Financial Statement Analysis
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ACCT90002 Financial Statement Analysis
Group Assignment
Business Valuation
Background to this assignment
Business valuations can be performed using financial statement information and by
developing an understanding of the factors affecting the company and the industry within
which it operates. Using this information, it is possible to perform either a relative value
analysis or a fundamental (or intrinsic) value analysis.
Relative valuation is the process of valuing a company or its equity by comparing the
performance indicators (value drivers) of similar companies (peers) relative to market
perception. This approach is based on “value drivers,” or valuation multiples which are
companies’ specific financial performance measures (e.g., sales, earnings, book value of
equity, cash flows, etc.) and market perception measures (market value). Peer benchmarks
are then derived from multiples for comparing the target company to the peer group.
In contrast, fundamental (or intrinsic) value is the process of valuing a company or equity
from discounting future cash flows. The philosophical basis of this approach is that the main
determinants of value are cash flows, growth, and risk. While growth is used to forecast cash
flows, risk is incorporated in the discount rate (cost of capital). Therefore, this valuation
process includes projections of future cash flows, the estimated lifetime of the investment,
and the appropriate discount rate. There are two primary approaches to fundamental (or
intrinsic) value analysis: “income capitalization” and “cash flow discounting.” The income
capitalization approach is applied to estimate the asset value based on “actual” cash flows
generated by those assets. The major assumption is that the past is a good representation
of the future. The applicable discount rate on this approach is known as the capitalization
rate, which is usually a market rate of return. The cash flow discount approach uses
“expected” cash flows, considering their past, current, and future positions.
A business valuation performed for a third party is a document containing an opinion on the
value of a business that is obtained through an independent, complex and structured
valuation process. Analysts typically rely on the information gathered and on their personal
experience, to carry out a comprehensive valuation. If the valuation is commissioned by a
seller, it is a sell-side valuation; if it is commissioned by a buyer, it is a buy-side valuation.
Select your Company for the Group Assignment