Valuation Techniques in Financial Management

Financial management

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

Question 2
a) Price/earnings ratio
It is the most common and widely used technique of valuation under mergers and
acquisitions (Chu and et.al, 2016). The market value of the company is determined using the
price earning ratio of the similarly quoted business organization.
Statements showing valuation under price earning ratio
Market price per share £3.89
Earnings per share £0.21
P/E ratio of Aztec (A) 18.52
Distributable earnings £40.4
Number of shares 147
Earnings per share of Trojan (B) £0.27
Value per share of Trojan (A*B) £5.09
Total market value £748.36
b) Dividend valuation method
This technique is useful in determining the intrinsic value of the stock of the company
(Li, 2018). It is based on the constant growth rate assumption.
Statements showing valuation under Dividend valuation method
Current dividend (D) £0.13
Risk free rate (Rf) 5.00%
Return on market (Rm) 11.00%
Beta (β) 1.10%
Growth rate 2.00%
As per CAPM,
The expected rate of return (K) = Rf + (Rm - Rf) * β

= 5% + (11% - 5%) * 1.1%
5.07%
Market price share = D * (1+g)/(K-g)
= 0.13 * (1+2%)/(5.07%-2%)
£4.32
Total market value = 4.32 * 147
£635.04
c) Discounted cash flow method
This is the valuation method under which the market price is determined using the
discounting rate on the free cash flow of the company (Schumacher and Klönne, 2018).
Statements showing valuation under Discounted cash flow method
Computation of free cash flow Amount in £
Net Income 40.4
Add: Non-cash expenses -
Less: Increase in working capital -
Less: Capital expenditure -
Free cash flow 40.4
Discounting rate 9.00%
Market price per share = Free cash flow / Discounting rate
448.89
Total market value = 448.89 * 147
£65986.67