Article Critique for Value Functional Approach- myassignmenthelp

Question: Discuss about theArticle Critique for Value Functional Approach. Answer: Introduction A business valuation needs viable knowledge based on a multitude of factors, experience and above all, professional judgment (Trugman, 2016). It involves determining the aim of the valuation, the value propellants affecting the company in question, and a comprehension of economic and factors that are also accompanied by valuation approach(es) and method(s) (Anderson, 2013). Below is an article critique based on topic one of this unit - Valuation: What, Why and How. Discussion The title of the article is: Business Valuation - The Basics, and the writer behind it is Paul Barnes. For starters, the sub-headings are clear and specific. Paul begins the article by outlining the aim of valuation. Here, he is spot on and argues that determining the objective of business valuation is often a crucial initial step with regard to the process given that it defines clearly either the standard of value or the basis of value that will be taken up (Barnes, 2017). He further writes that the goal of business valuation can range from taxation and insolvency to acquisition and financial reporting. Once the goal is reached upon, the ideal standard of value can subsequently be put into practice (Barnes, 2017). However, Paul gives an example of US tax valuation but doesnt back it up with any reference(s). The second topic is representative of the of the article. As such, Paul talks about the basis of value. Here, there are no errors of misinterpretation. He talks of the basis of value as a form of value that is being measured which also considers the aspects of the participants of the assumed transaction. The basis of value can play a pivotal role on the choosing of valuation methods, assumptions, inputs and approaches (Hermoza Molina, 2017). Paul gives a concise conclusion by claiming that the goal of valuation as well as the application of basis of value are inter-linked. The third topic relates to premise of value which we have covered in this unit (Hwee et al., 2017). Here, there are no underlying assumptions with regard to the content outlined and the structure is pretty easily to follow. Paul states that the inputs, assumptions or even the valuation approach that is employed highly relies on the chosen premise of value. In addition, the premise of value is propelled by the aim of the valuation in conjunction with the basis of value employed, and is normally split into two categories which Paul lists in bullet which make it easy for the reader to follow. A going concern premise - This is the most predominant premise of value. Although the section is somewhat small, it is well summarized. As such, this form of premise assumes that the assets will continue to be used and a business will carry on with its operations (Doganova et al., 2014). An orderly liquidation premise - This is also referred to as a forced liquidation premise and in this section, Paul talks of the general idea in a concise manner. This form of premise adds to it an in-exchange assumption of assets being operated both in an individual or group basis, which in fact are not part and parcel of the business (Doganova et al., 2014) The fourth topic relates to the subject that is valuation. Paul couldnt have explained this section in a more better way because there are no ambiguous statements and the discussion is relevant. He begins by arguing that the subject of valuation bears great significance to the valuation process, the choosing of inputs, methods and approaches. Performing a valuation of business equity or invested capital, hybrid securities or basically any other types of financial interests warrants the utilization of certain valuation methods (Hwee et al., 2017). Paul however notes that extra complexities may come up when a valuation may be needed as an input to undertake another. For example, a business valuation may come in as an input during the valuation of stock alternatives. Based on our unit, how one gets to a conclusion of value is another relevant topic from Pauls article. Three widely accepted valuation techniques include: the income approach, market approach and cost approach (Hwee et al., 2017). Paul outlines that the valuation approach to be used solely relies on the current facts as well as circumstances of the company in question. He gives a brief explanation of each but doesnt support the information with any accompanying evidence in form of references. The income approach according to Paul transforms expected cash flows into one current discounted amount with a reflection of present expectations regarding the future cash flows. Under this approach, the discounted cash flow (DCF) is the most renowned approach and entails capturing the running value of a particular business based on two components (Barnes, 2017). First up is the current value of expected cash income based on a discrete projected time frame(Baum et al., 2017). Next up is the current value or amount of the cash flows after the discrete time frame which is reflected in a continuing value calculation (Baum et al., 2017). However, the ideas in this section have been overemphasized to an extent and Paul could do better by not explaining too much about the extra issues businesses have to contend with when using the DCF method. The market approach employs prices among other relevant content brought about by market transactions that involve similar assets or companies to estimate the value of the business thats of interest (Botosan Huffman, 2013). Pauls explanation resonates well with the content in our unit and writes that two methods are widely used in this approach. These are: the Guideline Company and the Guideline Transaction method (Botosan Huffman, 2013). Here, Paul makes no assumptions and argues that both give value of a particular business through the application of several ratios of value such as equity value or enterprise value to financial metrics such as earnings before interest, revenue and after-tax earnings (Barnes, 2017). The cost approach estimates just how much would be required to stand in place of the service capacity of a particular asset (Anderson, 2013). Paul makes an assumption that the cost approach is often associated with the replaced cost method owing to the fact that the latter is more ideal when being applied to a single asset as opposed to a business. Paul also makes an assumption that entrepreneurs consider the value of their respective businesses based on the investment which would be needed to replace the assembled assets (Barnes, 2017). Conclusion The valuation of business can be a complex process and requires several considerations such as a clear definition of the goal of the valuation and the basis of value used or the premise of value employed (Trugman, 2016). In this article critique, Paul Barnes makes his case in an appropriate and clear manner. However, he has made a few assumptions and part of some information from the article has been omitted because its not relevant to our topic. Also, Paul hasnt included any references throughout the text which is an area that can be improved on. References Anderson, P. (2013).The economics of business valuation: towards a value functional approach. Stanford University Press. Barnes, P. (2017). Business Valuation - The Basics. [Blog] Duff and Phelps. Available at: https://www.duffandphelps.com/insights/publications/valuation/business-valuation [Accessed 14 Apr. 2018]. Baum, A., Mackmin, D., Nunnington, N. (2017).The income approach to property valuation. Routledge. Botosan, C., Huffman, A. (2013). A business valuation framework for asset measurement. University of Utah Working Paper. Doganova, L., Giraudeau, M., Helgesson, C. F., Kjellberg, H., Lee, F., Mallard, A., Zuiderent-Jerak, T. (2014). Valuation studies and the critique of valuation.Valuation Studies,2(2), 87-96. Hermoza, J. C. R., Molina, J. E. (2017). Brief considerations on business valuation methods. Tendencias, 18(2), 168-182. Hwee, E., Sin, L. and Hai, J. (2017). Business Valuation. 1st ed. Cengage Asia, pp.1-150. Trugman. (2016). Understanding business valuation: A practical guide to valuing small to medium sized businesses. John Wiley Sons.