CORPORATE FINANCIAL MANAGEMENT

Corporate Financial Management



Corporate Financial Management

Section A)

(Calculation are sent through email in an excel file)

Valuation

There is a difference between the valuation of Aer Lingus Group plc by Ryanair Holdings plc. This is because of many different techniques and accounting treatments conducted by companies.

Asset Accumulation

The Asset Approach is based on the premise that it is generally possible to liquidate the property, plant and equipment (PP&E) assets of a company, and after paying off the company's liabilities the net proceeds would accrue to the equity of the company. Valuation of assets based on liquidity does not yield better results if the fair market value of assets is in excess of value of its assets on a liquidated basis (Townsend, 2011, pp. 77).

Discounted cash flow method

This valuation method based on free cash flow is considered a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future free cash flow of the company (meeting all the liabilities) discounted by the firm's weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity), plus a risk factor measured by beta. Since risks are not always easy to determine precisely, Beta uses historic data to measure the sensitivity of the company's cash flow, for example, through business cycles.

Market Value

This valuation method is applicable for quoted companies only. The market value is determined by multiplying the quoted share price of the company by the number of issued shares. This valuation reflects the price that the market at a point in time is prepared to pay for the shares. This valuation method broadly takes into account the investors' perceptions about the performance of the company and the management's capabilities to deliver a return on their investments (Agar, 2005, pp. 23).

Price Earnings Multiple Valuation

The price-earnings ratio (P/E) is simply the price of a company's share of common stock in the public market divided by its earnings per share. By multiplying this P/E multiple by the net income, the value for the business could be determined. This valuation method provides a benchmark business valuation as the non-listed companies wishing to use this method; a comparable quoted company/sector should be used.

Financial experts believe that business valuations using any method should not be too high or too low because that could be costly, resulting in either overpayment or lost opportunities. The firms that face important investment, acquisition, or growth decisions, particularly in a rapidly changing competitive environment, effective management requires an understanding of value creation and a command over valuation analysis.

Section B)

The most common technique for valuing risky cash flows is the Free Cash Flow method. In that method, the tax deductibility of interest is treated as a decrease in the cost of capital using the after-tax weighted average cost of capital (WACC) (Sell, 1991, pp. 31). Interest tax shields are therefore excluded from the Free Cash Flows. Because the weighted average cost of capital is affected by ...