research paper 800 words doc 1

Corporate valuation

Apply the following principles to Microsoft Company (MSFT – the paper must be about Microsoft )

Corporate valuation can be approached from many different angles and perspectives. The goal of corporate valuation is to present the most accurate picture of net worth of a company. In general, there are five methods that can be used to value a corporation (Giddy, 2010):

• Asset-based methods
• Using comparables, such as earnings
• Free cash-flow methods
• Option-based valuation
• Special applications

All of these methods can be used either singly or in combination with each other to achieve the best results. Asset-based approaches include examining book value and working capital (Brigham, Gapenski, & Daves, 2004; Giddy, 2010). Comparing the earnings between similar types of companies in the same industry is another way to value a corporation (Giddy, 2010). Free cash flow includes discounted cash flow, such as net present value (NPV) and internal rate of return (IRR) that can be used to value assets (Gallagher & Andrew, 2003; Gitman, 2006; Block, Hirt, & Danielsen, 2009). Option-based approaches to corporate valuation include looking at puts, calls, and other derivatives in term of their net present value (Kodukula & Papuesey, 2006; Chance & Brooks, 2010). Special applications look at three unique situations that may complicate corporate valuation. These special situations are the following (Giddy, 2010):

• Valuation in a merger and acquisition
• Valuation of a company in distress
• Valuation of a company facing corporate financial restructuring

Corporate valuation is a complex process and can be very subjective in its nature. Regardless of the method used, there is still a significant amount of variability in the results.

Another way of thinking about corporate valuation is from the perspective of the stock value in the marketplace. The efficient market hypothesis (EMH) shows how the market views stock values based on the availability of information. A weak form of EMH is one where current market prices reflect past stock prices. This is the most limited form of an efficient market (Brigham et al., 2004). This form of EMH does not look at current information on a stock’s value that may be available, let alone all of its information. Generally, this is a restrictive market that normally does not exist in a free society. Semistrong EMH is a market in which current market prices of the stock include both past price information and current available information (Brigham et al., 2004). This is a market where all information currently known about the corporation is factored into the stock price, as well as historical stock price information. This level of efficient market is more in line with a normal market. The strong EMH is a market in which all information is available to affect the stock’s market price (Brigham et al., 2004). This of course is an ideal market that is not generally achievable, despite how much it might be desired. The efficient market hypothesis requires the following three market conditions to prevail (Brigham et al., 2004):

• Information is free
• No transaction costs
• A single institution or individual trader cannot affect prices

Because all of the conditions above do not exist, the various forms of EMH markets listed above are considered economically efficient, not perfectly efficient.

 

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