How Would You Value a Firm That You Were Trying To Purchase - Research Paper Example

Holton and Bates 2009, elucidates that there are a number of methods through which a potential purchaser of a particular firm may apply in an effort to realize the value of that firm. The methods may include: Free Cash Flow Methods, Asset-Based Methods, Option-Based Valuation method, and the method of using Comparables, These tools or methods of valuations would in return assist the potential purchaser of the firm to analyze and make an informed purchasing choice. Discussion To begin with, the asset-based method can be efficiently used be an intending purchaser to value a give firm.

This method reveals the book value of a firm’s equity. In simpler terms, the asset based method shows the asset value of a firm or a company, less the debts of the firm. According to Strauss, 2011, a potential purchaser of a firm may find this method of valuation helpful since a company’s equity is all that a firm can be left with in an instance where it suddenly halt its selling its products or making money. This equity may be current assets, shareholders equity, and cash as tangible things, as well as brand name and management as intangible qualities.

The shortcomings of this method however is that there are some hidden assets that cannot be revealed. This may happen in instances where a piece of a firm land was purchased years ago and the value of that land has been kept as it was despite the appreciation that has dramatically taken place. Another method may be used to value a firm is by using comparables. This method is one of the most common means through which a company valuation is done by simply using the earnings that a company gets.

The earnings of a firm sometimes referred to as the net profit or net income can be said to be the amount of money that a firm is left with after it has paid all its bills or debts. In most cases, earning of a firm is measured according to the earnings per share. Earnings per share can be calculated by dividing the amount of earning a firm reports by the outstanding number of shares the firm has. Even though this method may be helpful to an individual intending to purchase a given firm, it falls short of other aspects of valuing a firm such as the firm assets which are an importance aspect of valuation in any business (Mayo 2010) Further, free cash flow method may be used in an attempt to value the worth of a given firm.

Even though most of the individual investors are not conversant with cash flow, this method is commonly used for valuation of both private and public firms especially by the bankers. Cash flow can be described as the company’s earnings before taxes, interest amortization and depreciation. This method may however be ineffective in valuing a firm worth and the actual business earnings since the taxes and other costs are not subtracted from the general earning. Taxes payable by a given firm may vary depending on the laws governing taxation in a particular financial year and even though the earnings of a given firm may be hefty the amount of taxes may be large thus the secondary costs or company’s profits may be uncertain.

Finally, a person may opt to use the option based method to value the worth of a firm before purchasing that firm. There are several other techniques of firm valuation as aforementioned