Valuing a Company

As part of an investment planning exercise, it is frequently necessary to put a value on the totality of an operating company. The calculation of 

The simplest method of valuation starts from the obvious fact that to buy a company, one just has to buy all the outstanding shares. In principle, therefore, the value of the company is the number of shares multiplied by their individual value at any moment (the capitalization ). Almost certainly the offered price will have to exceed the current share price to persuade people to sell their shares (unless the market is falling, in which case they may be glad to offload them). There may also have to be a premium on the capitalization to allow for intangibles, such as goodwill . 

This valuation is sound for the particular sale/purchase situation, but is very dependent upon the immediately current share price. It has no direct link to any measure of an intrinsic company value, certainly not one that can be used to compare the sizes of two or more companies. 

So there must be other measures of value. The most obvious is gross sales volume the more a company sells in any market, the bigger it must be. This is generally true, but what may be more important for comparative purposes is what lies behind these sales are there enormous quantities of assets or capital required to achieve them, or is it a very lean company The ratio of gross sales to asset value or to capital employed will therefore be a better measure. 

Since companies exist primarily to provide income for their owners, i.e. to make a profit, their gross profit could be a more interesting figure than sales volume. The most profitable companies may be the best but, again, it is the ratio of profit to assets or capital employed that may be more important. 

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A key figure in valuing a company is the ratio of its current share price (as an indicator of what the world thinks of it) to the total net profit (earnings) divided by the number of shares (earnings per share). This is called the PjE ratio (price/earnings), and is a major tool in comparing the performance of a company within its class of similar companies. 

By effectively embedding caps and/or floors on a notional principal equal to a multiple of the underlying bond s face value, a company can offer investors significantly higher current yields, but with the risk that future returns could fall markedly if rates rose beyond a certain level. 

The market-to-book ratio provides another indication of how investors view the company. Since assets are based on historical costs, plus certain assets and nontangible items are not captured on the balance sheet, the balance sheet rarely reflects an accurate value of the company. The market-to-book ratio depicts the difference between the book value and what the market values the company. Are investors willing to pay more for a stock than the accounting book value A company s market capitalization is the total number of shares multiplied... 

What is value Value can be defined in different ways. There are those who might classify value in the short term in two main categories book value and market value. A company s financial statements determine its book value. The book value of assets and stockholder s equity can be ascertained from the balance sheet. Recall from earlier chapters that stockholder s equity is the difference between assets and liabilities. Market value, commonly referred to as market capitalization, is calculated by taking the number of shares outstanding times the share price. Market value changes multiple times per day, every day. When concentrating on the number of shares and share price, this refers to a company s market value of equity. 

The volumetries of a field, along with the anticipated recovery factors, control the reserves in the field those hydrocarbons which will be produced in the future. The value of an oil or gas company lies predominantly in its hydrocarbon reserves which are used by shareholders and investors as one indication of the strength of the company, both at present and in the future. A reliable estimate of the reserves of a company is therefore important to the current value as well as the longer term prospects of an oil or gas company. 

Discounted-cash-flow rate of return (DCFRR) has the advantage of being unique and readily understood. However, when used alone, it gives no indication of the scale of the operation. The (NPV) indicates the monetary return, but unlike that of the (DCFRR) its value depends on the base year chosen for the calculation. Additional information is needed before its significance can be appreciated. However, when a company is considering investment in a portfoho of projects, individual (NPV)s have the advantage of being additive. This is not true of (DCFRR)s. 

If the potential loss can bankrupt the company, then decisions are not necessarily made on the basis of expecded value even though the potential gain may be veiy high. Also, decisions are not necessarily made on the basis of expected value if the potential loss represents a relatively small amount of money to the company. Between these two extremes, expected value can be a veiy usehil criterion, particularly for a company with a large number of projects. 

Money does not hold the same value for each company or each individual. A dollar may keep a pauper from starvation while being a trivial amount to the person who gave it. Attempts have been made to quantify a company s attitude to money, risk, and uncertainty by asking business executives a number of questions such as the following ... 

