Finance Report: Analysis of Financial Valuation Techniques and Methods

This finance report provides a comprehensive analysis of various valuation techniques. It begins by exploring the price-earnings (PE) ratio method, including its application and limitations, and provides a practical example to determine the market value of a company. The report then delves into the dividend valuation method, outlining its calculation and limitations, and incorporates the capital asset pricing model to determine the required rate of return. The discounted cash flow method is also discussed. The report further evaluates the advantages and disadvantages of each valuation technique. Finally, the report examines depreciation calculations and the benefits and limitations of investment appraisal techniques, including payback period, accounting rate of return, net present value, and internal rate of return, providing a well-rounded understanding of financial valuation.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Answer to Question 2......................................................................................................................2
a)......................................................................................................................................................2
b)......................................................................................................................................................2
c)......................................................................................................................................................3
Answer to Question 3......................................................................................................................6
1.......................................................................................................................................................6
2.......................................................................................................................................................6
Reference.......................................................................................................................................10

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Answer to Question 2
a)
The price-earnings ratio is one of the common method of valuing a company. In this
method, value of company is determined from the Price earnings ratio of the similarly quoted
company (Brigham and Ehrhardt 2013). The calculation showing market value of company using
the PE ratio is given below:
Statement showing Valuation using Price Earnings ratio
Particulars Amount
Market Price per share £ 3.89
Earnings per share £ 0.21
Price Earnings ratio of Aztec (A) 18.52
Distributable Earning £ 40.40
Number of shares 147.00
Earnings Per share of Trojan plc (b) £ 0.27
Value per share of Trojan plc (AXB) £ 5.09
Total Market value £ 748.36
Table 1: Valuation using PE ratio
(Source: Created by Author)
b)
Statement showing valuation using Dividend Valuation Method
Particulars Amount
Current Dividend (D) £ 0.13
Risk free rate of return (rf) 5%
Return on the market (rm) 11%
Beta (B) 1.10%
Required rate of Return (K) 5.07%

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Growth rate 2%
market value per share £ 4.32
Total market value £ 635.75
Table 2: Valuation of shares using Dividend valuation method
(Source: created by Author)
The table above indicates the valuation of shares using the dividend valuation method.
The expected return that is used in the formula has been calculated using the Capital assets
pricing model.
c)
Statement showing valuation using Dividend Valuation Method
Particulars Amount
cash flow £ 40.40
Discounting rate 9%
Market value of shares £ 448.89
Total Market value £ 65,986.67
Table 3: Valuation using Dividend model
(Source: Created by Author)
d)
The crucial analysis of all these methods of valuation style that is relevant for particular
situations decreases the worth of the methodologies. Price Earnings Ratio is one of the most
common tools for valuation technique in a business enterprise and this used by the investors
while taking the investing decisions (Brigham 2014).

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Limitations of Price earnings ratio are:
 When Inflation is high, price earnings ratio is inclined to be lesser. The picture of stock
valuation is generally not clear at the time bear market.
 This has great chance of distortion and manipulation of the data regarding to earnings of
a company.
 The undervaluation of a company is not always result of low price earnings ratio.
 A company might twist Price earnings ratio into a variety of ways of bookkeeping. This
occurs for the reporting of lower earnings due to the tax returns (Petty et al. 2015).
Limitations of Dividend valuation method:
 Dividend valuation method is not relevant for large shareholders as the person holds
usually huge piece in the company. For them this way is not at all relevant condition for
an investor and company.
 The assumption of taking the rate of growth of a nation is stagnant that is impractical as
per the companies are concerned (Renz 2016).
 As per the above point, there are too many assumptions that make this impractical. The
assumptions such as growth rate, tax rate and interest rates are constant.
Limitations of Discounted Cash flow method:
 Discounted Cash Flow method is inclined to time intensive procedure than any other
ways of valuation and analysis.

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 It is extremely responsive to forecasts/ assumptions generally taken by the person
critically analysing the data (Finkler et al. 2016).
 If any businesses anticipation and potentials are altered then the fair value is modified as
per the anticipations. Therefore, this technique of valuation is then a target that always
move.
 Discounted Cash Flow engrosses anticipating the performance in future. When a business
enterprise does not function with full transparency then it becomes extremely
complicated.
Based on the above discussion it can be seen that all the methods have its own advantages
and disadvantages. However, it can be said that the dividend valuation method is best suited for
the purpose.

