The standard of value is the hypothetical conditions under which

the business will be valued. The premise of value relates to the assumptions, such as
assuming that
the business will continue forever in its current form (going concern), or that the value of
the business
lies in the proceeds from the sale of all of its assets minus the related debt (sum of the
parts or
assemblage of business assets).
In finance, valuation is the process of estimating the potential market value of a
financial asset or
liability. Valuations can be done on assets (for example, investments in marketable
securities such as
stocks, options, business enterprises, or intangible assets such as patents and
trademarks) or on
liabilities (e.g., Bonds issued by a company). Valuations are required in many contexts
including
investment analysis, capital budgeting, merger and acquisition transactions, financial
reporting, taxable
events to determine the proper tax liability, and in litigation.
Valuation of financial assets is done using one or more of these types of models:
1. Relative value models determine the value based on the market prices of similar
assets.
2. Absolute value models determine the value by estimating the expected future
earnings from
owning the asset discounted to their present value.
3. Option pricing models are used for certain types of financial assets (e.g., warrants,
put options,
call options, employee stock options, investments with embedded options such as a
callable
bond) and are a complex present value model.
When a firm
is required to show some of its assets at market value, some call this process "mark-tomarket."
Despite the risk of manager bias, investors and
creditors prefer to know the market values of a firm's assets--rather than their costs-because the
current values give them better information to make decisions.

Guideline companies method

This method determines the value of a firm by observing the prices of similar companies
(guideline
companies) that sold in the market. Those sales could be shares of stock or sales of
entire firms. The
observed prices serve as valuation benchmarks. From the prices, one calculates price
multiples such as
the price-to-earnings or price-to-book value ratios. Next, one or more price multiples are
used to value

the firm. For example, the average price-to-earnings multiple of the guideline companies
is applied to
the subject firm's earnings to estimate its value.
Valuation of intangible assets
Stock markets give indirectly an estimate of a corporation's intangible asset value. It can
be reckoned
as the difference between its market capitalisation and its book value (by including only
hard assets in
it). The 25% Rule, Monte Carlo Analysis, and Derivative Revenue Model (based on
license revenue) are just
a few of these tools. To have an open market for
intellectual property would create a more uniform and transparent form of IP valuation.
The "Bid" and
"Ask" system, many believe, is the most efficient form of valuing an asset. A "stock
exchange" for
intellectual property would change the face of intellectual property valuation.

Mining valuations are sometimes required for IPOs, fairness opinions, litigation, mergers
& acquisitions
and shareholder related matters.
In valuation of a mining project or mining property, fair market value is the standard of
value to be
used. The CIMVal Standards are a recognised standard for valuation of mining projects
and is also
recognised by the Toronto Stock Exchange (Venture). The standards spearheaded by
Spence & Roscoe,
stress the use of the cost approach, market approach and the income approach,
depending on the
stage of development of the mining property or project.
Normalization of financial statements
The most common normalization adjustments fall into the following four categories:
* Comparability Adjustments. The valuer may adjust the subject companys financial statements to
facilitate a comparison between the subject company and other businesses in the same
industry or
geographic location. These adjustments are intended to eliminate differences between
the way that
published industry data is presented and the way that the subject companys data is presented in its
financial statements.
* Non-operating Adjustments. It is reasonable to assume that if a business were sold in
a
hypothetical sales transaction (which is the underlying premise of the fair market value
standard), thseller would retain any assets which were not related to the production of
earnings or price those nonoperating assets separately. For this reason, non-operating
assets (such as excess cash) are usually
eliminated from the balance sheet.
* Non-recurring Adjustments. The subject companys financial statements may be affected by
events that are not expected to recur, such as the purchase or sale of assets, a lawsuit,
or an
unusually large revenue or expense. These non-recurring items are adjusted so that the
financial
statements will better reflect the managements expectations of future performance.

* Discretionary Adjustments. The owners of private companies may be paid at variance

from the
market level of compensation that similar executives in the industry might command. In
order to
determine fair market value, the owners compensation, benefits, perquisites and distributions must
be adjusted to industry standards. Similarly, the rent paid by the subject business for the
use of
property owned by the companys owners individually may be scrutinized.

