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Finance....?
Finance....?
Say you are an analyst with an investment management company and are asked to evaluate the following valuation methods as to the most appropriate for a possible venture index composed of dot.com companies that have no earnings, never had any earnings, and do not expect any earnings in the immediate future.
a. DDM
b. FCFE
c. Price/Earnings
d. Price/Book
Out of the 4 methods which one would you select, and briefly explain of support for your selection, which could include why the other methods are inappropriate.
Answers:
Chosen Answer
MikeInRI: I would choose b. FCFE because at this point in time you are deal with a start up so they would not be paying dividends most likely (that eliminates DDM), they probably have negative or low earnings (so P/E is eliminated), and they probably don't have much in the way of real assets at this point (eliminating price/book). What you really want to know is if they have enough free cash flow (which is what the FCFE will give you) in order for you to judge whether or not they will be able to sustain themselves until they are profitable because if they can't they will go bankrupt.
Good Luck!!!
2007-03-24 09:55:03
MikeInRI: I would choose b. FCFE because at this point in time you are deal with a start up so they would not be paying dividends most likely (that eliminates DDM), they probably have negative or low earnings (so P/E is eliminated), and they probably don't have much in the way of real assets at this point (eliminating price/book). What you really want to know is if they have enough free cash flow (which is what the FCFE will give you) in order for you to judge whether or not they will be able to sustain themselves until they are profitable because if they can't they will go bankrupt.
Good Luck!!!
2007-03-24 09:55:03