Download - Methods of Business Valuation
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METHODS OF BUSINESS
VALUATION
PRESENTED BY :
UMESH SHINDE - 49
KRUNAL JOSHI - 22
CORPORATE VALUATION
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What is business valuation?
Quite simply, business valuation is a process
and a set of procedures used to determine what
a business is worth. While this sounds easyenough, getting your business valuation done
right takes preparation and thought.
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Concepts of Value
Book Value
Market Value
Intrinsic Value Liquidation Value
Replacement Value
Salvage Value
Goodwill Value
Fair Value
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Approaches - Methods
There are three fundamental ways to measure
what a business is worth: -
AssetApproach MarketApproach
IncomeApproach
Under each of the three broad approaches to businessvaluation, there are a number of procedures, called businessvaluation methods, which you can use to calculate the businessvalue.
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ASSET-BASEDAPPROACH
It views the business as a set of assets and
liabilities
Focuses on determining the value of net asset. Focuses on determining whether the assets
should be valued at Book Value, Market Value,
Replacement Value or Liquidation Value.
It is based on the substitution
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Example Company
Liabilities (In Lakhs)Share Capital
50,000 10% Fully Paid Preference Shares of Rs.100/- Each - 50
1,50,000 Fully Paid Equity Shares of Rs. 100/- Each - 150
P&L - 25
10% Debentures - 20
Trade Creditors - 60
282
Assets (In Lakhs)Fixed Assets - 128
Current Assets
Stocks - 100
Debtors - 50
Cash & Bank - 10 - 160
Pre Opening Expenses - 2
282
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Additional Information. (In Terms of Lakhs)
Market Value of FixedA
sset 150 Stocks 110, Debtors 55,
No Dividend Yet
Liquidation Cost of FixedAsset 100
Stocks 80, Debtors 40,
Liquidation Cost incurred 20.
Find Book Value, Market and Liquidation Value
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Example Company Valuation :-
Book Value 102.00 NAV
Market Value 126.67 NAV Liquidation Value 50.00 NAV
ThisApproach indicates NetAsset Per Equity
Also,
It ignores Future Earnings / Cash Flow ability
of the CompanysAsset.
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MARKETAPPROACH
It relies on signs from the real market price to
determine what a business is worth.
Economic principle ofCompetition is a base.
Market Value of securities use for this purpose can be
(a) 12 Months
(b)Average of high low value of securities for
a one year
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Fair Value MethodFair market value (FMV) is an estimate of the market value of a asset, based on
what a knowledgeable, willing, and unpressured buyer would probably pay to a
knowledgeable, willing, and unpressured seller in the Market. An estimate of fairmarket value may be founded either on precedent or extrapolation. Fair market
value differs from the intrinsic value that an individual may place on the same asset
based on their own preferences and circumstances.
MVAMethodMarket Value Method is a new technique to measure the value , This approach
measures the change in the market value of the firms equity vis a vis equity
investment.
MVA= Market value of Firms Equity - EquityCapital Investment / Funds
OR
MVA= Total Market Value of Firms Securities (Share Capital + Debentures)
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Example of MVA
Krunal Industries has equity marketcapitalization of Rs.200 Crore for current year,
further it has a equity capital of Rs.111 Crore
its retained earnings are Rs.35C
rore. FindMVA
MVA = 200 (111+35) = Rs.45 Crore
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INCOMEAPPROACH
This approach takes a look at the core reason for
running a business (making money)
Multiplies the benefit stream generated by the subject
or target company times a discount or capitalization
rate
It guides in terms of firms potential of future
earnings or cash flow generating capacity.
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Income Valuation Methods
Capitalization of Earnings ORCash Flow
Discount Cash Flow (DCF)
WeightedAverage Cost ofCapital (WACC) Build Up Method
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Capitalization of Earnings
This Method is based on two parameters, i.e
Earnings of the firm and capitalization rate
Credible Future Maintainable Profit is to bearrived.
Earning Capitalization method is guided by the
Economic proposition of business valuation
should related to future earnings of the firm.
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Example ofCapitalization Method for A firm :-
Reported NPAT of current year is 65 Lakh (Tax 35%)
Extraordinary Income Rs.10 Lakh Extraordinary Loss Rs.3 Lakh
Nature of firm is likely to continue in future.
A Firm expect a launch of New Product in coming year(In LAKHS)
Sales Rs. 60
Material Cost Rs.15
LabourCost Rs.10
Allocated Fixed Cost Rs. 5
Additional Fixed Cost Rs.8 @ Capitalization rate 15%.
A Firm wants to value with Capitalization Method.
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DCF METHOD
Discount Cash Flow Method measures the
value of equity shareholder wealth
It concentrates on cash generation potential ofa business
This valuation method uses the future free cash
flow of the company (meeting all the
liabilities) discounted by the firm's weighted
average cost of capital
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Value of the firm = Present Value of Expected
Future Cash flow(CF) / Riskness of the cash
flow(Ko)
Example :-
Capital Employed Rs.1000 Lakh(Equal 10% Debt & 5 Lakh Equity Shares of 100 Each)
Ke = 0.14 , Corporate Tax @ 40%.
Five Years Projected Cash Flow:-
300,200,500,150 & 600.
Value of the Business?
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WACC
The weighted average cost of capital is an approach
to determining a discount rate.
WACCmethod determines the subject companys
actual cost ofCapital
It calculates the weighted average of the companys
cost of debt and cost of equity
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Build-Up Method
The Build-Up Method is a widely-recognizedmethod of determining the after-tax net cashflow discount rate, which in turn yields the
capitalization rate. The figures used in the Build-Up Method are
derived from various sources. This method iscalled a build-up method because it is thesum of risks associated with various classes ofassets