Income, Asset and Market Approaches

the income approaches determine value by calculating the net
present value of the benefit stream generated by the business (discounted cash flow);
the assetbased approaches determine value by adding the sum of the parts of the business (net
asset value);
and the market approaches determine value by comparing the subject company to other
companies in
the same industry, of the same size, and/or within the same region.
Income approaches
The income approaches determine fair market value by multiplying the benefit stream
generated by
the subject or target company times a discount or capitalization rate. The discount or
capitalization
rate converts the stream of benefits into present value. There are several different
income
approaches, including capitalization of earnings or cash flows, discounted future cash flows (DCF),
and the excess earnings method (which is a hybrid of asset and income approaches).
Most of the
income approaches look to the companys adjusted historical financial data for a single period; only DCF
requires data for multiple future periods.
Discount or capitalization rates
A discount rate or capitalization rate is used to determine the present value of the
expected returns of
a business. The discount rate and capitalization rate are closely related to each other, but
distinguishable. Generally speaking, the discount rate or capitalization rate may be
defined as the
yield necessary to attract investors to a particular investment, given the risks associated
with that
investment.
In DCF valuations, the discount rate, often an estimate of the cost of capital for the
business are
used to calculate the net present value of a series of projected cash flows.
* On the other hand, a capitalization rate is applied in methods of business valuation
that are
based on business data for a single period of time. For example, in real estate valuations
for
properties that generate cash flows, a capitalization rate may be applied to the net
operating income
(NOI) (i.e., income before depreciation and interest expenses) of the property for the
trailing twelve
months.

s. The discount rate

is composed of two elements: (1) the risk-free rate, which is the return that an investor
would expect
from a secure, practically risk-free investment, such as a high quality government bond;
plus (2) a
risk premium that compensates an investor for the relative level of risk associated with a
particular
investment in excess of the risk-free rate.

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model ( CAPM) is one method of determining the appropriate
discount rate in
business valuations. The CAPM method originated from the Nobel Prize winning studies
of Harry
Markowitz, James Tobin and William Sharpe. The CAPM method derives the discount rate
by adding a
risk premium to the risk-free rate. In this instance, however, the risk premium is derived
by
multiplying the equity risk premium times beta, which is a measure of stock price volatility. Beta is
published by various sources for particular industries and companies. Beta is associated
with the
systematic risks of an investment.
Build-Up Method
The Build-Up Method is a widely-recognized method of determining the after-tax net
cash flow
discount rate, which in turn yields the capitalization rate. The figures used in the BuildUp Method are
derived from various sources. This method is called a build-up method because it is the sum of risks
associated with various classes of assets. It is based on the principle that investors
would require a
greater return on classes of assets that are more risky. The first element of a Buil d-Up
capitalization
rate is the risk-free rate, which is the rate of return for long-term government bonds.
Investors who
buy large-cap equity stocks, which are inherently more risky than long-term government
bonds,
require a greater return, so the next element of the Build-Up method is the equity risk
premium. In
determining a companys value, the long-horizon equity risk premium is used because the Companys
life is assumed to be infinite. The sum of the risk-free rate and the equity risk premium
yields the
long-term average market rate of return on large public company stocks.
Similarly, investors who invest in small cap stocks, which are riskier than blue-chip
stocks, require a
greater return, called the size premium. Size premium data is generally ava ilable from two sources:
Morningstars' (formerly Ibbotson & Associates') Stocks, Bonds, Bills & Inflation and Duff
& Phelps'
Risk Premium Report.
By adding the first three elements of a Build-Up discount rate, we can determine the rate
of return
that investors would require on their investments in small public company stocks. These
three
elements of the Build-Up discount rate are known collectively as the systematic risks.

In addition to systematic risks, the discount rate must include unsystematic risks, which fall into
twocategories. One of those categories is the industry risk premium. Morningstars yearbooks contain
empirical data to quantify the risks associated with various industries, grouped by SIC
industry code
The other category of unsystematic risk is referred to as specific company risk. Historically, no
published data has been available to quantify specific company risks.
Butler Pinkerton Model (BPM), using a modified Capital Asset Pricing Model ( CAPM) to
calculate the company specific risk premium. The model uses an equality between the
standard CAPM
which relies on the total beta on one side of the equation; and the firm's beta, size
premium and
company specific risk premium on the other. The equality is then solved for the company
specific risk
premium as the only unknown.

