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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

h l

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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