@Olawalebab: Thanx (in one million places).

enyojo:

If you are to buy a company for instance, what avenue of valuation will you use? Market capitalization?
In otherwords, if for instance the market capitalization of a company rises sporadically due to speculation, and it hits N50Billion, however the on-ground assessment and debt profile shows that the actual value is N4.5Billion, which do you use to buy it?

The scenario you have described here is the reason why 'market capitalization' fails to answer all the questions concerning company valuation.  You have also rightly pointed out, though using different words, that expectations and perceptions sometimes affect the share price of a company.

The 'on-ground assessment' you mentioned reminds me of another method of valuing a company - Tangible Assets.  It says something like a company is worth no more than than the value of its tangible assets.  Or put differently, what is the replacement cost of the tangible assets of a company? Against this background, I would prefer this method to market capitalization method (as a buyer).

It is more complex like this in reality however as issues of goodwill, quality of staff, deals in the pipeline, etc may need to be considered in buying/selling a company. 

In short, as some people say, the worth of a company is what someone is willing to pay for it.

Method of Valuations

Discounted cash flow: This method involves forecasting earnings into the future (usually by three to 10 years) to determine the present value. Discounted cash flow is a good valuation method for fast-growth businesses; it can also be used if you're valuing your business for the purpose of bringing in a partner.

Capitalization of cash flow: For this method, which is best used for mature companies with stable earnings, the value of one normalized earning period is used to predict future value.
Market-based. If you're valuing your company in order to sell it, you'll want to look at how other businesses in your industry are valued.

Capital market (or guidance company): This method looks at multiples of publicly traded stocks, and works best for any companies that are large enough to be comparable to publicly traded firms. For example, this method would be more appropriate to use for a chain of retail stores than a single-unit retail company.

Transaction: Better for smaller companies, this method examines what other businesses in your industry have sold for.

Cost- or asset-based. This valuation method adds up all the individual components of your business to find its value. Manufacturing or asset-holding companies, which have few intangibles, can get the most from this method.  etc,

How does the price of quoted company on the stock exchange affect the company profitabity and goodwill valuation.

My question is this why is there no secoundary market in Nigeria or alternative trading house apart from the NSE(MONOPOLY). This has lead to the GREAT unemployment in this country. Why? a company can raise a lot of money from the stockmarkets this company will then have to use that money and make more money for its share holders in the process increase employment. Another major loser in this is our universities and research institutions. They are suppose to benefit from companies that are using them, which intend to go public. So a scoundary or alternative exchange will give more opportunity for smaller local companies.

The [b]Nasdaq [/b]is one stock exchange where research institutes have greatly benefited from on a daily basis.