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VALUATION of Enterprise
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CAPM
P/E Ratio
Gordons
Model
DividendGrowthModel
NetAsset
Value
Liquidation
Value Method
DCF
I need assistance
EV
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What is Valuation?
Valuation is the first step toward intelligent investing.
The object of investment is to find assets that are worth more than theycost
Valuation is the process of estimating how much an asset is worth
Valuation encompasses many considerations
howthe value of an asset is determined
whythe asset has a certain value, and not a higher or lower one
howto compareasset values, as a basis for investment decisionmaking
What is Valuation?
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Reasons for Valuation
M&As
Buyouts
ESOP
Estate Planning
Keyman Life Insurance
Financing by Potential/New Investors
Reasons for Valuation
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Who Uses Valuation
Investors (Active & Passive)
Financial Analysts
Chartists
Traders
Market Timers
Efficient Marketers
Who Uses Valuation
C f V l
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Concepts of Value
Net Book Value
Adjusted Book Value
Replacement Value
Liquidation Value
Concepts of Value
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APPROACHES TO ASSETVALUATION
Balance Sheet Value method
(Net Book Value Method).
Adjusted Book Value method.
Liquidation Value method.
Replacement Cost method.
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BALANCE SHEET METHODNet Book Value
Value of a asset will be represented by the book
value reflected in the balance sheet.
Vo = [Total assets at balance sheet values Total Liabilities(excludingnetworth) ] divided by Number of ordinary shares issued
Or,Vo = Share Capital + Reserves and Surplus
Number of ordinary shares issued
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ILLUSTRATION:
The balance sheet of Ahuja Ltd shows share capital
of Rs 100 crores. (10 CRORE SHARES OF Rs 10Each) and reserves and surplus of Rs 100 crores.Estimate the value of the firms equity shares.
BALANCE SHEET METHOD
Net Book Value
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SOLUTION:
Share Capital = Rs.100 Crs (10 crs shares of Rs.10
each).Reserves & Surpluses = Rs 100 Crs.
Net Book Value = Rs. 200 Crs (100 Crs + 100 Cr)
NBV per share = 200 Crs/10 Crs shares
= Rs. 20 per share.
One can compare NBV with the going market price whiletaking investment decisions.
BALANCE SHEET METHOD
Net Book Value
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LIMITATIONS: It does not take into account the future earning
capacity of the business.
It does not take into account the present value or thechange in the historical value of the asset over aperiod of time as the valuation is based on thehistorical value of the assets.
Technological advances renders some of the existing
assets worthless which is not accounted for in thismodel.
These limitations of the NBV method is somewhatrectified by the Adjusted Book Value method of
valuation.
BALANCE SHEET METHOD
Net Book Value
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ADJUSTED BOOK VALUE METHODImprovement Over NBV
It involves determining the FAIR MARKET VALUE of
the assets and liabilities of the firm as a goingconcern.
Assets are not taken at historical costs but are valuedat market price.
This fair market value of an asset can be determinedby either Replacement Cost method, orLiquidation Value method.
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REPLACEMENT COST METHODFor Adjusted Book Value
The value of business is arrived at bydetermining the current cost of putting up similarfacilities or buying similar assets.
Net book values are substituted by currentreplacement costs.
The Table on the next page illustrates how replacementcosts for various assets are considered.
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Debtors Valued at Face Value. Provide for bad debts if doubtful.
Inventories R.M. at most recent cost of acquisition
WIP at Cost of R.M + Cost of processing
FG at Realizable S.P (holding, transport & selling costs)
Other C.A. Other C.A. like deposits, prepaid expenses and accruals
valued at Book Value
Fixed Assets (Land, P&M, Buildings valued at Market Price ) +(transportation, installation & selling expenses if any).
Non-
operating
assets
Financial securities, excess land & buildings valued at Fair
Market Value
REPLACEMENT COST METHOD
For Adjusted Book Value
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Replacement Cost per share
Total assets at replacement cost Total liabilities
(excluding networth)
No. of Outstanding shares
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LIQUIDATION VALUE METHODFor Adjusted Book Value
For approximating the fair market value of theassets on the balance sheet of a firm is to find
out what they would fetch if the firm wereliquidated immediately
The value of the business is arrived at by
totaling up the realizable value of variousassets of the unit minus the liabilities.
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LIQUIDATION VALUE per share
The value realized from
liquidating all the assets of the
firm.
Less amount paid to all the
creditors and preference share
holders
No. of outstanding shares
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LIQUIDATION VALUE METHOD
For Adjusted Book
Value
LIMITATIONS:
This approach is relevant mainly for sick units that arebeyond redemption.
It is not suitable for going concerns as instead of valuingthe company as a whole, it values it as a collection ofassets to be sold individually.
One of the major drawback of this model is that it does
not take into account the future earning potential of thefirm and just concentrates on the liquidation costs of theassets.
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Enterprise Value (EV)
Measure of what the market believes acompany's ongoing operations are worth
Enterprise value discusses the aggregate valueof a company as an enterprise rather than justfocus on its current market capitalization.
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Enterprise Value (EV)
Equity value Market value of shareholders equity (shares outstanding x current
stock price)
Enterprise value
Measure of what the market believes a company's ongoing
operations are worth Market value of all capital invested in the firm
Equity, debt (short-term and long-term), preferred stock, minorityinterest
Equity
Debt
Preferred Stock
Minority Interest
EnterpriseValue
LiabilitiesAssets
=
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Calculating EV
To calculate enterprise value, we start with a company's marketcap, add debt (on a company's balance sheet), and subtractcash and Equivalents (on the balance sheet).
To get total debt, add together long-term and short-term debt.
Market Cap = Current share price * Total shares Outstanding
Debt = Long Term Debt + Short Term Debt
E V = Market Capitalization + DebtCash & Equivalents
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Example
Tata Steel Ltd.Total shares Outstanding = 55,34,72,856
Current share price (Rs.) = 347.70
Long-Term Debt (Rs. In 000 crores) = 24,681.80Short-Term Debt (Rs. In000 crores) = 2,715.20Cash & Equivalents Rs(in 000 crores) = 2,467.20Market Cap = (55,34,72,856*347.70)
In 000 crores = 19,244.25
Enterprise Value = 19,244.25 +(24,681.20 +2,715.20)2,467.20
= Rs 44,173.45 thousand crores
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EV/ Sales
Ratio measures the total company value as
compared to its annual sales
A high ratio means that the company's value is
much more than its sales.
When valuing companies that do not have
earnings, or that are going through unusually
rough times
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EV/ EBITDA
Higher the number, the more expensivethe company is.
Best way to use EV/EBITDA is to compare
it to that of other similar companies
Disco nted Cash Flo
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Discounted Cash FlowValuation
What is it: In discounted cash flowvaluation, the value of an asset is thepresent value of the expected cash
flows on the asset. Philosophical Basis: Every asset has
an intrinsic value that can be estimated,
based upon its characteristics in termsof cash flows, growth and risk.
Discounted Cash Flow
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Discounted Cash FlowValuation
Information Needed: To use discountedcash flow valuation, you need
to estimate the life of the asset
to estimate the cash flows during the life of the
asset
to estimate the discount rate to apply to thesecash flows to get present value
Market Inefficiency: Markets are assumed tomake mistakes in pricing assets across time,and are assumed to correct themselves overtime, as new information comes out about
assets.
Discounted Cashflow Valuation
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Discounted Cashflow Valuation
where, n = Life of the asset CFt = Cashflow in period t r = Discount rate reflecting the riskiness of the estimated cashflows