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 different business valuation techniques............................................4
QUESTION 3...................................................................................................................................7
1. Application of various investment appraisal techniques.........................................................7
2. Benefits and limitation of different investment appraisal techniques...................................10
.......................................................................................................................................................12
REFERENCES..............................................................................................................................13

QUESTION 2
a) Price/earnings ratio
The price earnings ratio is the which is widely used in evaluating the value of the firm
under mergers and acquisitions. A complete evaluation it carried out below based on the given
scenario.
Statements showing valuation under- price earnings 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
From the above data it is clear and evident that the if the company will go for the merger and
acquisition on bases of P/ E ratio then this will include the total market value of £748.36. This
states that when the company will go merger on basis of the price earning ratio then the value
paid to the company will £748.36.
b) Dividend valuation method
This method determines the value of firm by using the expected rate of return. This
approach is based on certain 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
With the help of the above data it is illustrated and evaluated that of the company will go for the
merger and acquisition on the basis of the dividend valuation method then the cost or total
market value will be £635.04. This means that if the company will go for the merger on the basis
of dividend yield method then company will have to pay less.
c) Discounted cash flow method
Under this valuation technique, the market price of the stock is identified using the
discounting rate and the free cash flow of the company.
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