Asset-based approaches
The value of asset-based analysis of a business is equal to the sum of its parts. That is
the theory
underlying the asset-based approaches to business valuation. The asset approach to
business
valuation is based on the principle of substitution: no rational investor will pay more for
the business
assets than the cost of procuring assets of similar economic utility. In considering an
asset-based approach, the valuation professional
must consider whether the shareholder whose interest is being valued would have any
authority to
access the value of the assets directly. Shareholders own shares in a corporation, but not
its assets,
which are owned by the corporation. A controlling shareholder may have the authority to
direct the
corporation to sell all or part of the assets it owns and to distribute the proceeds to the
shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot
access the
value of the assets. As a result, the value of a corporation's assets is rarely the most
relevant
indicator of value to a shareholder who cannot avail himself of that value. Adjusted net
book value
may be the most relevant standard of value where liquidation is imminent or ongoing;
where a
company earnings or cash flow are nominal, negative or worth less than its assets; or
where net book
value is standard in the industry in which the company operates. None of these
situations applies to
the Company which is the subject of this valuation report. However, the adjusted net
book value may
be used as a sanity check

Market approaches
The market approach to business valuation is rooted in the economic principle of
competition: that in
a free market the supply and demand forces will drive the price of business assets to a
certain

equilibrium. Buyers would not pay more for the business, and the sellers will not accept
less, than the
price of a comparable business enterprise. It is similar in many respects to the comparable sales
method that is commonly used in real estate appraisal. The market price of the stocks of
publicly
traded companies engaged in the same or a similar line of business, whose shares are
actively traded
in a free and open market, can be a valid indicator of value when the transactions in
which stocks are
traded are sufficiently similar to permit meaningful comparison.
The difficulty lies in identifying public companies that are sufficiently comparable to the
subject
company for this purpose. Also, as for a private company, the equity is less liquid (in
other words its
stocks are less easy to buy or sell) than for a public company, its value is considered to
be slightly
lower than such a market-based valuation would give.

Guideline Public Company method

The Guideline Public Company method entails a comparison of the subject company to
publicly traded
companies. The comparison is generally based on published data regarding the public companies
stock
price and earnings, sales, or revenues, which is expressed as a fraction known as a multiple.
If the guideline public companies are sufficiently similar to each other and the subject
company to
permit a meaningful comparison, then their multiples should be similar. The public
companies
identified for comparison purposes should be similar to the subject company in terms of
industry,
product lines, market, growth, margins and risk.
Transaction Method or Direct Market Data Method
Using this method, the valuation analyst may determine market multiples by reviewing
published data
regarding actual transactions involving either minority or controlling interests in either
publicly traded
or closely held companies. In judging whether a reasonable basis for comparison exists,
the valuation
analysis must consider: (1) the similarity of qualitative and quantitative investment and
investor
characteristics; (2) the extent to which reliable data is known about the transactions in
which
interests in the guideline companies were bought and sold; and (3) whether or not the
price paid for
the guideline companies was in an arms-length transaction, or a forced or distressed
sale.

Discounts and premiums

The valuation approaches yield the fair market value of the Company as a whole. In
valuing a

minority, non-controlling interest in a business, however, the valuation professional must

consider the
applicability of discounts that affect such interests. Discussions of discounts and
premiums frequently
begin with a review of the levels of value. There are three common levels of value: controlling
interest, marketable minority, and non-marketable minority. The intermediate level,
marketable
minority interest, is lesser than the controlling interest level and higher than the nonmarketable
minority interest level. The marketable minority interest level represents the perceived
value of equity
interests that are freely traded without any restrictions. These interests are generally
traded on the
New York Stock Exchange, AMEX, NASDAQ, and other exchanges where there is a ready
market for
equity securities. These values represent a minority interest in the subject companies
small blocks
of stock that represent less than 50% of the companys equity, and usually much less than 50%.
Controlling interest level is the value that an investor would be willing to pay to acquire
more than
50% of a companys stock, thereby gaining the attendant prerogatives of control. Some of the
prerogatives of control include: electing directors, hiring and firing the companys management and
determining their compensation; declaring dividends and distributions, determining the companys
strategy and line of business, and acquiring, selling or liquidating the business. This level
of value
generally contains a control premium over the intermediate level of value, which typically
ranges from
25% to 50%. An additional premium may be paid by strategic investors who are
motivated by
synergistic motives. Non-marketable, minority level is the lowest level on the chart,
representing the
level at which non-controlling equity interests in private companies are generally valued
or traded.
This level of value is discounted because no ready market exists in which to purchase or
sell interests.
Private companies are less liquid than publicly-traded companies, and transactions in private
companies take longer and are more uncertain. Between the intermediate and lowest
levels of the
chart, there are restricted shares of publicly-traded companies. Despite a growing
inclination of the
IRS and Tax Courts to challenge valuation discounts , Shannon Pratt suggested in a
scholarly
presentation recently that valuation discounts are actually increasing as the differences
between
public and private companies is widening . Publicly-traded stocks have grown more liquid
in the past
decade due to rapid electronic trading, reduced commissions, and governmental
deregulation. These
developments have not improved the liquidity of interests in private companies, however.
Valuation
discounts are multiplicative, so they must be considered in order. Control premiums and
their inverse,
minority interest discounts, are considered before marketability discounts are applied.

