Accounting and Finance Project: Business Valuation Methods

This finance project analyzes the valuation of a business using several methods. Task 1 focuses on calculating the maintainable earnings before interest, tax, depreciation, and amortization (EBITDA) using a weighted average approach, adjusting for abnormal expenses. Task 2 employs the capitalizatio...Read More

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
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ACCOUNTING AND FINANCE
Table of Contents
Task 1:.............................................................................................................................................2
Task 2:.............................................................................................................................................3
Task 3:.............................................................................................................................................4
Task 4:.............................................................................................................................................5
References and bibliography:..........................................................................................................6

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ACCOUNTING AND FINANCE
Task 1:
Earnings before interest, tax, depreciation and amortization is the measure profitability in
real terms before providing for the depreciation, amortization, finance costs and provision for
tax. Various models can be used for determination of the value of the business such as
discounted cash flow technique, capitalization of cash flow and net assets approach (Pinto 2020).
For applying the discounted cash flow model for valuation of a business determination of
maintainable profit or determination of expected cash flow is important. In the given case study,
the earnings before interest, tax, depreciation and amortization have been calculated using the
weighted average method from the earnings of the last four years. To calculate the weighted
average earnings, first the interest expense, depreciation and amortization have been added with
the profit before tax. Then all the expenses losses and incomes which are expected not to occur
in future have been adjusted (Pinto 2020). Based on the adjusted earnings before interest, tax,
depreciation and amortization and applying the respective weights the expected maintainable
earnings have been calculated as follows. Please refer to the excel spreadsheet for detailed
calculations.
Particulars 2019 2018 2017 2016
Earnings before tax (EBT) $ 634 $ 598 $ 579 $ 18
Add: Interest expense $ 150 $ 152 $ 154 $ 20
Earnings before interest and tax (EBIT) $ 784 $ 750 $ 733 $ 38
Add: Depreciation and amortization $ 445 $ 411 $ 396 $ 414
Earnings before interest, tax, depreciation
and amortization (EBITDA) $ 1,229 $ 1,161 $ 1,129 $ 452
Adjustments for abnormal expenses:
Additional overhead expenses $ 175
Oversight monitoring and administrative
support $ 80 $ 80 $ 80 $ 40
Loss for theft $ 75
Total adjustment $ 80 $ 155 $ 80 $ 215

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ACCOUNTING AND FINANCE
Adjusted EBITDA $ 1,309 $ 1,316 $ 1,209 $ 667
Weights 40% 30% 20% 10%
Weighted EBITDA $ 523.60 $ 394.80 $ 241.80 $ 66.70
Maintainable earnings before interest, tax, depreciation and amortization
(EBITDA) $ 1,226.90
Task 2:
Capitalization of cash flow is an important method of equity valuation. In this method the
expected free cash flow is divided with the capitalization rate to calculate the value of the firm.
In the given case study, the expected free cash flow has been calculated from the maintainable
earnings before interest, tax, depreciation and amortization (Friedman 2014). It has been
assumed that the depreciation expenses will be same as it is in the year 2019. It has also been
assumed that the debt will remain unchanged and hence, the interest expenses will also remain
the same as it is in the year 2019. To calculate the profit after tax, depreciation, amortization and
interest expenses have been deducted from the maintainable earnings before, interest, tax,
depreciation and amortization. Then the provision for tax has been made using the tax rate of
25%. Then to calculate the free cash flow, depreciation, amortization and interest expenses have
been added back. In the given case study, it has been given that there will be an increase in
working capital and capital expenditure. Considering such change in working capital and capital
expenditure the free cash flow to the firm has been calculated. As no growth rate has been
mentioned, the free cash flow has been divided by the weighted average cost of capital to find
out the value of the firm (Friedman 2014). Then the value of debt has been deducted from the

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ACCOUNTING AND FINANCE
value of the firm to find out the value of equity. Following statement shows all such calculation
and please refer to the excel spreadsheet for detail calculation.
Maintainable EBITDA $ 1,226.90
Depreciation and amortization $ (445)
Earnings before interest and tax (EBIT) $ 781.90
Interest expense $ (150)
Earnings before tax $ 632
Provision for tax $ (158)
Earnings after tax $ 474
Add: Depreciation and amortization $ 445
Add: Interest expense $ 150
Free cash flow to the firm (FCFF) $ 1,069
Free cash flow to the firm (FCFF) $ 1,069
Capital expenditure $ (300)
Change in working capital $ (10)
Expected free cash flow to the firm (FCFF) $ 759
Weighted average cost of capital (WACC) 8%
Value of the firm $ 9,487
Less: Value of debt $ 3,044
Value of Equity $ 6,443
Task 3:
In this part the value of the equity has been calculated using the net assets approach. In
the net assets approach the value of net assets after providing for the debt is considered as the
value of equity (Turcas et al. 2016). The fair market value has been considered for such
valuation in the given case study as follow. Please refer to the excel spreadsheet for detail
calculations.

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ACCOUNTING AND FINANCE
Particulars Book value Eliminations
Adjustment for
Fair Market
Value
Adjusted Book
Value
Assets:
Current assets $ 2,438 $ (500) $ 1,938
Property plant and
equipment $ 5,977 $ 1,031 $ 7,008
Total Assets $ 8,415 $ (500) $ 1,031 $ 8,946
Liabilities:
Accounts payable $ 1,044 $ 1,044
Long term debt $ 2,000 $ 2,000
Total liabilities $ 3,044 $ - $ - $ 3,044
Value of equity $ 5,371 $ (500) $ 1,031 $ 5,902
Task 4:
The capitalization of the cash flow method uses the expected cash flow and the
capitalization rate to find out the value of equity whereas the value of equity is calculated as the
value of net assets in the net assets approach (Ferraro 2017). As the inputs for the calculations
are different and one uses the income and the other uses the net worth of the business, the results
of two such valuation methods become different. It can be observed that the value of equity is
$6,443,000 in the capitalization method and it is $5,902,000 in the net assets approach. Lastly, it
can be concluded that, as the net assets implies the true value of equity, the value of equity for
the MBC can be considered as $5,902,000.

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References and bibliography:
Ferraro, O., 2017. Business valuation: premiums and discounts in international professional
practice. In Financial Environment and Business Development (pp. 79-88). Springer, Cham.
Friedman, M.L., 2014. Business valuation—Recasting the financial statements.
Pinto, J.E., 2020. Equity asset valuation. John Wiley & Sons.
Turcas, F., Dumiter, F., Brezeanu, P. and Jimon, S., 2016. Theoretical and Practical Issues in
Business Valuation. Studia Universitatis „Vasile Goldis” Arad–Economics Series, 26(4), pp.1-
23.