Firm Valuation
Firm valuation can be helpful when evaluating the decision to buy, sell or combine organization to improve financial success, growth or productivity. This information can also be helpful when reporting to shareholders or seeking out new investors. Finally, it can be useful to know the steps to valuation (listed below) on hand for nothing more than a firm’s own information. It is good to know where the firm is going and where it is headed. Is it possible to borrow against your assets and build that expansion? Would it make sense to cut back on production during the winter months? A lot can be told with firm valuation.
The following seven steps to firm valuation have been outline by Wharton School of Business’ Okan Bayrak:
- Analyze Historical Performance -> A lot can be said about a company’s past. You want to know if you are buying into a cyclical organization or one that shows results all year round. It is also important to note the trends the organization experiences and how its individual stakeholders respond to company news.
- Forecast Performance -> Forecast future performance. Where is the firm headed in terms of growth? Test the limits of industry growth and the actual company’s room for increasing capacity.
- Estimate the Cost of Capital -> Knowing the value of a firm’s assets can change the bargaining agreements. The assets in an organization may be worth going through an merger or acquisition even if future performance may not show as positive results.
- Estimate the Cost of Equity Financing -> How much equity is build up in the organization? Calculate the cost involved with financing.
- Arbitrage Pricing Model -> Arbitrage pricing is a theory applied to asset pricing. It can be useful when placing value outstanding shares.
- Continuing Value -> Forecast future earnings. Understand where the future of the company is headed.
- Review Results -> Review the first six steps in firm valuation to generate a price or trade agreement between your organization and the firm you wish to collaborate with or purchase. Reviewing the results might lead your organization to not take any action. Calculating these estimations can give you powerful insight during the decision making process.
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