Discount for lack of control

The first discount that must be considered is the discount for lack of control, which in
this instance is
also a minority interest discount. Minority interest discounts are the inverse of control
premiums, to
which the following mathematical relationship exists: MID = 1 [1 / (1 + CP)] The most
common
source of data regarding control premiums is the Control Premium Study, published
annually by
Mergerstat since 1972. Mergerstat compiles data regarding publicly announced mergers,
acquisitions
and divestitures involving 10% or more of the equity interests in public companies,
where the
purchase price is $1 million or more and at least one of the parties to the transaction is a
U.S. entity.
Mergerstat defines the control premium as the percentage difference between the acquisition price
and the share price of the freely-traded public shares five days prior to the
announcement of the M&A
transaction. While it is not without valid criticism, Mergerstat control premium data (and
the minority
interest discount derived therefrom) is widely accepted within the valuation profession.

Discount for lack of marketability

Another factor to be considered in valuing closely held companies is the marketability of
an interest in
such businesses. Marketability is defined as the ability to convert the business interest
into cash
quickly, with minimum transaction and administrative costs, and with a high degree of
certainty as to
the amount of net proceeds. There is usually a cost and a time lag associated with
locating interested
and capable buyers of interests in privately-held companies, because there is no
established market
of readily-available buyers and sellers. All other factors being equal, an interest in a
publicly traded
company is worth more because it is readily marketable. Conversely, an interest in a
private-held
company is worth less because no established market exists. The IRS Valuation Guide for
Income,
Estate and Gift Taxes, Valuation Training for Appeals Officers acknowledges the
relationship between
value and marketability, stating: Investors prefer an asset which is easy to sell, that is, liquid. The
discount for lack of control is separate and distinguishable from the discount for lack of
marketability.
It is the valuation professionals task to quantify the lack of marketability of an interest in a
privately
held company. Because, in this case, the subject interest is not a controlling interest in
the Company,
and the owner of that interest cannot compel liquidation to convert the subject interest
to cash
quickly, and no established market exists on which that interest could be sold, the
discount for lack of
marketability is appropriate. Several empirical studies have been published that attempt
to quantify

the discount for lack of marketability. These studies include the restricted stock studies
and the preIPO studies. The aggregate of these studies indicate average discounts of 35% and 50%,
respectively.
Some experts believe the Lack of Control and Marketability discounts can aggregate
discounts for as
much as ninety percent of a Company's fair market value, specifically with family owned
companies.
Restricted stock studies
Restricted stocks are equity securities of public companies that are similar in all respects
to the freely
traded stocks of those companies except that they carry a restriction that prevents them
from being
traded on the open market for a certain period of time, which is usually one year (two
years prior to
1990). This restriction from active trading, which amounts to a lack of marketability, is
the only
distinction between the restricted stock and its freely-traded counterpart. Restricted
stock can be
traded in private transactions and usually do so at a discount. The restricted stock
studies attempt to
verify the difference in price at which the restricted shares trade versus the price at
which the same
unrestricted securities trade in the open market as of the same date. The underlying
data by which
these studies arrived at their conclusions has not been made public. Consequently, it is
not possible
when valuing a particular company to compare the characteristics of that company to the
study data.
Still, the existence of a marketability discount has been recognized by valuation
professionals and the
Courts, and the restricted stock studies are frequently cited as empirical evidence.
Notably, the lowest
average discount reported by these studies was 26% and the highest average discount
was 45%.

