the stock in relation to its earnings per
share. It is mainly used for valuing the organizations having any already established profit
related history (Fazzini, 2018). This technique can also be made use for valuing not only the
quoted companies but also to determine the value of unquoted business entities as well. For
instance, after tax profit of a company is £200000 and was offered £1000000 which is equal to
having PER of 5. This ratio offers the investors a perspective or an idea pertaining to the
willingness of the market in regard to paying for the entity's future earnings. As the ratio rises in
the future, it indicates that it is favourable to the investors and in the opposite situation it shows
that it is not in favour of investors.
Computation of valuation of the company using price earning ratio
Particulars Formula Amount (in £m )
Distributable earnings 40.4
Numbers of shares outstanding 147
Market price per share (MPS) 3.89
Earnings per share (EPS)
Price earnings ratio of Aztec (MPS/EPS) 18.52
EPS of the Trojan 0.27
Value of the shares of Trojan (PER of Aztec * EPS of Trojan) 5.0004
Determining the market value
Trojan plc
= Value of the shares of Trojan *
Numbers of shares outstanding
= 5.0004 * 147 735.0588
1

b) Dividend valuation method
The Gordon's dividend growth model (GGM) is another approach through which the
investor can identify the intrinsic value of the shares of the company on the basis of the constant
growth rate in respect to the dividend. This technique makes use of the dividend growth rate and
the entity's rate of return (ROR). It is based on the dividend discount model but it differs on
account of the fact that GGM assumes that dividend grows at the constant rate (Yu, Assad and
Fuller, 2016). The growth rate can be evaluated through making a multiplication of ROE with
the retention ratio. It provides assistance to the investors in determining whether it is viable to
make an investment in the respected company or not. It provides a clear relationship between the
return and the valuation. This technique is most suitable for business organization with the stable
earnings or the cash flows.
Computation of valuation of the company using Dividend valuation method
Particulars Formula Amount (in £m )
Information provided:
Latest dividend payment (Current
dividend) 0.13
Growth rate (GR)
= 0.10(1+g)^5 = 0.13
= 0.05 5.00%
Risk free rate (Rf) 5.00%
Beta (β) 1.10%
Number of shares 147
Return on market (Rm) 11.00%
For determining expected rate of return
(K), CAPM model will be used
According to CAPM, K is = Rf + (Rm-Rf)β
2