Valuation Techniques- Burins Entity

Question 1

What is business valuation?

Answer 1

The estimation of the economic value of a burins entity or a portion of the business

• used in buying or selling a burins, developing a buy/sell agreement, estate

Question 2

What is the process of business valuation?

Answer 2

Establishing standards and premise of the valuation

Assessing economic environment

Analyzing F/S and related information

Formulating value

Question 3

Establishing standards are premise:

Answer 3

• Standards- Establish conditions of valuation:
• Is valuation legally or otherwise mandated
• Is valuation at request of and for owners?
• Is valuation for prospective buyer?
• Premise- Establishes assumptions to be used
• Will the business continue as a single going-concern?
• Will businesses be separated into separate units?
• Will asset be sold separately

Question 4

How do you analyze the F/S?

Answer 4

• Common-size analysis (converting dollar amount to percentages)
• Trend analysis- Changes in important measures
• Ratio analysis- Determine important ratios
• Make adjustments to statements to better reflect normal, on-going operations

Question 5

What is the alternative approach to burins valuation?

Answer 5

1) Market approach
2) Income approach
3) Asset approach

Question 6

What is the market approach?

Answer 6

(also called guideline public company method)

• Determines values of a business by comparing it with a highly similar entities for which there is a readily determinable value.
• Market value of a publicly-trade company
• May require adjustment to get the final value

Question 7

What is the income approach?

Answer 7

Determines the net present value of the benefit stream generated by the entity being valued

Net present value = entity value

Net present value is calculated using a discount rate

Discount rate should be based on rate of return need to attract investor funding given the level of risk

What are the alternative approach methods:

• Discounted cash flows
• Capitalization of earnings method- applies capitalization or interest rate
• Earnings multiple- Applies a multiple factor to earnings to get value
• Free cash flow - applies discount rate to get present value

Question 8

What is the asset approach?

Answer 8

Determines value by adding values of individual assets that comprise the entity being valued

• Fair value of each individual asset is determined
• Sum of net asset is the value of the burins

To determine asset value you would use:

• Market approach
• Income approach
• Cost approach

Certain asset are difficult to value alone (intangible assets or trademarks)

Asset approach is less appropriate for valuing a going-concern and non-controlling interest

May be appropriate for valuing entity in liquidation or little to no cash flows or earnings.