Stock Valuation Techniques
Introduction
The organization traded as a public limited company. It operates mainly on the retail offering industry. The organization was formed on April 1990. The founders of the organization were Steve Smith and Dave Dodd. The headquarters of the organization was in England. The organization operates in 450 retail stores. The products for the organization comprise of the electronic, DIY, Consumer goods and groceries. The organization has posted revenue of 642 million pounds, (Thomas, 2011). The operating income for the organization was 16 million. The firm posted a profit of 11.8 million pounds. The owners for the organization are Warburg Pinks, (Hobbs, 2011). The employees of the organization are 10020 people. The firm has a plan to enter into the London stock exchange. This editorial will offer the reasons for the entry into the stock exchange and assess the critical methods that can be used in the valuation.
1.1. Scope
The discussion section will identify the different reasons for the organization to get listed in the London stock exchange. The discussion section will analyze the different valuation methods that could be implemented by the management. The analysis section will offer a recommendation on the best valuation method.
1.2. Purpose
The endeavour of the investigation is to offer insight on the need for the company to be listed. The editorial offers information on the best valuation techniques for the assessment.
1.3. Thesis
DDM is the best valuation method.
Discussion
2.1. Reasons for stock market listing
The reasons for the firm to go for the market listing in the London stock exchange are the following. The first reason is the access of the capital to fund growth. The public placement of the company in the market listing increased the attractiveness of the firm to attract the management to upgrade the production facilities and acquisitive expansion. The management will be able to obtain the timeless pool of capital and boost for the investment credibility in the businesses, (Luke, 2011).
The second reason is to offer the creation of liquidity form the potential exit for the current owners. The listing of the market in the stock exchange increases the chances for the creation of liquidity and provision of opportunities that offer the sale of shares with the minimal transaction costs, (Hobbs, 2011). The exit of the owners assures the clients, suppliers and partners of the different quality issues that they were able to identify for the organizational capabilities. The aspect of due diligence is provided to the firm through the assessment of the financial position.
The third reason is for the maximization of the value of the company. The market listing increases the identification of the business and offers confidence in its liquidity. The identification of the liquidity provision assures the success of the organization in dealing with the divergent issues that will generate finances for the organization, (Eduard, 2011). The improvement in the debt finances will be based on the financial reporting for the company that will be listed for the recognition of the stock exchanges, (Thomas, 2011). The different financial institutions will fight to identify the divergence of the recognised stock exchange that that originates from the reliable and desirable partners. The corporate governance and transparency focuses on the assessment of the additional factors of confidence for the suppliers and banks.
2.2. Methods for Valuation
2.2.1. Dividend discount model
The Dividend discount model assesses the intrinsic value of stocks that represent the present value of the income streams. The method assesses the estimate for the value of the share of stock through the discounting of the different expected future dividend payment. The fundamental analysis for the evaluation is based on the analysis of the company’s accounting statement and other economic and financial information, (Alfonso, 2011). The assessment allows the assessment of the firm’s economic value for the company’s stock.
The basic idea is for the identification of the overvalued and undervalued stocks. The practice looks at the stocks that can be correctly priced for the reasons that are not immediately apparent to the different analysis. The Dividend discount model assumes that the dividend will grow at the constant rate forever, (Eduard, 2011). The growth rate for the dividends is estimated at different approaches. The fist approach is applying the historical rate for the company as the average growth rate, (Luke, 2011). The growth rate is identified through the identification of the mean for the median of the average growth rate. The management can use the sustainable growth rate for the assessment of the approaches.
The discount rates for Dividend discount model are identified through CAPM. The discount rate focuses on the time value of money and the risk premium. The model is more beneficial than others due to the simplicity in computation. The approach is not usable for the firms that refuse the payment of the dividends, (Eduard, 2011). The approach has the limitation of offering the unrealistic assumptions. The limitation arises for the assumption that the dividends can be forecasted indefinitely. The dividend for the valuation is expected to grow at a fixed rate. The earnings for the shares are expected to be constant together with the payout ratio, (Alfonso, 2011). The management offers the source of the growth through the assumption of the new capital that is added. The retained earnings for the valuation are assumed to pay for the new firm’s investment. This is the first valuation technique that can be used for the valuation of the stocks.
2.2.2. Discounted Cash Flow
The method focuses on the estimation of the attractiveness of the investment opportunity. The Discounted Cash Flow method applies the future free cash flow. The projection and discounts for the cash flows allow the arrival of the present value for the discounts, (Luke, 2011). The analysis evaluates the potential for the investments, (Eduard, 2011). The arrival at the value of Discounted Cash Flow offers the high value of the current costs for investment and opportunity to become a good stock. The methodology requires the estimation of the cost of capital, forecasting of the free cash flows, calculation of the present values for the future cash flows and the estimation of the organizational terminal value. The last step involves the derivation of the implied valuation range.
