Valuation of Tesco

3. VALUATION OF THE COMPANY

A vast spectrum of literature has evolved during the years concerning the valuation of an organisation. A number of methods will be utilised in this paper, namely the net asset valuation approach, the earnings stream method, the dividend model, the economic value added scheme and the free cash flow model. These will be computed and discussed in the proceeding sub-sections.

3.1 Net Asset Valuation Approach

Under such an approach, the net asset value of the organisation is sought to represent the value of the company. In 2009, the net asset value of Tesco amounted to £12,938 million (£46,053 - £33,115). If one divides this figure by the weighted average number of ordinary shares of 7,859 million, one can translate such value on a per share basis. This is conducted below:

Under the efficient market hypothesis, this posits that in a strong market, the current price reflects all pertinent information, being past, public and private data. The stock price reflects the true and intrinsic value of the share relying on future cash flows. In this type of market arbitrage cannot take place and speculation for capital gains purposes is futile (Pike et al. 1999). Therefore, in a strong market, under such premise, the share price reflects the value of the company. If one compares the present share price of Tesco standing at £4.18, one can note that such figure is much higher than the one computed above (Reuters.com 2009). This stems from the weaknesses of the net asset valuation approach, which rely on accounting data. Financial accounting is prepared in accordance with a number of international accounting standards. Such standards are highly conservative and prohibit the recording of certain items despite they are present in the business environment and affect the valuation of a company. For example, IAS 38 – Intangible Assets states that internally generated intangible assets like goodwill cannot be recorded in the accounts due to...