The Need for Company Valuation

The purpose of valuations (and various feasibility studies) is, first and foremost, to include the ability to make decisions and achieve better returns for investors of all types. One type of investor, who needs valuations, is firms and individuals who acquire control of the company.

Company value is not an absolute value

Another essential type of investors, who frequently use valuations, is the institutional entities in the various capital markets, which are currently the dominant investors in the modern capital markets.

According to several finance models (such as the capital asset pricing model - CAPM model), it is not very important to do valuations because all investors will hold the same stock portfolio. All stocks will yield a return expectation equal to the systematic risk of the stock.

However, the economic reality is much more complicated than the simplistic assumptions underlying these models. Moreover, the history of executives, companies, analysts, and investment managers in the world, shows that some can yield higher returns than others, thanks to high managerial capacity, brilliant economic analysis ability, etc. The aim of performing valuations (and analyzing the viability of investments) is, as stated above, to improve the return to the firm's shareholders and, at the macro level, also the efficiency of allocating resources in the economy, so that the resources will flow to finance the appropriate firms and investments. Will not be entitled to receive excess financial resources at the expense of companies where the assets are expected to yield better returns (relative to risk).

Company value is not an absolute value, as opposed to the market price at a given moment. An estimated company value, different from its market value, does not usually guarantee the possibility of taking advantage of the gap to perform arbitrage profits since stocks do not ensure, on a future date, payment of known cash flows in advance.

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