Special cases of valuation Firms with negative or low earnings

Firms with negative or low earnings are difficult to value, as traditional valuation methods, such as the discounted cash flow (DCF) method, are not applicable. This is because the DCF method requires the company to have a positive earnings stream to discount.

There are a number of methods that can be used to value firms with negative or low earnings, including:

  • Precedent transactions: This method values the firm based on the multiples of other similar firms that have been recently sold.
  • Asset-based valuation: This method values the firm based on the fair market value of its assets.
  • Sum of the parts: This method values the firm as the sum of its individual assets and liabilities.
  • Discounted cash flow (DCF) with terminal value: This method values the firm as the present value of its future cash flows, plus a terminal value. The terminal value is the estimated value of the firm at a future date.

Here are some multiple choice questions (MCQs) on special cases of valuation of firms with negative or low earnings:

  1. Which of the following is a method that can be used to value firms with negative or low earnings?
    • Precedent transactions
    • Asset-based valuation
    • Sum of the parts
    • Discounted cash flow (DCF) with terminal value
    • All of the above
    • Answer: All of the above
  2. Which of the following methods values the firm based on the multiples of other similar firms that have been recently sold?
    • Precedent transactions
    • Discounted cash flow (DCF)
    • Asset-based valuation
    • Sum of the parts
    • Answer: Precedent transactions
  3. Which of the following methods values the firm based on the fair market value of its assets?
    • Precedent transactions
    • Discounted cash flow (DCF)
    • Asset-based valuation
    • Sum of the parts
    • Answer: Asset-based valuation

Answers:

  1. All of the above
  2. Precedent transactions
  3. Asset-based valuation

Here are some additional points about special cases of valuation of firms with negative or low earnings:

  • The valuation of firms with negative or low earnings is more subjective than the valuation of firms with positive earnings.
  • There is no single method that is best for all cases, and the best approach will vary depending on the specific firm being valued.
  • The value of firms with negative or low earnings can change rapidly, so it is important to periodically re-evaluate their value.