Finance and Investment - Valuation of a Firm

Running head: FINANCE AND INVESTMENT
FINANCE AND INVESTMENT
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FINANCE AND INVESTMENT
Introduction
Valuation of a firm can be defined as the true worth of a business at a particular date.
In other words, the value of a firm is the amount that one needs to pay during the takeover of
the company. Valuation of a firm is ascertained in two ways- either on book value or on a
market value basis. The most common and widely followed valuation technique is the
Discounted Cash flow technique for the valuation of a firm. Discounted cash flow is the
valuation technique for measuring the value of a firm following the time value of money.
Discussion
The market value of organization can be thought as the total value of the organization
that the investors has invested. The market value does shift as there are trading done
everyday. The bigger organziations have a more stable market value than the samleer
organziations as there is owing of the market value and there is also diversity in the investors
which they have. The small organzations can easily do a double digit in a market value as
there is a relatively less number of transactions which is pushing the stoct maket (Smith,
Driver and Matthews 2018) . That can be the on eof the reason in which the small
organzations has a target for the market manipulation. The markt value of equity is usually
calculated by the multiplication of the number of shares which is outstanding by the share
price which is current. The market value of equity is usually compared with the other
valuations like the book value and organizational value (Penman and Yehuda 2019). There is
an incorporation of the market value organizational value and the market value of the equity
which is put into the occasion i.e. total debt minus cash and cash equivalents, so that there is
a rough idea provided at the time of valuation of the organzition. The market value of the
equity is also different from the book value of equity. Upon the shareholder’s equity, the
book value is based upon that and there is a line of item in the fianancial ststemnt of the

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FINANCE AND INVESTMENT
organization (Jenkinson et al. 2019). The organization’s market value is different from the
book value of equity as usually the book value of equity is focused on the assets and
liabilities that is owned by the organzaition (Buchardt and Møller 2018). The market value is
the price that is upon the potential of the growth of organization and have a potential look
beyond the financial statements, that usually means that the organization has a potential value
buy.
The implementation of this technique requires the calculation of future cash flows
which are to be discounted by the cost of capital to yield the present value.
Discounted cash flow can be best understood using the following formula:
Value of a firm = Market value of the firm’s debt + Market value of the firm’s equity
= PV (Future Free Cash flows discounted at WACC) + Cash and marketable securities, where
PV stands for Present Value, WACC stands for Weighted Average Cost of Capital and
WACC is calculated by multiplying the source of capital by its relative weights.
The valuation of a firm can also be done using the Discounted Cash Flow method on
Net Present Value basis where the future free cash flows are discounted at the applicable
discount rates. The calculation is done in multiple stages (Pless et al. 2016). The first stage
deals with the computation of future free cash flows. Then the appropriate discount rate is
determined, and the Weighted Average Cost of Capital is calculated. Lastly, all the future
free cash flows are discounted to get the Net Present Values (Wu et al. 2016). The only step
that remains after all these calculations is the identification of the terminal value, which is the
NPV of the future cash flows that accumulate during the period for which the calculation is
done. DCF calculation can be done using Free cash flows in two ways. It can be calculated