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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.)

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.

$2.19