The DCF technique focuses on the amount of cash and the value that the investors will receive. The Discounted Cash Flow method offers the assessment of the intrinsic value for the value of the company. The relative and theoretical values for the stocks are assessed through the Discounted Cash Flow method, (Alfonso, 2011). The valuation bases the calculation on the free cash flows. These include the assessment of the independent capital structure and the free cash flow for the different capital holders. The value of the Discounted Cash Flow is equal to the present value summation, (Hobbs, 2011). The un-levered free cash flow and projected terminal value offers the estimation of the values that are beyond the forecasted period.
The Discounted Cash Flow valuation has the following advantages in valuation. The technique assures the identification of the intrinsic value that is passed on the projected Future cash flows. The approach is considered to be adaptive and flexible. The changes in the projection assess the synergies, expansion plans, operating margins and the growth rates. This offers the complete assessment of the state of the organizational stock, (Eduard, 2011). The Discounted Cash Flow offers the objective calculation for the different stocks. The assessment of the flow of income assures the providence of the best decision for the management of tasks. The management will require the scrutiny of the key drivers for the value of the management. The approach is always obtainable in the assessment of activities within the organization.
The limitations or challenges for the model are the following. The cash flow from the forecast can be based on the possible biasness. The forecast’s focus on sensitivities reduces their overall reliability in offering funds to the organization. The management focuses on the subjective valuation of the different stocks, (Thomas, 2011). The valuation method is considered to be sensitive to the future cash flows, growth margins and growth rates. The assumed discount rate and market conditions affect the overall rate of participation for the organization.
2.2.3. Asset Based Valuation
The valuation aspect values the business as being equivalent to the summation of the diverse parts. The theory underlies the asset based approaches for the business valuation. The valuation assesses the value of the asset for the price for the able and willing buyers that pay for the willing and able sellers, (Eduard, 2011). The company’s worth assesses the tangibility of the assets, assessment of the worth for the goodwill and assets. The asset valuation analyzes the balance sheet. The balance sheet summarizes the financial condition for the business till the point in tome of remembering of the picture given in seconds. The management will be required to estimate the net worth or owners equity. The transactions will be assessed with the basis of analysis for the balance sheet that could be changing daily. The rationale of the balance sheet is to measure the business or individuals that are given at the stated point. The assets assess the value of anything that is owned. The liability assessment focuses on the analysis debt or the other financial obligations that are owed to an individual. The valuation method is based on the substitution principle.
The rational investors will be required to pay for the business assets rather than procuring the assesses to the economic utility. The valuation method focuses on the adjusted net book value for the assets, (Eduard, 2011). The valuation requires the application of the accounting convention that reports all the assets to be reported on the books for the subject company at their acquisition value. The valuation method does not focus on the different intangible assets. The asset valuation approach explains some part of the value for the organizations going concern, (Eduard, 2011). The controlling off the shareholders will require the definition of authority that assures the direction of the corporation for selling off the parts of the assets through the distribution of the proceeds to the shareholders. The method applies the complex concepts for measurement and recognition of assets that are based on the following purposes. The aims are the effects of inflation, functions placed on the replacement costs and the true economic costs for the replication of costs.
Analysis
The best approach for the firm is Dividend discount model. The model will offer the intrinsic value of the firm, unlike the other valuation models. The technique focuses on the complexity and depth of the subject valuation. The valuation focuses on the identification of the understanding for the business. The valuation offers the forecasting of the performance and selection of the appropriate valuation models. The DDM model will be suited in the assessment of the business proficiency that allows the assessment of the basic applications and mechanics for the dividend discount model that utilizes the firm’s cost of capital. The cost of capital is applied for the discounting of the dividends.
Conclusion
In conclusion, DDM was the best method to be applied in the analysis. DDM offers the assessment of the intrinsic value for the organization. The DCF model was not chosen due to the fluctuation expectation in the movement for resources. The high degree for confidence on the cash flow forecast can be flawed. The forecasting can be biased and offer problem in the analysis of the valuation for the organization. The asset based valuation requires the support of another valuation method to assure the assessment of the organizational approaches. The asset based approach assesses the floor value for the company that is valued as the going concern.
Reference
Alfonso, P (2011). Capital accumulation and unemployment in Canada: Journal on Post Keynesian financial side, 34, 1, 113-136.
Eduard, B. (2011). The Stock Markets and Real trade and industry Activity: Journal on Eastern European Economics, 49, 4, 6-23.
Hobbs, B. (2011). A fresh look at the payment of project organization to organizational routine: Journal on Project Management, 42, 1, 3-16.
Luke, H. (2011). Sturgeon Business in China: development, strategies and prediction assessed on the origin of nation-wide surveys (2007-2009). Journal on Applied Ichthyology, 27, 2, 219-312
Thomas, L. (2011). Conceptualizing vendor aggressive Intelligence: An Individual-Level standpoint: Journal on Personal Selling or Sales Management, 31, 2, 141-156.
