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11 - Business Valuation: Prof. S. Satya Moorthi

Valuation is estimating the worth of an asset or business. It is important for investing, transactions, financing, and other purposes. Valuation includes tangible and intangible assets as well as human resources. Common valuation approaches include asset-based valuation, earnings-based valuation, discounted cash flow valuation, and market valuation. The discounted cash flow approach discounts future free cash flows by the weighted average cost of capital plus a risk factor to determine present value.

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Vandana Kuntal Chahar
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59 views13 pages

11 - Business Valuation: Prof. S. Satya Moorthi

Valuation is estimating the worth of an asset or business. It is important for investing, transactions, financing, and other purposes. Valuation includes tangible and intangible assets as well as human resources. Common valuation approaches include asset-based valuation, earnings-based valuation, discounted cash flow valuation, and market valuation. The discounted cash flow approach discounts future free cash flows by the weighted average cost of capital plus a risk factor to determine present value.

Uploaded by

Vandana Kuntal Chahar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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11_BUSINESS VALUATION

Prof. S. Satya Moorthi


VITBS
Jan-Apr 2011
What is Valuation?

 Valuation is the task of estimating the


worth / value of an asset, a security or a
business.
 Value of an entity is a sum of parts of a
business together, adding up resulting
the streams of economic returns, and
value of an enterprise can be more than
sum of parts.
Why valuation?

 Investing entails committing money today, in


order to gain a future financial return.

 Valuation is the mechanism by which


investors trade cash today for future
claims on cash flows.
Why valuation? (contd..)

 Transaction pricing (eg. M&A)


 Privatization/post privatization
 Financing
 ESOPs
 Management buyouts
 Joint venture
 investments
 Bankruptcy
 reorganization and restructuring
 Litigation
 Planning
 Other
Valuation of a firm includes

 Tangible assets
 Like, plant & machinery, land & buildings,
office equipments, other assets, etc.
 Intangible assets
 Goodwill, brands, patents, trademarks, etc.
 Human Resources
Framework of Valuation

 Understanding the concepts of


 Book value
 Market value
 Intrinsic/ economic value
 Liquidation value
 Replacement value
 Salvage value
 Value of goodwill
 Fair value
Approaches / Methods of valuation

 Asset-based approach
 Earnings based approach
 Discounted Cash Flow (DCF) approach,
and
 Market value approach
Asset-based approach
 is based on the premise that it is generally
possible to liquidate the property.
 Adjusted Book Value Method
 Liquidation Value Method (Liquidation value)
 Cost to Create Method (Replacement Value)
 Valuation of assets based on liquidity does not
yield better results if the fair market value of
assets is in excess of value of its assets on a
liquidated basis.
 revaluation of assets and liabilities.
 Value is based on fair market value of assets less fair market
value of liabilities
Earnings based approach
 The price-earnings ration (P/E) is simply the price
of a company's share of common stock in the
public market divided by its earnings per share.
 By multiplying this P/E multiple by the net income,
the value for the business could be determined.
 provides a benchmark business valuation for the
non-listed companies wishing to use this method.
 key advantage of market approach is that it is
based on actual transactions
Discounted cash flow approach
 DCF method uses the future free cash flow of
the company (meeting all the liabilities)
discounted by the firm's weighted average cost
of capital, plus a risk factor measured by beta.

 Since risks are not always easy to determine


precisely, Beta uses historic data to measure
the sensitivity of the company's cash flow, for
example, through business cycles.
Steps in DCF
 Analyze capital requirements and prepare a forecast
 Calculate cash flow for each year
 Determine the appropriate discount rate (WACC)
 Calculate the terminal value
 Calculate the present value of the future cash flows
and terminal value, and their sum
 Make any final adjustments
 Perform review procedures
 Compare forecast revenue growth to forecast industry growth
 Compare forecast margins to historical
 Compare forecast margins to similar companies
 Compare old forecasts to actual results
DCF may not be the best either, but

 “It is better to be vaguely right than


precisely wrong.”

 The difficulty of creating a sound DCF model


reflects the uncertainty inherent in corporate
cash flows, not a flaw in the analytical
approach.
Market value approach
 applicable for quoted companies only.

 Market value is determined by multiplying the quoted share


price of the company by the number of issued shares.

 It reflects the price that the market at a point in time is


prepared to pay for the shares.

 It broadly takes into account the investors’ perceptions about


the performance of the company and the management’s
capabilities to deliver a return on their investments.
 At the end of the day, we can prove very little about stock
valuation, because stock prices reflect investor expectations.

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