gitam - valuation of equity

8/8/2019 Gitam - Valuation of Equity

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Equity Valuation

What is Value?

Depends on who is asking and why

Generally an economic concept where what a buyer iswilling to pay and what a seller is willing to take overlap

Implies transferabilityImplies agreeable to both parties

In the real world it is normally a range, not a point

2

What is a Valuation?

Part art, part science

A process to arrive at an estimate of value for acompany involving:

An analysis of the industry;

An understanding of the historical, current andfuture operations of the company;

An analysis of the financial history andprospects of the company; and

Applying acceptable valuation methods3

Why are Valuations Performed?

Transaction pricing(mergers, acquisitions)

Privatization/postprivatization

Bankruptcy,reorganization and

restructuring Allocation of purchase

Financing

Tax and audit support

ESOPs

Management buyouts Joint venture

investments

price

Litigation

Planning

Value basedmanagement

Other4


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Why Valuation?

Basics of sound investing

Do not buy it for morethan its worth Do not sell it for less

than its worth

Price is what you pay. Value is what you get.--Warren Buffett

Why Valuation?

Valuation plays a key role in many allied areas of finance:

portfolio management sell-offs acqu s ons mergers joint ventures buy-backs

corporate finance

For every complex problem there is a simple solution that is wrong.--G B Shaw

What does accounting track ..

Financial Year

Inflows & Outflows of cash

Consumption of resources & Sales

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End ofearlier

financialyear

Endof this

financialyear

Assets &Liabilities

Assets &Liabilities

Liability

A liability is what a business owes to outsiders. Liabilities financevarious assets

A liability could arise by borrowing money or by acquiring otherresources on credit

Liabilities can be for a Long Term or Short Term

Liabilities are raised according to the end use of those funds

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Liabilities(Sources of Funds)

ShareCapital

Reserves

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& Surplus

Current Liabilities & Provisons

Liabilities to be discharged in the near future

They include credit received from suppliers, short-term bankfinance, advances received from customers, tax dues

Employees also offer short-term credit to their employer. Unpaidsalary would be a part of current liabilities

Provisions are made for any of the foreseen liabilities in currentfuture

10

Assets(Application of Funds)

Asset simply means what a business owns. It implies any ownedresource available at the disposal of the firm.

Assets can take physical forms like factory, land, machinery orcapital inventory

Or they can take monetary form such as a bill yet to be paid by aclient, cash, bank balances, deposits with suppliers are all legalclaims which have a value

Some assets are also called as Intangible Assets, these are,Goodwill, Patents, Software, Licenses, Trademarks

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Fixed Assets

Fixed Assets are assets which are acquired for a long-termuse in business

For instance, a machine will be used for a long period of. , .

Fixed Assets form the business infrastructure.

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Current Assets

Current Assets are assets which are acquired not with a view toretain them for a long time but to convert them into a product or aservice or a job or a contract which provides value to a customer

ese rema n proper es o e organ za on or a s or me. erthey are:

Converted to another formSold to a customerConverted into money.

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Examples of Current Assets

Raw Material Inventory

Spares Inventory

Receivables or Debtors or Outstanding

Advances to suppliers

Cash & Bank Balance

Loans & Advances

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Exercise:Identify out of the following items which are current assets& which are fixed assets.

Particulars Identify whether CurrentAsset or Fixed Asset

Balance in Current Account with a bank

Advance aid to a su lier

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Bank balance at a manufacturing location

Bank balance at the head office

Stock of beverages for a hotel

Credit card sales

Bill raised on the customer, not yet paid

Head-office building owned by thecompany

Working Capital

This stands for rolling money which forms a part of the money cycle.It is the most dynamic component of the investment made inbusiness

This amount needs to be invested before customer ultimatel a s

This investment takes the form of various Current Assets,collectively called as Gross Working Capital / Current Assets (CA)

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Man or anizations are strivin to ush net workin

Net Working Capital implies the net funds blocked inCurrent Assets after reducing current liabilities

Net Working Capital / Net CurrentAssets

capital to zero or sub-zero

Thus, they want to finance their investment in workingcapital out of supplier (credit) or customer (advance) funds

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Reserves

Profits earned from business belong to shareholders

However, entire profits may not be distributed due to needssuch as expansion, diversification

These profits accumulate as reserves

Reserves are a liability to shareholders

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Liability of the company to shareholders

Capital + Reserves

Net Worth

Networth of a company is the same as thenetworth of an individual

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Amount of investment in infrastructure + net working capital

Can also be derived by adding the following:

Capital Employed

Long Term Borrowings

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Net Worth & Capital Employed

Based on the following data calculate the net worth &capital employed for a company for the last two years.

Has the financing mix for the company changed?

Rs. Crores 2009 2008Equity Capital 65 65Reserves 422 375

Secured Loans 403 224Unsecured Loans 23 13

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Revenues

Basically sales revenues

Sales revenue from the products and services of the company

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Cost

Compensation (expressed in monetary terms) paid to thesupplier of any service or commodity

What is the difference between cost & price?

