The Impact Of Assigned Components Of A Designated Measure Essay Example for Free

The Impact Of Assigned Components Of A Designated Measure Essay Introduction In carrying out valuation of companies, there are many methods that are used. Among them include asset valuation models, discounted cash flow models, abnormal earnings model. In valuing the company using future cash flow valuation method the net operating profit after tax, operating current assets and other figures are used. The main aim of valuation is to find the fair value of the company prices.    This is called discount cash flow models. Assets based model assigns a value to the firm by aggregating market values of assets and liabilities to enable in getting the fair value. There is a possibility that the value of the firm exceeds the value of the sum of assets and liabilities in this valuation method. When these figures are used, we assume that the valuation is based on the book value. Operating current assets. Every company that is in business of manufacture, retail, distribution has in it financial statements current assets. Current assets form an integral part of the assets of the company. Current assets include inventory, cash at hand and bank, short term investments such as notes, promissory notes, treasury bills and bonds and other short term investments. This forms part of the working capital of the organization. They help in the day to day running of the organization since they provide quick resources for those in the company. Operating current assets are grouped into two: those that are easily convertible to cash and those that are not easily converted. The easily convertible to cash include short term investments like treasury bills and bonds, cash at bank and at hand. Those that are not easily convertible include stock or inventory. Cash is the real amount of money that is in bank or at hand it can be used in need current obligations as to when they fall due.   It is realized from collections of sales or data. Data is another cash item which is easily convertible and forms part of the operating current assets. Data arises from the sale of goods and services on credit facilities. Marketable short term investments are the securities which can be sold to the market on any working day there fore it is easily convertible to cash. Stock or inventory is items for sale in an organization. The business cannot survive without stock. It consists of raw materials purchased for manufacture, work in progress (WIP), materials that have been badly processed into finished goods and finished goods which is the final product meant for the market. There fore if there is operating current assets in a company, the above components are considered to be important. The role of operating current assets in determining the price per share. Current assets forms part of the assets of the company. While determining price per share of the company, all the value of assets is added less reliabilities. The method used, the future cash flow valuation considers all assets less liabilities to arrive at capital employed by the company or net worthy of assets. Then the net worth of the assets is subjected to division using the number of shares of the company to arrive at the price value of the share. The net worth of assets is equivalent to the equity of the firm. This method is used during acquisitions. The role of operating current assets in determining the price value per share. In arriving at the price value per share in this method, operating current assets have been used. In arriving net operating working capital of 104088.5, 10500.3, 1100250, operating current liabilities has been subtracted from operating current assets. These figures arrived at is added to net fixed assets to arrive at net operating capital. The net operating capital will eventually be used in determining the difference in the investment in capital. In this case, investment in capital in year 2002 has been arrived at by subtracting the totals of net operating capital of 315042.3- 303088.5 to get 11953.8   to arrive at return on capital, the figure of the previous year of 303,088.05 has been subjected to division by net operating capital. Therefore, operating current assets has been used effectively in determining investment in capital which is in return used to calculate return on capital employed.   In arriving at the future cash flows that are used in calculating the price per share of the company are arrived at by subtracting the net operating profit after tax i.e.net operating profit after tax – investment in capital. The figure arrived at of 35.1 is comparable to the figures arrived at of EVA based on return on investment capital.   Therefore from the explanation provided, the role of operating current assets is shown. References Mayberry Personal Receivers from 2002 to 2003, annual accounts White G.I, Sondhi A.C and Fried D.(1997), The Analysis and Use of Financial Statements; John Wiley Sons Inc., New York.