Option pricing
In addition to the restricted stock studies, U.S. publicly traded companies are able to sell
stock to
offshore investors (SEC Regulation S, enacted in 1990) without registering the shares
with the
Securities and Exchange Commission. The offshore buyers may resell these shares in the
United
States, still without having to register the shares, after holding them for just 40 days.
Typically, these
shares are sold for 20% to 30% below the publicly traded share price. Some of these
transactions
have been reported with discounts of more than 30%, resulting from the lack of
marketability. These
discounts are similar to the marketability discounts inferred from the restricted and preIPO studies,
despite the holding period being just 40 days. Studies based on the prices paid for
options have also

confirmed similar discounts. If one holds restricted stock and purchases an option to sell
that stock at
the market price (a put), the holder has, in effect, purchased marketability for the
shares. The price of
the put is equal to the marketability discount. The range of marketability discounts
derived by this
study was 32% to 49%.
Pre-IPO studies
Another approach to measure the marketability discount is to compare the prices of
stock offered in
initial public offerings (IPOs) to transactions in the same companys stocks prior to the IPO. Companies
that are going public are required to disclose all transactions in their stocks for a period
of three
years prior to the IPO. The pre-IPO studies are the leading alternative to the restricted
stock
stocks in quantifying the marketability discount. The pre-IPO studies are sometimes
criticized because
the sample size is relatively small, the pre-IPO transactions may not be arms length, and the
financial
structure and product lines of the studied companies may have changed during the three
year pre-IPO
window.
In finance, the discounted cash flow (or DCF) approach describes a method of valuing a
project,
company, or asset using the concepts of the time value of money. All future cash flows
are estimated
and discounted to give their present values. The discount rate used is generally the
appropriate
WACC, that reflects the risk of the cashflows. The discount rate reflects two things:
1. the time value of money (risk rate) - investors would rather have cash immediately
than having to
wait and must therefore be compensated by paying for the delay.
2. a risk premium (risk premium rate) - reflects the extra return investors demand
because they want
to be compensated for the risk that the cash flow might not materialize after all.
Discounted cash flow analysis is widely used in investment finance, real estate
development, and
corporate financial management.
Very similar is the net present value.
Thus the discounted present value (for one cash flow in one future period) is expressed
as:
where

DPV is the discounted present value of the future cash flow (FV), or FV adjusted for
the delay in
receipt;
FV is the nominal value of a cash flow amount in a future period;
i is the interest rate, which reflects the cost of tying up capital and may also allow for
the risk

that the payment may not be received in full;

d is the discount rate, which is i/(1+i), ie the interest rate expressed as a deduction at
the

beginning of the year instead of an addition at the end of the year;

n is the time in years before the future cash flow occurs.

Where multiple cash flows in multiple time periods are discounted, it is necessary to sum
them as
follows:
for each future cash flow (FV) at any time period (t) in years from the present time,
summed over all
time periods. The sum can then be used as a net present value figure. If the amount to
be paid at time
0 (now) for all the future cash flows is known, then that amount can be substituted for
DPV and the
equation can be solved for i, that is the internal rate of return.
All the above assumes that the interest rate remains constant throughout the whole
period.
(1+i)^(-t) can of course also be expressed as exp(-it).
Continuous cash flows
With continuous cash flows, the summation in the above formula is replaced by an
integration - nothing

else changes:
where FV(t) is now the rate of cash flow.
Example DCF

To show how discounted cash flow analysis is performed, consider the following
simplified example.
John Doe buys a house for $100,000. Three years later, he expects to be able to sell
this house

for $150,000.
Simple subtraction suggests that the value of his profit on such a transaction would be $150,000 $100,000 = $50,000, or 50%. If that $50,000 is amortized over the three years, his
implied annual
return (known as the internal rate of return) would be about 14.5%. Looking at those
figures, he might
be justified in thinking that the purchase looked like a good idea.
1.145
3

x 100000 = 150000 approximately.

However, since three years have passed between the purchase and the sale, any cash
flow from the
sale must be discounted accordingly. At the time John Doe buys the house, the 3-year
US Treasury
Note rate is 5% per annum. Treasury Notes are generally considered to be inherently
less risky than
real estate, since the value of the Note is guaranteed by the US Government and there is
a liquid
market for the purchase and sale of T-Notes. If he hadn't put his money into buying the
house, he
could have invested it in the relatively safe T-Notes instead. This 5% per annum can
therefore be
regarded as the risk-free interest rate for the relevant period (3 years).
Using the DPV formula above, that means that the value of $150,000 received in three
years actually
has a present value of $129,576 (rounded off). Those future dollars aren't worth the
same as the
dollars we have now.
Subtracting the purchase price of the house ($100,000) from the present value results in
the net
present value of the whole transaction, which would be $29,576 or a little more than
29% of the
purchase price.
Another way of looking at the deal as the excess return achieved (over the risk-free rate)
is (14.5%5.0%)/(100%+5%) or approximately 9.0% (still very respectable). (As a check, 1.050 x
1.090 = 1.145
approximately.)
But what about risk?

