Present Valuation of Financial and Banking Institution
Present value expresses how much the future amount of money is worth today. It is calculated as PV = CF/(1+r) n. For example, you want to make sure that the amount of money that will be in your bank account in 10 years to come will enough to buy a care worth $10,000 while the bank provides an interest rate of 5%. With this, you need to determine the amount of money to save in your account today. Using the present value formula, it will be calculated as:
PV = $10,000/ (1 + .05)10 = $6,139.13 In this scenario, the present value of $10,000 in 10 years at an interest of 5% is equal to $6,139.13.
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The range of Estimated Value For 1 Standard Deviation:
SD = √ (10,000-6,139.13)/10 = 1.965±1
The basic problem of present valuation is that it does not consider the effect of inflation and interest rate fluctuations. This may negatively affect the financial condition of the bank.
Challenges of Firms with Negative, Low or Abnormal Earnings
More often, negative earnings are caused by either short-term (temporary) or long-term factors (permanent). Temporary factors may include a change in consumer preferences or worker unrest while permanent factors comprise poor investments, outdated plan, or too much debt. The much problem associated with valuing a firm with negative, low or abnormal earnings is that they tend to be clustered in industries. As a result, valuation techniques such as P/E ratios can be used in valuing unprofitable firms.
Most Important Things Learned
For this course, through valuation, I have learned two essential elements. One of these elements is that through the present valuation method, it is easy to determine the amount to save today to achieve a future goal in terms of saving. Second, P/E ratios cannot be used while value a company with a negative profit. Other methods applicable in this case include DCF (relative valuation), price-to-sales, and enterprise value-to-EBITDA.
References
Muniesa, F., & Doganova, L. (2018). The time that money requires: use of the future and critique of the present in financial valuation . HAL.
Ross, S. A., Bianchi, R., Christensen, M., Drew, M., Westerfield, R., & Jordan, B. D. (2014). Fundamentals of Corporate Finance: Introduction to corporate finance Chapter: 2 Financial statements, taxes and cash flow PART 2 Chapter: 3 Working with financial statements Chapter: 4 Long-term financial planning and corporate growth PART 3 Chapter: 5 First principles of valuation: TVM Chapter: 6 Valuing shares and bonds PART 4 Chapter: 7 Net present value and other investment criteria Chapter: 8 Making capital investment decisions Chapter: 9 Project analysis and evaluation PART 5 Chapter: 10 Lessons ... . McGraw-Hill Education (Australia).
Shaffie, S. S., Jaaman, S. H., & Mohamad, D. (2017, April). Fuzzy net present valuation based on risk assessment of Malaysian infrastructure. In AIP Conference Proceedings (Vol. 1830, No. 1, p. 040005). AIP Publishing.
