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Managerial Finance: Finance Department

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Consider the role of the finance department at Strident Marks. The finance department has a couple of new hires, and the CFO has asked that you spend a short amount of time with them, catching them up on some areas that are very important to the company at this time. These also happen to be areas for which Strident Marks does not yet have any training material. Write what you feel should be included in their training manual about the components of financial systems, focusing on valuation. What role does a financial department play in valuing business opportunities and what are some of the key financial concepts that valuation work must consider?

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Solution Summary

This solution explains the role a financial department playing in judging business opportunities and WACC.

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Key concepts relating to

Approaches to Business/Stock valuation:

Free cash flow or WACC approach gives the firm's value of assets or stock.
Value of stock = Value of firm - Value of Debt

(For various valuation models see excel file (Valuation theory- attached.)
It is a better method because:

Capitalization of expected income
Intrinsic value based on the discounted value of the expected stream of cash flows

But other methods should also be used such as dividend discount model AND PE ratio as it will act as complimentary model.

P/E multiplier remains popular for its ease in use and the objections to the dividend discount model because investor tend to focus on the capital gain.

P/E ratios are a useful indicator and tool when performing valuation and comparing firms. List three factors that should be considered or adjusted for when comparing P/E ratios among different ...

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