Question

Can the following items in the financial statement affect the valuation of a company?

a. Goodwill

b. Change in accounting practice

c. Growth rate

d. The weighted average cost of capital

e. Earnings per share

f. Cash flow from operating activities

g. Investment in plant and machinery

Explain with example.

Answer 1

Following items in financial statment can affect the valuation of the company.

a) Goodwill :

Goodwill is asset of the company. Goodwill means company's reputation in monitary term.

So, goodwill affect the valuation of the company.

b) Change in accounting practice :

Change in accounting practice means change in method of preparing financial statments. Value of assets and liabilities will be different if change in accounting standard or policy etc.

So, change in accounting practice affect the valuation of company.

​​​​​​c) Growth rate :

Company uses growth rate for the analysis of financial situation and valuation.

So, Growth rate affects the valuation of company.

d) weighted average cost of capital :

Weighted average cost of capital is a method to find cost of capital according to weight given in particular situation.

This method is use by investors and outsiders of company for the valuation.

e) Earning per share :

Earning per share means distribution of net profit among shareholders. Earning per share is deciding factor for firm value.

So, earning per share affect the valuation of company.

f) Cash flow from operating activities :

Cash flow from operating activities is a statment of incoming or outgoing of cash.

So, Cash flow from operating activities affects the valuation of company.

g) Investment in plant and machinery :

Investment in plant and machinery is a asset for company because investment in plant and machinery is done to produce goods which is important to run company.

So, Investment in plant and machinery affects the valuation of company.