Identify how an analyst places a value on a company.
Recognize who uses company valuations.
Introduction
This section shows the correct method for determining the value of a company using the constant growth dividend capitalization model. Explanations are presented of (1) the variables defined in the model and (2) the valuation techniques and who uses them.
Why use a valuation technique?
Financial information is an important determinant of company value. We need to know how the financial statements affect company value.
How does increased profitability affect company value?
Profitability is positively related to company value. That is, as a company becomes more profitable its value increases.
How does increased growth affect company value?
Growth is defined as the company’s increasing ability to produce cash flows or profits. Growth is positively related to company value.
How does increased risk affect company value? Liquidity risk? Financial risk?
All types of risk reduce company value. Liquidity and financial risk can be measured from financial statements. As they increase, company value declines.
A valuation technique is particularly important for small- and medium-sized companies. Large-company values are found in the security markets. Smaller companies do not have this luxury.
The value of a company is determined ...
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