Valuation Models & Pricing an Asset or a Business
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There are many different valuation models. What are some of them and how are they used to value an asset or business entity? Can you make any suggestions on how to enhance any of the valuation models to make them more accurate?
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The solution discusses valuation models and pricing an asset or a business.
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We can start by stating the fact that when we perform valuation, we are carrying out an objective search for what can be termed as "true" value. While a good valuation model provides us with the precise estimate of a value, all valuations have a tinge of bias in them. In essence, every valuation model has its shortcomings and mythical truths about them.
There exist four main approaches of valuation models. They include asset-based valuation models, discounted cash flow models, relative valuation and contingent claim models. Most businesses utilize either or a combination of the said valuation methods with the basic assumption that the markets are basically inefficient and have errors during value assessment, and that the fact that they make assumptions on how and when the market inefficiencies will be streamlined (Damodaran, n.d.).
The discounted cash flow valuation assigns value on an asset based on the present value of all future cash flows expected to be generated from the asset. The philosophical basis behind this is that all assets contain intrinsic values which can hypothetically be derived given the asset's ...
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