In this dissertation an effort has been made to address the problems related to the methodology of valuations that has been adopted recently to predict the net worth of companies. Te current financial valuation techniques of a company primarily comprise of four methods [Jacob, 2004: p1-4 and Fernandes, 2007: p2-19]; Al four methods result in different ways of thinking and often in different valuations. Te investors normally do not understand which method is more suitable for them to use for making the most informed investment decisions and hence methods that are generally adopted and presented by the rating agencies and performance valuation agencies operating in the markets.
Cre and Guay et al. 2003: p43-51) described that the world has witnessed a “new economy period” in which the notion of firm valuations have changed from what has been considered as “empirically supported valuations” to the latest highly inflated “forecasted cash flow valuation model” that is not empirically supported. Fr example, lt us analyse what Enron did in the valuations of their structured finance products in 2001-2002. Tey signed agreement with “Blockbuster Video” (a company that developed technology models of streaming videos) and introduced a new business concept of video on demand that could be launched in the US cities.
Tey planned to use their optical fibre based infrastructure for broadband networking and created some pilot projects in the cities of Seattle, Slt Lake City and Portland where they provided video streaming services to some apartments from the systems installed in their basements. Bsed on such pilots, tey projected huge cash flows with about USD 110 Million net within a year using the “forecasted cash flow model” to the retail investors.
Eperts say that the business model was itself baseless because the legal licensing and market demands for such services were not clear. Tey raised huge funds by just projecting a business based on pilots and cash flow projections (Healy and Palepu, 2003: pIn the old models, wll established and successful companies that have proven track records for at least five years, ahieve respectable firm value (share prices) if they have been able to sustain “residual cash” the past five years and also have been exhibiting sustained growth of income.
Nw companies therefore have to wait until they generate such performance. ..
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