Share
Explore BrainMass

Wealth Maximization - How important is corporate valuation methods?

How important is corporate valuation methods? Why is it important? How could you apply it in your own organization?

Solution Preview

How important is corporate valuation methods? Why is it important? How could you apply it in your own organization?
Corporate valuation methods are very important to know the value of the organization. This helps in determining the fair value of the organization. This assists in raising the money through public issue or by any other way. This also helps in merger and acquisition and also in wealth maximization of the shareholder. Factors affecting valuation of stock
a) Fundamental factors
These factors include the financial performance of the organization such as cash flows, dividend paid, quality of management, Product portfolio, industry prospects etc.

b) Macroeconomic factors
These factors include GDP growth, economic situation, legal regulations etc.

c) Technical factors
Demand and supply, volumes, breadth of market

d) Other factors
Contingency factors such as earth quake, terrorist attack.

In this cash flow is the most important factor because it leads to maximization of shareholder's wealth
Moreover it has following benefits:
1. It indicates the efficiency of the operations of the business; it reflects the cash effects of transactions that create revenues and expenses.
2. It indicates the relationship with the net income.
3. Evaluation on the parameters like liquidity, solvency is done on the cash flow from the operating activity.
I can apply in the following way. 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 valued using Free Cash Flows and WACC. (Weighted average cost of capital)
Free cash flows are the funds that can be distributed to investors after the operating costs have been deducted. Operating costs are the costs incurred while running the business and making a product or providing a service. These costs include but are not limited to: materials, labor, rent, taxes, interest, loan payments, etc. The remaining cash or Net Operating Profit after Taxes, can be used to reinvest in the ...

Solution Summary

The importance of valuation methods is discussed.

$2.19