A firm with full equity has and EPS of Rs 8.50 with a growth rate of ten percent is looking forward for acquirer. Find the firm`s value, if its required rate is fifteen percent.
Answers
Explanation:
1
CHAPTER 1
INTRODUCTION TO VALUATION
Every asset, financial as well as real, has a value. The key to successfully investing
in and managing these assets lies in understanding not only what the value is but also the
sources of the value. Any asset can be valued, but some assets are easier to value than
others and the details of valuation will vary from case to case. Thus, the valuation of a
share of a real estate property will require different information and follow a different
format than the valuation of a publicly traded stock. What is surprising, however, is not
the differences in valuation techniques across assets, but the degree of similarity in basic
principles. There is undeniably uncertainty associated with valuation. Often that
uncertainty comes from the asset being valued, though the valuation model may add to
that uncertainty.
This chapter lays out a philosophical basis for valuation, together with a
discussion of how valuation is or can be used in a variety of frameworks, from portfolio
management to corporate finance.
A philosophical basis for valuation
It was Oscar Wilde who described a cynic as one who “knows the price of
everything, but the value of nothing”. He could very well have been describing some
equity research analysts and many investors, a surprising number of whom subscribe to
the 'bigger fool' theory of investing, which argues that the value of an asset is irrelevant as
long as there is a 'bigger fool' willing to buy the asset from them. While this may provide a
basis for some profits, it is a dangerous game to play, since there is no guarantee that such
an investor will still be around when the time to sell comes.
A postulate of sound investing is that an investor does not pay more for an asset
than its worth. This statement may seem logical and obvious, but it is forgotten and
rediscovered at some time in every generation and in every market. There are those who
are disingenuous enough to argue that value is in the eyes of the beholder, and that any
price can be justified if there are other investors willing to pay that price. That is patently
absurd. Perceptions may be all that matter when the asset is a painting or a sculpture, but
investors do not (and should not) buy most assets for aesthetic or emotional reasons;