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Answer to Question 3
1.
Deprecitaion -£38,958.33 -£ 38,958.33 -£ 38,958.33 -£ 38,958.33
Net Profit/Accounting Profit £ 33,541.67 £ 33,541.67 £ 33,541.67 £ 33,541.67
Deprecitaion £ 38,958.33 £ 38,958.33 £ 38,958.33 £ 38,958.33
Disposal of Machine
Net Cash flow £ 72,500.00 £ 72,500.00 £ 72,500.00 £ 72,500.00
PV factor 0.892857 0.797194 0.711780 0.635518
PV of Cash Flow £ 64,732.14 £ 57,796.56 £ 51,604.07 £ 46,075.06
Initial Investment £ 275,000.00
a Cumulative Cash flow £ 72,500.00 £ 145,000.00 £ 217,500.00 £ 290,000.00
Payback period (years) 3.79
b
Average Accounting Profit £ 33,541.67
Initial Investment £ 275,000.00
Accounting Rate of Return 12.20%
C
PV of Net cash inflow £ 284,752.63
Initial Investment £ 275,000.00
Net Present Value £ 9,752.63
d Net Cash flow -£ 275,000.00 £ 64,732.14 £ 57,796.56 £ 51,604.07 £ 46,075.06
IRR 1.19%
Particulars Amount
Depreciation calculation
Particulars Amount
Cost of Machinery £ 275,000.00
Less:
Residual Value £ 41,250.00
Depreciable amount £ 233,750.00
Depreciation expenses £ 38,958.33
2.
The benefits and limitations of different valuation techniques are discussed below.

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Pay back period
The Benefits of Payback period are:
 This is simple to understand and used widely.
 This provides added significance on liquidity for taking assessment on the proposals of
investment.
 This deals with threats. The payback period that is shortest may have fewer risk than
compared to the longest payback period projects.
 The payback period in case of short term, we get an extra benefit of computing capital
expenditure.
 The business that faces the acute problem of deficiency of liquidity then this facilitates
superior project rankings that would result receiving of early money (McKinney 2015).
Losses of Payback Period:
 In the computation of payback period, the time value of money not acknowledged.
 Payback period pay no attention to the profitability and gives far more stress on liquidity.
 Only flow of cash is earlier than the payback period. This is considered. If flow of cash
takes place after payback period then it is not considered.
 Benefits of Accounting Rate of Return are:
 Accounting Rate of Return is established around the information of accounting.
Therefore, Accounting Rate of Return does not require to be determining by other special
reports.
 Accounting Rate of Return is easy to understand
 Accounting Rate of Return is simpler to compute.

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 This technique is established around the profit in accounting. Therefore, gauges the
investments profits and its profitability’s.
Accounting rate of Return
The benefits are:
 In this method the investment appraisal calculation is easy;
 In this the profitability factor of the investment is recognised;
The Limitations of Accounting Rate of Return are:
 Accounting Rate of Return does not acknowledge the time value of money.
 Accounting Rate of Return, process pays no attention to the flow of cash from the
venture.
 Accounting Rate of Return will not consider project’s terminal value (Attig et al. 2016).
Net present value
The benefit of this technique are:
 This method takes into account time value of money;
 The NPV provides better decisions than any other discounted cash flow technique.
The limitation of this technique are:
 It is based on estimation and is subject to changes.
 It fails to takes into account the size of the project.
Internal rate of return

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The benefit of this technique are:
 It is a simple method.
 It takes into account the time value of money.
The disadvantages or limitations are:
 In this method, it is assumed that the positive cash flows are reinvested in the project.
 It depends on various factors.
 The projects of different time period cannot be evaluated using the IRR method.

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Reference
Attig, N., Boubakri, N., El Ghoul, S. and Guedhami, O., 2016. The global financial crisis, family
control, and dividend policy. Financial Management, 45(2), pp.291-313.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage
Learning.
Brigham, E.F., 2014. Financial management theory and practice. Atlantic Publishers & Distri.
Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for
public, health, and not-for-profit organizations. CQ Press.
McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-
CLIO.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial
management: Principles and applications. Pearson Higher Education AU.
Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.