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 andperspectives. The goal of corporate valuation is to present the mostaccurate picture of net worth of a company. In general, there are fivemethods 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 witheach other to achieve the best results. Asset-based approaches includeexamining book value and working capital (Brigham, Gapenski, &Daves, 2004; Giddy, 2010). Comparing the earnings between similar typesof companies in the same industry is another way to value a corporation(Giddy, 2010). Free cash flow includes discounted cash flow, such as netpresent value (NPV) and internal rate of return (IRR) that can be usedto value assets (Gallagher & Andrew, 2003; Gitman, 2006; Block,Hirt, & Danielsen, 2009). Option-based approaches to corporatevaluation include looking at puts, calls, and other derivatives in termof their net present value (Kodukula & Papuesey, 2006; Chance &Brooks, 2010). Special applications look at three unique situations thatmay complicate corporate valuation. These special situations are thefollowing (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 subjectivein its nature. Regardless of the method used, there is still asignificant amount of variability in the results.

Another way of thinking about corporate valuation is from theperspective of the stock value in the marketplace. The efficient markethypothesis (EMH) shows how the market views stock values based on theavailability of information. A weak form of EMH is one where currentmarket prices reflect past stock prices. This is the most limited formof an efficient market (Brigham et al., 2004). This form of EMH does notlook at current information on a stock’s value that may be available,let alone all of its information. Generally, this is a restrictivemarket that normally does not exist in a free society. Semistrong EMH isa market in which current market prices of the stock include both pastprice information and current available information (Brigham et al.,2004). This is a market where all information currently known about thecorporation is factored into the stock price, as well as historicalstock price information. This level of efficient market is more in linewith a normal market. The strong EMH is a market in which allinformation is available to affect the stock’s market price (Brigham etal., 2004). This of course is an ideal market that is not generallyachievable, despite how much it might be desired. The efficient markethypothesis 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 formsof EMH markets listed above are considered economically efficient, notperfectly efficient.