We assume that the $150,000 is John's best estimate of the sale price that he will be
able to achieve in
3 years time (after deducting all expenses, of course). There is of course a lot of
uncertainty about
house prices, and the outturn may end up higher or lower than this estimate.
(The house John is buying is in a "good neighborhood", but market values have been
rising quite a lot
lately and the real estate market analysts in the media are talking about a slow-down
and higher
interest rates. There is a probability that John might not be able to get the full $150,000
he is expecting
in three years due to a slowing of price appreciation, or that loss of liquidity in the real
estate market
might make it very hard for him to sell at all.)
Under normal circumstances, people entering into such transactions are risk-averse, that
is to say that
they are prepared to accept a lower expected return for the sake of avoiding risk. See
Capital asset
pricing model for a further discussion of this. For the sake of the example (and this is a
gross

simplification), let's assume that he values this particular risk at 5% per annum (we
could perform a
more precise probabilistic analysis of the risk, but that is beyond the scope of this
article). Therefore,
allowing for this risk, his expected return is now 9.0% per annum (the arithmetic is the
same as
above).
And the excess return over the risk-free rate is now (9.0%-5.0%)/(100% + 5%) which
comes to
approximately 3.8% per annum.
That return rate may seem low, but it is still positive after all of our discounting,
suggesting that the
investment decision is probably a good one: it produces enough profit to compensate for
tying up
capital and incurring risk with a little extra left over. When investors and managers
perform DCF
analysis, the important thing is that the net present value of the decision after
discounting all future
cash flows at least be positive (more than zero). If it is negative, that means that the
investment
decision would actually lose money even if it appears to generate a nominal profit. For
instance, if the
expected sale price of John Doe's house in the example above was not $150,000 in three
years, but
$130,000 in three years or $150,000 in five years, then on the above assumptions
buying the house
would actually cause John to lose money in present-value terms (about $3,000 in the
first case, and
about $8,000 in the second). Similarly, if the house was located in an undesirable
neighborhood and
the Federal Reserve Bank was about to raise interest rates by five percentage points,
then the risk
factor would be a lot higher than 5%: it might not be possible for him to make a profit in
discounted
terms even if he could sell the house for $200,000 in three years.
In this example, only one future cash flow was considered. For a decision which
generates multiple cash
flows in multiple time periods, all the cash flows must be discounted and then summed
into a single net
present value.

Methods of appraisal of a company or project

Equity-Approach

o Flows to equity approach (FTE)

Discount the cash flows available to the holders of equity capital, after allowing for cost
of servicing
debt capital

Advantages: Makes explicit allowance for the cost of debt capital

Disadvantages: Requires judgement on choice of discount rate

Entity-Approach:
o Adjusted present value approach (APV)
Discount the cash flows before allowing for the debt capital (but allowing for the tax
relief obtained on
the debt capital)
Advantages: Simpler to apply if a specific project is being valued which does not have
earmarked debt
capital finance

Disadvantages: Requires judgement on choice of discount rate; no explicit allowance for

cost of debt
capital, which may be much higher than a "risk-free" rate
o Weighted average cost of capital approach (WACC)
Derive a weighted cost of the capital obtained from the various sources and use that
discount rate to
discount the cash flows from the project
Advantages: Overcomes the requirement for debt capital finance to be earmarked to
particular projects

Disadvantages: Care must be exercised in the selection of the appropriate income

stream. The net cash
flow to total invested capital is the generally accepted choice.
o Total cash flow approach (TCF)
This distinction illustrates that the Discounted Cash Flow method can be used to
determine the value of
various business ownership interests. These can include equity or debt holders.

Financial analysis refers to an assessment of the viability, stability and profitability of a

business,
sub-business or project.
It is performed by professionals who prepare reports using ratios that make use of
information taken
from financial statements and other reports. These reports are usually presented to top
management as
one of their bases in making business decisions. Based on these reports, management
may:
Continue or discontinue its main operation or part of its business;

 Make or purchase certain materials in the manufacture of its product;

Acquire or rent/lease certain machineries and equipment in the production of its
goods;
Issue stocks or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;

Other decisions that allow management to make an informed selection on various

alternatives in
the conduct of its business.