Why you should calculate market value of company you own?
Determining the market value of a business is important not only when the owner is selling the business. It is a consideration on tax planning for heirs to the business. The IRS will be interested in its market value to establish inheritance tax and capital gains tax. A business used as collateral for loans will need to establish a market value of company for lenders. Knowing the true market value of your business may help you get a better price when selling and perhaps lessen the tax impact.
Calculating the market value of company publicly held
Establishing the market value of a publicly held company is relatively easy using the following steps:
- Look up the current price of the company stock.
- Look up the number of outstanding shares.
- Multiply the number of shares times the price per share to get the company’s market value.
If you don’t know how to do a profit and loss statement or a market value of a company, feel free to follow our tips.
Finding market value company that is private
For a privately owned company it is more difficult to determine market value. Company information is not as easily available as with public companies. The following are some methods of estimating the market value of private companies:
- Comparable company analysis – The simplest method to estimate the market value of a company privately held is to use comparable company analysis (CCA). Look to the public markets for firms which most closely resemble the private (or target) firm and base valuation estimates on the values at which its publicly-traded peers are traded. After establishing the peer group calculates the industry averages.
- Capitalization of earnings – Start with annual earnings over one or more years. Divide earnings by a “cap rate” that reflects the cost of capital and the risk of the company. If a company has average annual earnings of $120,000 and a cap rate of 12%, its estimated value under the capitalization of earnings method would be $120,000/12% = $1 million.
- Discounted cash flow – Begin by forecasting future earnings over several years. To account for the time value of money, a discount rate is applied to each year of forecasted earnings. The discount rate reflects a weighted average cost of capital for similar companies. Finally, a discounted residual value is established at the end of the forecast period. The business value is the sum of all discounted cash flows over the forecast period plus the discounted residual value
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