FINANCIAL MARKETS AND INVESTMENT ANALYSIS

Financial Markets and Investment Analysis



Table of Content

Question 1: Executive Summary3

Company Valuation3

Asset Basis Method4

Advantages5

Disadvantages6

Earning Basis Method6

Advantages7

Disadvantages7

Question 2: Executive Summary8

Exchange Rate8

Advantages of Weak Currency9

Benefits for exports9

Short term Benefit9

Disadvantages of Weak Currency10

The risk of inflation10

Drawback for Import11

Question 3: Executive Summary12

Hedging12

Hedging Exchange Rate Risks13

Foreign Exchange Risk13

Hedging of Currency Risks15

Forward exchange contracts15

A futures contract on the foreign currency15

Option16

Limitations16

References18

Financial Markets and Investment Analysis

Question 1: Executive Summary

It is said that Company valuation is an art and not a precise science and can be very difficult in practice. The importance of company valuation increases in the process of Mergers and Acquisitions. The valuation of a company is complex because of the plurality of elements that come into account. The valuation of a company goes beyond the pure financial considerations that represent its balance sheets and income statements. The two most commonly used techniques for business valuation are asset accumulation and income valuation method. The valuation of companies would be to estimate the value of the assets of each element separately, and then deducting all liabilities. These methods are critically evaluated and benefits and drawbacks are studied. Valuing a company is calculating the financial value of a company taking account of past accounting data and the development potential of the company. However, the goal is rarely the same, and therefore also the technique used.

Company Valuation

Valuation of the company, it is useful in many situations, but especially when it comes to selling the company or holding or obtaining an investor. Its solid preparation is helpful in achieving better trading conditions during the negotiations as it allows relying on facts and not on intuitive feelings and emotions. There are also cases in which the preparation of the valuation of the company is required by law, such as privatization and transformation of forms of action right businesses, mergers, acquisitions, divisions of companies (Longhofer, 2010). Valuation of the company can also be useful when applying for loans when the business or part thereof is used as collateral for the financing granted. 

A company valuation can have multiple uses such as buying and selling a company, property creation, conversion, acquisition of an investment, merger, division, change in ownership, compulsory part of calculations on an estate, marital property among married couples. A succession plan will be prepared with a business valuation for both the transferor a decision (which price can be demanded at least?) And for the successor (who can pay a maximum of how much?). This is called a decision value or critical value at which it comes to define the boundary of the concession stand. Estimating the value of a company or the valuation process today plays an important role in company management, particularly in terms of financial statements (Koller et al, 2010, 87). This allows determining the viability of development-oriented, strategic decisions, acquisitions and mergers.

The two most commonly used methods of valuation companies are property or Asset Accumulation and the income valuation method also known as discounted cash flow method. Usually, the valuation is carried out while using at least two methods, ...