A guide to assignment on Business Valuation Methods including Market Capitalizations, Book Value, and Income-based approach. Including a comparison between these methods
Market capitalization commonly referred to as "market cap" is the total value of a firm's
outstanding shares of stock (Fernando, 2022). It's a simple and easy method to estimate a
business's value. It is used for publicly traded companies that have sold their shares to investors.
The investors can simply find the product of the number of available shares by the share price to
find the market cap.
The market will determine the firm's value so it might go up or down depending on various
factors. Market cap is a helpful metric for investors to find which stocks will be profitable and
the risk associated with them (Fernando, 2022). Additionally, investors use the market cap to
determine how to diversify their portfolio by determining the company size.
Book value is simply the value we get if we deduct a firm's total liabilities from its total assets
(Seth, 2021). It's what the investors get if the firm is liquidated. It can be easily calculated based
on the firm's balance sheet reported quarterly or annually. Book value will show the capacity of
the firm's tangible assets to cover any obligations or debts that the firm has (Seth, 2021).
Another approach is the income-based approach. This approach focuses on the cash flows of a
business to determine its value. There are two methods in this approach the first is the
capitalization of earnings method and the second is the discounted cash flow method. The
capitalization of earnings methods uses the business's cash flow from a recent period (three to
five year periods) and divides it by a capitalization rate (Gordon, 2021). This would help us
determine the required rate of return of the investment necessary to yield a profit.
Discounted cash flow (DCF) method is based on the cash flow and it is used to determine the
current value of future projected earnings (Marker, 2021). Evaluators use this method to find the
value of an investment based on estimated future cash flow. We use a predetermined discount
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