Question

5. For each of the following types of companies, identify the best valuation method to use:  (6 pts)
   1. A company going out of business, with assets that have value in the market:

2. A mature company that isn’t growing, that pays a rich and consistent dividend:

3. A high growth early stage tech company, with no earnings or dividends, but is projected to generate large amount of free cash flow in the future:

Answer 1

1]

Liquidation value method is the best valuation method because the company is likely to be liquidated soon.

2]

Dividend discount model is the best valuation method because the company is mature, and the dividend is consistent and substantial.

3]

Comparable company method is the best valuation method because it is an early stage company. Free cash flows although projected in the future are highly uncertain, hence free cash flow valuation model is not appropriate