Muhammad Ehsan Zubair Roll No 19

1.What is meant by fair value of a firm?

Fair Value of the Company(Firm) means the price at which a willing seller and a willing
buyer would trade and shall take into account all relevant factors, including the Company’s
assets, liabilities, earnings, goodwill, going concern value, and future prospects and shall be
determined pursuant to the relevant provisions of this Agreement using standard valuation
methodologies, including discounted cash flows, comparable companies and precedent
transaction analyses as well as any other techniques deemed applicable by both Members under
the market conditions existing at the time at which such determination is made.
Fair Value of the Company (Firm) means, as of a particular date, the value (including
for the avoidance of doubt the control premium associated with a sale of all of the equity of a
company), expressed in US dollars, that would be obtained at such time in a sale to an
unaffiliated buyer on arm’s-length terms of all of the equity of the Company on a stand-alone
basis and, for avoidance of doubt, shall not be subject to any discount for a sale of a minority
interest.
For example, Company A sells its stocks to company B at $30 per share. Company B’s
owner thinks he could sell the stock at $50 per share once he acquires it and so decides to buy
a million shares at the original price. Despite the large profit potential for Company B, the sale
is considered fair value because the price was agreed by both sides and they both benefit from
the sale.

2. How is fair value determined?

There are three levels of input data for determining the fair value of an asset or liability.
The hierarchy is defined by IFRS 13 Fair Value Measurement.
Level 1
Level 1 is quoted prices for identical assets and liabilities in active markets. An active
market is a market where the transactions for assets and liabilities are done frequently and at a
volume to provide ongoing pricing information, such as stock exchanges.
Level 2
Level 2 inputs refer to observable information for similar items in active or inactive
markets, such as two buildings in a similar location.
Level 3
When values for level 1 and level 2 are unavailable, fair value is estimated using
valuation techniques. Level 3 are unobservable inputs to be used in situations where markets
Muhammad Ehsan Zubair Roll No 19

are non-existent or are illiquid such as during a credit crisis. At this point, fair market valuation
becomes extremely subjective and businesses may include their own data adjusted for other
reasonably available information.

3. How can strategic finance help increase fair value of firm by increasing
shareholder wealth?
Shareholder value is the financial worth owners of a business receive for owning shares
in the company. An increase in shareholder value is created when a company earns a return on
invested capital (ROIC) that is greater than its weighted average cost of capital (WACC). Put
more simply, value is created for shareholders when the business increases profits.
Since the value of a company and its shares are based on the net present value of all
future cash flows, that value can be increased or decreased by changes in cash flow and changes
in the discount rate. Since the company has little influence over discount rates, its managers
focus on investing capital effectively to generate more cash flow with less risk.