Valuation of corporate rights is an important process for determining the value of a company or its parts. This process includes the analysis of financial indicators, assets, liabilities, and market conditions, which allows for establishing the real value of corporate rights. In this article, we will consider the main methods of evaluating corporate rights, and the challenges faced by experts, and give practical examples of evaluation.
The discounted cash flow (DCF) method is one of the most common methods for valuing corporate rights. It is based on forecasting the company's future cash flows and discounting them to present value. The main stages include:
- Forecasting future cash flows.
- Determination of the discount rate.
- Discounting future cash flows to present value.
The comparative method uses market indicators of similar companies to estimate the value of corporate rights. The main steps include:
- Selection of a group of similar companies.
- Determination of relevant financial indicators (for example, P/E, P/S).
- Application of average indicators to the evaluated company.
The net asset method is based on the valuation of the company's assets minus its liabilities. The main stages include:
- Valuation of the company's assets.
- Assessment of the company's liabilities.
- Deduction of liabilities from the value of assets.
Forecasting future cash flows is a difficult task because they depend on many factors, including economic conditions, market conditions, and internal changes in the company.
Choosing the right discount rate is critical to the accuracy of the valuation. The wrong choice can lead to a significant distortion of the results.
Market conditions can change rapidly, which affects the accuracy of the valuation, especially when using the comparative method.
Company ABC forecasts the following cash flows for the next five years:
- Year 1: $1,000,000
- Year 2: $1,200,000
- Year 3: $1,400,000
- Year 4: $1,600,000
- Year 5: $1,800,000
The discount rate is 10%. Discounting future cash flows to present value gives us an estimate of ABC's corporate equity.
Company XYZ has the following financial indicators:
- Earnings per share (P/E): 15
- Sales per share (P/S): 2
The average indicators of similar companies are:
- P/E: 18
- PS: 2.5
Applying these averages to company XYZ allows us to assess its corporate rights.
The valuation of corporate rights is a complex process that requires consideration of many factors and the use of various methods. Correct assessment helps to make informed management decisions and ensures transparency in financial transactions. The challenges faced by experts can be overcome through careful analysis and the use of different assessment approaches.
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Serhii Floreskul
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Violetta Loseva
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