Business valuations
Valuation methods
Business valuation estimates what a company or share is worth. Asset-based methods value net assets, useful for property-heavy or liquidation situations but poor for going concerns with intangible value. Market-based methods use P/E ratios or dividend yields from comparable companies. Earnings-based valuation: value = sustainable earnings times P/E. Dividend valuation: P0 = D1/(Ke minus g) for constant growth. Discounted cash flow values expected free cash flows at WACC and is theoretically strongest. Valuation is a range, not a single number, and depends on purpose, control and marketability.
Traps and rule of thumb
Traps: using one year's exceptional earnings rather than maintainable earnings; applying a parent's P/E to a subsidiary without adjustment; forgetting to add synergy or subtract integration costs; using cum-div price when a dividend is about to be paid; ignoring minority discounts or control premiums. For takeover valuation, compare stand-alone value plus synergy with the price paid.
Worked example: maintainable earnings are $5m and a suitable P/E is 10, giving $50m. If the acquiring company expects synergy with present value $8m and pays $54m, net gain to acquirer = $50m + $8m minus $54m = $4m. Rule of thumb: value on a consistent basis, use sustainable cash or earnings, cross-check with at least two methods, and state assumptions clearly.