Example 13 Evaluation of Investment Priorities Using Prob-ability Calculations A company is considering investment in one or more of three projects, A, B, and C. We wish to evaluate the investment priorities if the prohahihties of attaining various net present values (NPV) are as listed in the third column of Table 9-11. Equation (9-105) gives the expected value for (NPV),. Hence for project A, (NPV), is computed from the data in Table 9-12 and found to be... 

Let us consider the very simplified case of a company with 100,000 shares of common stock, each with a market value of 10, giving a total market value of 1,000,000. If a further 50,000 shares are sold at 4 each, the total market value of the 150,000 shares is 1,200,000, or 8 each. This means that the new stockholders have gained at the expense of the original ones. The preemptive right is designed to prevent this. In practice, the situation is rather more complex than is indicated here. 

Stockholders equity in a company is made up of the capital contributed by the stockholders and the capital generated from retained earnings. The presence of retained earnings on a balance sheet, as shown in Table 9-23, does not necessarily mean that they are matched by an equal amount of cash. In fact, there may be little or no cash available. The retained earnings shown on a balance sheet may be largely fictitious. For example, the assets on a balance sheet may be worth less than shown by at least the value of the retained earnings. 

Sometimes a company uses a sinking fund to retire a bond. A series of equal annual payments A, invested at a fractional interest rate i and made at the end of each year over a period of n years, is equivalent to a sum of money of present value P, given by... 

A mortgage is a bond in which specific real assets are pledged as security. A senior mortgage has a prior claim on assets. A junior mortgage is normally a second mortgage on the residual value of the assets. A blanket mortgage is a pledge on all real property owned by a company. 

Since ratios, like balance sheets, refer to a particiilar point in time, they have a hmited use unless they are compared with previous values. A study of ratio trends indicates whether or not a company is approaching a working-capital or a hquidity crisis and may enable management to compare the performance of the company with that of competitors. 

Transactions that change the character of the net working capital but do not affect its value occur in a company. For example, a cash payment of 10,000 for accounts payable reduces both the current asset of cash by 10,000 and the current liabihty of accounts payable by 10,000, leaving the net working capital unchanged. However, this transac tion affects Doth the current and the quick ratios. 

In considering either multiple payments or cash into and out of a company, the present values are additive. For example, at 6 percent interest, the present value of receiving both 1,000 in one year and 1,000 in three years would be 943.40 + 839.62 = 1,783.06. Similarly, if one were to receive 1,000 in one year, and pay 1,000 in 3 years the present value would be 943.40 - 839.62 = 103.78. It is common practice to compare investment options based on the present-value equation shown above. We may also apply one or all of the following four factors when comparing investment options Payback Period Internal Rale of Return Benefit-to-cost Ratio and Present Value of Net Benefit. But as we will see later, it is rate of return that is usually the most enlightening when considering an investment. 

Although most companies use only revenue and expense figures when comparing investment projects, income-tax effects can enter into each calculation if either revenues or expenses change from the baseline values. More expenses mean lower profits and fewer taxes, and vice versa. If a company needs to know the effect of income taxes on profit, the computations are simple and can be done during or after... 

In many cases, it is not readily apparent how the potential impacts from different hazards can be translated into some common scale or measure. For example, how do you compare long term environmental damage and health risks from use of CFG refrigerants to the immediate risk of fatality from the fire, explosion, and toxicity hazards associated with many alternative refrigerants This question does not have a right answer. It is not really a scientific question, but instead it is a question of values. Individuals, companies, and society must determine how to value different kinds of risks relative to each other, and base decisions on this evaluation. 

The stock value. The value of the stores stock represents a significant investment for many manufacturers and financing the work in progress can represent a significant cost. It is a useful indicator of the financial health of a company and is a prime target for cuts in the drive for increased economic efficiency. Section 7.2 highlighted this. 

The share capital of a company is expressed as a sum of money, the authorized share capital, made up of a stated number of shares, each of which has a face or nominal value. 

