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Advantages and disadvantages of the three valuation methods used
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The result is
the company’s equity i
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company’s value
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There is an overall problem expressed in
difficulty of valuing assets and liabilities correctly
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co
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Depending on the nature of the business there is a more suitable approach and one that is not that
suitable
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Next problem arising when using the asset valuation is difficulty in estimating intangible assets’ value
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(Titman, et al
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This is a general disadvantage of the asset valuation method
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Therefore, this
problem can be eliminated when deciding which method is most appropriate in the current case
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Another disadvantage which should be kept in mind when valuing a
business under this method is that assets are valued at their historical costs (book value) on the balance
sheet i
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the original cost of the asset, which may be adjusted if any improvements were made to the
asset or the asset has lost value due to aging
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co
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However, estimating the market value of
fixed asset can be a quite tricky process
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Moreover, sometimes companies may have hidden liabilities
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An example shows what will be the effect of hidden liabilities
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It has hidden liabilities
amounting to £500,000
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If the
company’s market value is calculated without the knowledge of the hidden liabilities, it will come up
with £700,000 market value
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Therefore,
there is risk when valuing company under net asset valuation without identifying hidden liabilities
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Some assets can have
different earning power under different circumstances and management
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Earnings Valuation
The next method used in evaluating Nutec is earnings valuation
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However, it is not the best valuation method, generally because company’s earnings are subject to
various manipulations by accounting practices
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(McGregor,
2009) Therefore, this is one of the method’s disadvantages
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Another disadvantage is the difficulty of finding a company which is appropriate enough to “borrow” its
P/E ratio
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However, the average ratio is not entirely
appropriate in valuing the company in question because two main reasons: 1st – they are quoted
companies and Nutec is not yet and 2nd – companies’ P/E ratios varies widely between companies
within the same sector of operation
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Usually, unquoted companies are
estimated to be 30% - 40% below the comparable listed company (Evans, 2011)

Dividend Valuation
Main problem of this method is the difficulty to identify the growth rate
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The
average beta has to be “borrowed” from similar quoted companies in the same industry sector
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(Neale & McElroy, 2004)
A significant disadvantage of dividend valuation is that the method will not work if the growth rate is
greater than the cost of equity capital (Ke)
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(Titman, et al
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An advantage of the method is that dividends are cashflow which is not subject to accounting
manipulation as the earnings figure
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Conclusion: It is quite difficult to choose which of the last two methods would be most appropriate in
the current case
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In both two other methods it was “borrowed” either the P/E ratio or the beta factor from comparable
companies
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(accaglobal
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Company’s earning power differs from company to
company and depends on many factors such as management capacity
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However, it is more likely that the beta will
not differ much from the two other companies’ ones
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Consequently, based on these and the above arguments the most appropriate valuation method for
Nutec is Dividend valuation method

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