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What are the ways to value a firm? What is Net Operating Income approach to value a firm?
Value of a firm = Total Number of Outstanding Ordinary Shares x Value Per Share
The value per share or total value can be determined by using the following commonly used "asset based and income based" valuation methods.
ASSETS BASED VALUATION METHODS
1. Historic Cost Method / Book Value Method / Balance Sheet Method / BreaK Up Value Method
2. Market Value Method / Fair Value Method / Net Realizable Method
3. Replacement Cost Method / Deprival Value Method
INCOME BASED VALUATION METHODS
1. Earning Yield Method / Yield Valuation Method
2. Dividend Yield Method
3. PE Ratio Method
4. Present Value of Future Cash Flows / Discounted Cash Flow Method
5. Dual Capitalization Method
The best way to value a firm is market capitalization i.e. Number of Ordinary Shares Outstanding x Market Price of Ordinary Shares.
Othe approach is to compute and sum up net present value of future investment projects. Marekt Value can also be determined by calculating net present value of future free cash flows.
In net operating incomce approcah value of a firm is supposed to be present value of future operating profits of the firm.
Generally there are the following ways to value a business :
1. Discounted Cash Flow analysis (DCF ) - Which is the same as NOP as in the second part of your question and it is the most thorough based on discount factors NPV and FCF or Forward Cash Flows . There are two ways of doing this 1. APV method (Ajusted Present Value)2. WACC method (Weighted Average Cost Of Capital Method)
2.Market Capitalization Method - which is the easiest .
3. Valuation Based on Comparable Transactions
There are following models to value a firm.
1- Net Income approach (assuming tha cost of debt Ki and cost of equity Ke remain unchanged if capital structure is changed)
2- Net Operating Income Approach (assuming that cost of overall capital Ko does not change with the change of capital structure)
3- Miller and Modigliani Approach (assuming the Ke increases with increased debt to offset the use of cheaper debt)
4- Traditional Approach (assuming that there is an optimal cost of capital, and that changes with the change in capital structure)
5- Market capitalization PE X EPS or as described by Mohammad Ahmed Siddiqui it can be calculated directly by multiplying Market Price of shares by Outstanding shares.
6- Cash Flow Approach (assuming economic profits are the base)
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