Not all the shares in a company may, or need to be, issued. By the issue of more shares, at an appropriate stage in the company s growth, capital may be raised from the institutions mentioned above or, through a flotation on the Stock Exchange, from the investing public at large. When this happens, the price paid per share by the purchasers may be many times greater than the nominal value. 

Financial data on their own provide only an historical record of the transactions of a business. The accounts of a company published annually are mainly of historical value but must, by law, include comparisons with the figures for a prior corresponding period. 

The chemical and petrochemical industries are highly capital intensive and this has two important implications for the plant designer. Before the expenditure for any plant is approved, a discounted cash flow (DCF) return on capital invested is projected (Section 9.1). The capital cost of the plant is a key factor in deciding whether the DCF return is above or below the cut-off value used by a company to judge the viability of projects. Thus, there is always strong pressure on the materials engineer not to overspecify the materials of construction. 

Specified interest rate to be used to calculate present values (the return on investment a company wants to make). 

Sometimes, new values are added not only to the polymer itself, but also to the shape or physical state of the processed polymers to maximize the profit opportunity. For example, when a company develops a novel polymeric material and its manufacturing technology, the company may prefer to make their novel polymers available to customers in the form of intermediate consumer products, such as hi performance films or fibers, rather than manufacturing and selling bulk resins to industrial customers. To do so, the company should have a line of technical capabilities from polymer synthesis to consumer product manufacturing. 

Before an organization sets down the path to green chemistry they must become aware of the value of green chemistry and be motivated to implement change. A company should consider why it is embarking on the path to green chemistry. Potential motivations and drivers include ... 

Considering the failure of available log D methods to predict in-house data and taking into account that such data are usually generated just for a few fixed pH values, a number of companies started to elaborate in-house methods for log D prediction at fixed pH. Up to date several companies have reported development of such methods. For example, Cerep has developed methods to predict log D at pH 7.4 and 6.5 included in their Bio Print package [107], but details of their method are not pubhshed. HQSAR Tripos descriptors were used by Bayer to develop log D models at pH 2.3 and 7.5 using 70000 (qi =0.76, STD =0.60) and 7000 (qi =0.83, STD =0.67) compounds, respectively [108] however, again, no details of the approach were provided. 

This tax is similar to a sales tax. However, it is based on the amount by which a company has increased the value of a product, whereas a sales tax is based on the selling price. For instance, if a manufacturer spent 100 on the raw materials used in manufacturing a pump and then sold the pump for 275, the value-added tax would be a certain percentage of 175. For mining concerns the value-added tax would be the same as a sales tax, since minerals in their natural state are assumed to have no value. 

A company is considering purchasing a power-driven post-hole digger mounted on a line truck. The machine will cost 12,000 and have an 8-year life 2 men will operate it and can dig 25 holes per day. It uses 10/day of fuel and oil. It will be used in place of a present line truck (value 500) when not digging. The line truck is only used 50% of the time. 

Depreciation is important for two reasons. First, it reduces federal income taxes, because the amount of depreciation occurring in any one year is considered as an expense. Second, it is a means whereby the stockholder can assess the physical value of a company. 

Investors, however, like companies that have large tangible assets, because they think they have a better chance of getting their money back should the company become bankrupt. The tangible assets are the undepreciated assets of the company. So if a company is interested in selling bonds, it looks better if it has depreciated its assets slowly. As a result, some companies keep dual books-one for the public and the other for the Internal Revenue Service. There is nothing illegal about this. The capitalized cost minus the amount that has been depreciated is called the book value of the asset. This may be above, below, or the same as its resale value. 

Since the net salvage value may be difficult to determine, a company may estimate the cost of removing and disposing of the used equipment as up to 10% of... 

The quant-based combinatorial optimization accounts for the entire value chain and its associated processes, that is for all of its inputs, outputs and system parameters. Based on these data an integrated and complete model of a company s supply chain is derived, detecting in advance what impact a decision or an external influence will have on the total system. 

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