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Corporate Valuation and Investment Question

Assume you are CFO at a diversified company, and your Board has directed you to sell one of your business units.

How do you determine your asking price? Discuss at least two or three approaches. NOTE: the business unit is not publicly traded. (By the way, apparently most business executives do not know the value of their private enterprise or division.)

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Solution Preview

The major difference between the valuation of private and public firms is that in the case of public firms one can use the valuation by stock market as a benchmark. This is not applicable with respect to the private firms. They are mostly valued on book values.

Let us discuss certain valuation techniques:

Free cash flow or WACC approach gives the firm's value of assets or stock.
The use of the DCF techniques can be extended to value a business firm. In the valuation of a firm a financial analyst usually assumes a constant debt ratio. The firm can be ...

Solution Summary

This solution explains how to determine an asking price for a diversified company.