The valuing of a company is a difficult task. In order to value there is a number of ways are used. They are discussed below:
Discounted cash flow
The discounted cash flow approach describes valuing a company on the basis of the time value of money. In this, all cash flow is estimated and discounted to give them a present value. It focuses on the estimation of the future performance of a firm and therefore the implication of shortcomings and methods to overcome are discussed. In other words, it assumes that the value of a company is the present value of all the cash that the company will make in future. If the DCF is higher it is a better decision to purchase, so it is a measuring tool to make a decision.
Book value is the value of an asset or liability according to the balance sheet account balance. In other words, it is the difference between asset and liability. By comparing the market value, the book value can indicate whether a stock is under or overpriced. This will help to know the value of a company.
Market capitalization or market cap is a way of measuring the size of a company and is calculated by multiplying the current stock price by the number of outstanding shares. A stock trading at $55 with 100,000,000 outstanding shares would have a market cap of $5.5 billion. The market value helps to know the company’s market value and can determine whether the market value is adequate or not.
Common stock valuation
The term common stock represents an ownership interest in the corporation. It entitles its owner to dividends when the company has sufficient earnings. The stock can be sold at a higher price than the purchase price at a future date. When the stock is sold at a price higher than the purchase price the investor will receive a capital gain. Peoples buy common stock in the expectation of a capital gain. The common stock provides an expected future cash flow stream. The expected cash flow consists of the dividends expected in each year and the price investors expected to receive when they sell the stock.
The liquidation value of a firm
The liquidation value of a firm is assessed on the estimation that the firm will cease its operations at a point in time in the future and it will sell all assets it has accumulated to the highest bidders. The value thus estimated is known as the liquidation value. The liquidation value can be estimated in two ways. One is based on the book value of assets adjusted for any inflation during the period and the other is based upon the earning power of the assets.