Basic Valuation Techniques Balance Sheet Valuations

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Basic Valuation TechniquesBalance Sheet
Valuations

• Book Value (assets - liabilities)
• Adjusted Book Value (A/R collectibility,
  condition of inventory, market values of
  buildings, land, equipment)
• Liquidation Value (absolute floor price)
• Replacement Value (reference point)

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Basic Valuation Techniques Earnings Approaches

• Market Approach P/E ratio x EBIT
• Excess Earnings Value of net worth estimation
  of goodwill
• Capitalized Earnings Earnings divided by
  appropriate rate of return
• Discounted Future Earnings NPV of future
  earnings
• Discounted Cash Flows NPV of all cash inflows
  outflows

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Basic Valuation Techniques Price-Sales Approach

• Examine Profit Margin as percent of Sales
  (compute profit/sales)
• Divide Profit/Sales by expected Growth rate
  (usually 5 - rate of economy)
• Multiply resulting percent by Sales to get value
  of firm

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Commercial Fixtures, Inc. Case

• Book Value 900,646
• Adjusted Book 900,646
• add 200,000 for undervalued plant
• 1,100,646
• Earnings (Market) 215,818 (97)
• x 5 (P/E) 1,080,000
• x 10 2,158,180

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Commercial Fixtures, Inc. Case
Earnings (Market) estimated EBIT for 1998
240,000 x 5 1,200,000 x 10
2,400,000 Earnings (Market) adjusted for
expected 1998 sales (10 higher) EBIT
264,000 x 5 1,320,000 x 10 2,640,000
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Commercial Fixtures, Inc. Case
Price/Sales Approach 1997 Net Earnings
115,209 as a pct of Sales 2.61 Expected
Growth Rate 6 Ratio of profit/sales as percent
of growth 2.61/6 43.5 43.5 of Sales
(4,412,191) 1,919,303
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Commercial Fixtures, Inc. CaseRange of Possible
Values
Total Firm One-Half Value Value

• Book Value 900,646 450,323
• FE Mkt 1998 EBIT 1,080,000 540,000
• Adj BV 1,100,646 550,323
• FE Mkt Adj 1998 1,320,000 660,000
• DCF (equity only) 1,488,000 744,250
• Price/Sales 1,919,303 959,652
• Disc FE (PV) 1,998,120 990,060