Skip to main content

Alternative Financial Valuation Concepts

A good financial modeler should also be aware that besides the most commonly used Discounted Cash Flow (DCF) approach and Market Multiples approach, there are a number of alternative financial valuation techniques that can be used to provide different viewpoints in a financial modeling and valuation exercise.

Alternative valuation techniques, when used in combination with the DCF or Market Multiples approach, allow investors or business owners form a holistic view through multiple perspectives on the value of the business under consideration.

Alternative valuation concepts include Asset Replacement Cost and Control Premium.

Asset Replacement Cost
Assessing the adjusted cost of replacing the useful assets of a business is a useful way of valuing capital intensive businesses such as those in the infrastructure and industrial related sectors.

Control Premium

The term “Control Premium” refers the the extra that typically must be paid to gain operating control of the business. An acquirer wanting control over the operations of a business is likely to want to pay a control premium as it will give the acquirer:

The ability to set dividends
Control over investment policy
Control over compensation
A good financial modeler should know that there is no one ‘best technique’ in financial valuation.

The appropriate valuation technique to use will depend upon a number of characteristics of the firm being valued.

Analysts valuing a firm or its equity have to choose between three different approaches and within each approach, between different models.

While the DCF approach is theoretically superior to the use of market multiples, in practice, it is advisable to use both in a financial modeling exercise. Ideally, first do a DCF and then seek confirmation in the form of multiples.

The issues that a financial modeler can consider whilst making choices on the types of valuation techniques to use in a financial model include the following:

  • The level and quality of earnings
  • Growth rate in earnings
  • Percentage of FCF to equity paid out as dividends (dividend policy)
  • Stability of leverage
  • Number of quality of comparables available to use market multiples
  • Type of business

A good financial modeler will typically consider several different valuation techniques in parallel to arrive at a “fair valuation” for the business under consideration.

Labels:

Comments

Post a Comment

Popular posts from this blog

CA Info - industrial training

Hi Friends, Here is the list of approved insitutions eligible for imparting Industrial training Approved Organisations - Eastern Region SIEMENS LIMITED 43 SHANTI PALLY E.M.BY PASS CALCUTTA 700042 CITI BANK N.A. TATA CENTRE 41,CHOWRINGHEE ROAD CALCUTTA 700071 RECKITT & COLMAN OF INDIA LTD 41,CHOWRINGHEE ROAD CALCUTTA 700071 BRITANIA INDUSTRIES LTD . 14, TARATALA ROAD CALCUTTA 700088 ICI INDIA LTD 34, CHOWRINGHEE ROAD CALCUTTA 700071 GRASIM INDUSTRIES LTD. INDUSTRY HOUSE 14TH FLOOR, 10, CAMAC STREET KOLKATA 700017 AMERICAN EXPRESS BANK 21, OLD COURT HOUSE STREET CALCUTTA 700001 BALMER LAWRIE CO. LTD 21, NETAJI SUBHAS ROAD CALCUTTA 700001 INDIAN OIL CORPORATION LIMITED 2,GARIAHAT ROAD(S) DHAKURIA CALCUTTA 700068 SRF LIMITED EXPRESS BUILDING 1ST FLOOR BAHADUR SHAH ZAFAR MARG NEW DELHI 110002 INDIAN RAYON AND INDUSTRIES LTD RISHRA HOOGHLY 712249 PEPSI-COLA INDIA MARKETING COMPANY SREE MANJURI BLDG. SUITE NO.6 , 1ST FLOOR 8/1, MIDDLETON ROW CALCUTT...
116 comments
Read more

Understanding Financial Markets

Understanding Financial Markets What are the various types of financial markets? The financial markets can broadly be divided into money and capital market. Money Market : Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market : Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. What is meant by the Secondary Market? Secondary Market refers to a market where securities are traded after being initia...
1 comment
Read more

IND AS103 Business Combination

Business Combination The term ‘business combination’ in Ind AS 103 is a broader term than ‘amalgamation’. It is defined as a transaction in which an acquirer obtains control of one or more businesses. An acquirer may obtain control in a number of ways including, for example, by transferring cash or other assets, incurring liabilities, issuing equity instruments or without transferring consideration. There is a presumption of control if an entity owns more than 50% of the equity shareholding in another entity, though this may not always be the case. Business Ind AS 103 defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. A business generally consists of inputs, processes applied to those inputs and the ability to create outputs. For Example, R Ltd....
1 comment
Read more