Business Valuation

School 2009 ,

.3

Hence the cost of equity capital 4 .64 5 9 .64

The debt component in the capital structure is assumed to be zero , since the summary figures for 2008 show only a minimal figure of long-term liabilities , which can be ignored (Portsmouth Business School 2010 Hence the entire capital is assumed to be made up of only equity capital

Consequently , the weighted average cost of capital is the same as the cost of equity capital , which is 9 .64

Quantitative Assessment of the value

The valuation

of company shares can be made by employing a number of different approaches such as asset based methods , earnings based methods , dividend valuation models , or discounted cash flow methods More recently , methods such as market value addition and economic value addition approaches are also being used (McMenamin 1999 , 252-282

The Discounted Cash Flow methods offer the advantage of taking into consideration the time value of money , and therefore represent a true picture , particularly in cases of variations of cash flows from year to year . The Net present value of projected future cash flows gives a reasonably good idea of the value of the business

Calculation of Net present Value involves the assumption and use of a particular discounting rate . The Weighted average cost of capital can be used as the discounting rate , as this is the return that is actually required

Strictly speaking , the entire life of the project should be considered for valuing any project . In this .case we could consider a greater number of years or an infinite stream

However , this might not provide accurate results because it is difficult to forecast even with a low level of accuracy , the cash flows for such a long period , as we have no idea of what future conditions are likely...