|
|
|
Ownership of all the shares in another company is a major investment to be carefully evaluated. The evaluation methods outlined below are the classic methods of evaluating shares. They are fraught with pitfalls and are best used as an approximate estimate only, to be corrected by comparison with the market price. The most important factor in this case - and one difficult to quantify - is the value of the investment to your overall business strategy.
Present Value of All Future Dividends
The classic method of evaluating ownership of a company is to estimate the present value of all future dividends. Usually the dividend is assumed to be either constant or growing at a constant rate. The required rate of return (based on the firm's capital structure and industry dynamics) are also assumed to be constant. The following formula is used:
Net Present Value Based on Selling at a Future Data
An alternative is to use the Net Present Value method to consider the present values of the forecast cashflows, these being the takeover bid, dividends and the future selling price.