CERENT CORPORATION Harvard Case Solution & Analysis


Valuation models

Various valuation models can be used to value the Ce rent Corporation and to consider the favorableness of the bid offered by Cisco. Different valuation gives different financial performance information of the company. These valuation techniques can be grouped into three categories:

Performing valuation based on different models helps in determining range of possible valuations that are based on different assumptions and information. Thus, it provides information to assist in considering whether the bid offered is feasible or the firm has greater value than the offered bid. For Cerent, different valuations will be made to analyze the bid offered by Cisco and to help Carl Russo, CEO of Cerent Corporation in deciding whether to proceed with IPO or sell the undertaking to Cisco.

Balance sheet valuation

In the balance sheet valuation, there are three techniques that include book value valuation, adjusted book value, and liquidation value. Cerent is a new company with limited operating information. The liquidity valuation model is not appropriate here. Because the liquidation model is used when the company considers winding up its business. The assets that can be realized are valued, while the valuation in this model is less than real market value. The second method that is adjusted book value, is also impossible to apply here because it will require appraising the values of assets and liabilities, valuing them at market values. Due to lack of data, this model cannot be applied.

Therefore, the book value valuation technique can be applied here to have a valuation analysis for the firm. The value of the firm can be easily determined by subtracting the liabilities from the firm’s total assets. The net asset of the company is calculated to be $33,628,000 and total liabilities are $20,144,000. Thus as per valuation, the value of the company as per book value technique is determined to be $13,484,000.

Income statement Valuation

Income statement valuation technique involves use of earnings multiples for the company, based on the earnings multiple of the comparable similar nature company. The following earnings multiples can be used for valuation:


In the case, the multiples of comparable companies were given. These companies, similar to Cerent, are newly established with few years of operations. Thus, the valuation through using the multiples of such comparable companies can be possible. For valuation purpose, the mean or average multiple of comparable company is taken, which is 36.4x. But on the other hand, Cerent does not have any earnings, it is running on loss. There is projection data given in case but that data cannot be used. The multiple can only be applied to the current year’s earnings or last year’s earnings. Cerent had net loss of $29,304,000 last year. The Valuation through income statement cannot be possible.....................

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