Assignment - Alternative Valuation Methods

You may do this assignment individually or with one other person.

In this assignment, you use horizon value calculation methods to estimate the current market value of a privately held company.

Select a non-financial company for which financial information is available for several fiscal years. Obtain financial statements for at least the three most recent years. Use the selected company's financial statements, together with other information described, to calculate the values indicated in questions 1-4.

Part 1 - Determining value multiples

Perpetuity based valuation method

1a. Estimate a growth rate for the company. Use any appropriate method, such as the average of several years' growth rates for sales (or total revenue), the average of several years' growth rates in net income (or operating income), or the average dividend growth rate. Specify how you determine the growth rate.

b. Estimate the required return for the company using the capital asset pricing model if beta is available for the company (assume the risk free rate is 2.5% and the expected market return, 12.5%). If beta is not available, use the company's average annual stock return for the last three years as the required return.

Valuation estimated by capitalizing an operating variable

2a. Select an appropriate income statement line item from which to estimate a value multiple for an operating variable. E.g., net income can be used to calculate the price earnings ratio; total revenue to calculate the price to sales ratio; total cash flow to calculate the price to cash flow ratio; and etc.

b. Find the value of the selected operating variable for the most recent year.

c. Find the company's current equity value (market capitalization or price per share * number of shares outstanding).

d. Using 2b and c, calculate the selected value multiple for the public company.

Valuation estimated by capitalizing an asset

3a. Select an appropriate balance sheet line item from which to estimate a value multiple for a non-operating, financial variable. E.g., book value of equity can be used to calculate the price to book value ratio; total assets to calculate the price to total assets ratio; and etc.

b. Find the value of the selected asset for the most recent year.

c. Using 2c and 3b, calculate the selected value multiple for the public company.

Valuation estimated using a non-financial asset

4a. Find the number of employees for the company for the most recent fiscal year.

b. Using 2c and 4a, calculate the price to employee ratio for the selected company.

Part 2 - Determining the value of a privately held company

Assume the value multiples you calculated in part 1 are representative of the entire industry (rather than just the selected company).

5. Estimate the value the privately held company for which the most recent financial statement are attached would have in the market

a. based on valuation using the growing perpetuity method (assuming the required return and growth rate from question 1).

b. using the value multiple for the operating variable calculated in question 2.

c. using the value multiple for a non-operating variable calculated in question 3.

d. using the employee value multiplier calculated in question 4.

6. Briefly discuss the differences in values obtained in question 5 using the different methods, and indicate which estimate(s) of value are likely to be most accurate given the characteristics, the industry, or the principal determinants of value of the firm selected in part 1.