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Yield-based valuation of a company | Free template

Yield-based valuation of a company or other business is a free template to calculate the yield (return) value through profit and a cost of capital rate.

When you intend to buy or sell a company or other business then you need to appreciate the value of the business as a basis for the purchase price to be agreed on for the deal. A yield (return) value approach is a simple and fair method for estimating the value of a company or a other business.

Anyone who wants to sell a business would normally set the selling price at a level which means that the purchase price can be used for a new investment with the same risk-adjusted return as the sold business.

Anyone who wants to buy a business would not pay more for a business than that the risk-adjusted return on the investment is at least as well as other alternative investment options.

With this template for yield-based valuation of a company can the seller compute the minimum price he is willing to sell for and the buyer can calculate the maximum purchase price that he is willing to buy for. The seller, however, normally has an advantage over the buyer and the buyer who is paying for future earnings will therefore typically have a higher cost of capital compared to the seller because of different perceptions of risk.

This template for the yield-based valuation is constructed as a income statement in which revenues and expenses for a fiscal year is stated. The seller and the buyer should think about taking into account their own unpaid work in personnel costs as the unpaid work required to run the business is not a profit that provides a return on an investment.

The yield value in the template is calculated by dividing the net profit by the cost of capital. The required return should be a real rate of return that does not include an inflation component and the required return can be freely adjusted for infinite real earnings growth, earnings growth should normally be assumed to be zero.

The return requirement does not need to be adjusted for tax because the corporation tax is included in the income statement.
Updated: 01/01/2015 | Created by

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