Of the eight factors usually considered when valuing the venture, provide four of them along with a sentence of explanation for each factor you provide.
What will be an ideal response?
Students may choose any of the following factors and explanations or examples may vary.
The first factor is the nature and history of the business. The characteristics of the venture and the industry in which it operates are fundamental aspects in every evaluation process.
The second factor involves the financial data of the venture compared with those of other companies in the industry. Management's capability now and in the future is assessed, as well as the future market for the company's products/services.
The third factor is the book value (net value) of the stock of the company and the overall financial condition of the business. The book value (often called owner's equity) is the acquisition cost (less accumulated depreciation) minus liabilities. Frequently, the book value is not a good indicator of fair market value.
The fourth factor is the future earning capacity of the company and it is the most important factor in valuation. Income by product line is analyzed to judge future profitability and value.
The fifth valuation factor is the dividend-paying capacity of the venture. It is the future capacity to pay dividends rather than actual dividend payments made that is important.
An assessment of goodwill and other intangibles of the venture is the sixth valuation factor. These intangible assets usually cannot be valued without reference to the tangible assets of the venture.
The seventh factor in valuation involves assessing any previous sale of equity. Previous equity transactions and their valuations represent future terms of sale, particularly if recent.
The final valuation factor is the market price of equity of companies engaged in the same or similar lines of business. The critical issue is the degree of similarity between the publicly traded company and the company being valued.
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