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Profit is the difference between Revenue & CostCosts can be defined narrowly or widely to derive different definitions ofprofit

Different Profit Terms:

Net Profit or Profit after Tax (PAT) : All costs reduced

Profit

Profit before Tax (PBT): All costs but tax reduced

Profit before Interest & Tax (PBIT): All costs other than interest

& tax reduced

Profit before Interest, Depreciation & Tax (PBIDT): All costs

other than interest, depreciation & tax reduced (personnel,

operating & other)

Gross Profit (GP): Only material consumed / processed24


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In business, cash surplus is different from profit

Time lags involved in:

Earning of revenue & collecting it

Cash Surplus vs. Profit

Incurring expenses & paying for them

Infrastructure investments involved

Ability to inject funds into the system by raising funds

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Financial statements answers thesequestions ..

FinancialStatement

Nature Focus Key Information

BalanceSheet

PositionStatement

Financial position ona particular date

Composition of assets(resources) & liabilities(sources)

IncomeStatement

Flow Statement Profitability during afinancial period

Revenues & costs

Cash FlowStatement

Flow Statement Cash inflows &outflows during a

financial period

Cash inflows arisingfrom revenue &

liabilities and cashoutflows arising fromcosts & assets

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What do we keep account of?

Income Our charges to customers

Expenses Our costs, consumption of resources

Inflow Inflow of money into the system

Outflow Outflow of money from the system

Assets What we own

Liabilities What we owe to others

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Profit & Loss Statement

Rs. in CroreFirm A Firm B

Revenue (Sales) 200 180CostsOutsourcing 55 25

Food Materials 45 55Manpower Costs 12 18

Maintenance & Depr. 15 14Power & Fuel 8 13Other Overheads 15 15Interest Cost 10 13Profit before taxes 40 27

Profit After Tax 28 19


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Balance Sheet

Rs. in Crore

Liabilities Firm A Firm B Assets Firm A Firm B

Capital 10 20 Fixed Assets 118 112

Reserves 50 40 Inventory 25 65

Bank Borrowing 65 85 Receivables 35 25

Current Liabilities 55 65 Bank Balance 2 8

Total 180 210 Total 180 210

OperatingCash Flow

FinancingCash Flow

InvestingCash Flow

Where is the money coming from & where

is it going ?

Cash Flow Statement

Cash generated inregular course of business net of

taxes and net of increase in

inventories & receivables

Cash received & paid out in raising

money for thebusiness & servicing

previously raisedfunds respectively

Cash paid out inmaking fresh

investments inLong Term Assetsor cash realized

from sale of previous

investments

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Financial management

Key objective:Profit Maximization?Shareholder wealth maximization

Key activity:

Key decision issuesFinancingInvesting

Key focus areas:Monitoring of critical variables impacting businessFinancial controls

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Financial Analysis

Comparison to industry

Provides a measure of the companys financial performanceand condition relative to its peers

Common size (base zero) balance sheets

Common size income statements

Ratio analysis

Other productivity statistics, such as sales/person

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Financial Analysis

Ratio Peculiarities

Highly dependent on underlying accounting assumptions(depreciation method, inventory valuation) in the financials.GIGO!Generally consider book values, not market valuesMostly post-facto, not forward-lookingNo ideal standard figure across all industries, or allcompanies in the same industry

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Financial Analysis

Ratio Peculiarities No ideal standard figure across all industries, or all

companies in the same industry Depend upon relative competitive strength of business in the

industry Depend on nature of industry/business

Seasonality of business Entire production cycle process time FMCG vs Cement vs Breweries

Ideal ratios are rarely static can differ for the same

company/industry, from time to time

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Financial Analysis

Ratio PeculiaritiesFormula for computing a ratio may differ across analysts

o DSCRo Short-term debt

Single ratio cannot be seen in isolationTo be seen in conjunction with other supporting ratios, trendanalysis, peers

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Financial Analysis

Analysis of trends and unusual items

Trend analysis examining changes over timeUnusual items that seem out of place compared to otheryears or industry averages to be discussed in detail

Accounts with unusual titles or those that seem out ofplace compared to the normal business operationsshould be investigated

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Ratio Analysis

Ratio is a meaningful relationship between two financialparameters

Ratios are best interpreted in comparison with:

Historical data

Competition

Industry norms

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Types of Ratios

Liquidity Ratios

Turnover Ratios

Capital Structure Ratios

Profitability Ratios

Earning Ratios

Return on Investments

Market measures

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Liquidity Ratios

Judge firms ability to meet short term obligations

Current Assets

Current Ratio = ---------------------------Current Liabilities

Liquid Assets* Liquid Ratio = ---------------------------

Current Liabilities (normally, Bank OD is excluded)

* Current Assets other than inventories & pre-paids

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Turnover Ratios

Sales Basic Turnover Ratio = ------------------------------

Total AssetsSales

F. Assets Turn. Ratio = --------------------------------Fixed Assets

Cost of Goods Sold Inventory Turn. Ratio= -----------------------------

InventoryCredit Sales

Debtors (Receivables) Turn. Ratio = ----------------------------

Debtors

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Note: when there is one figure coming from P&L and the other from balance sheet,the balance sheet items may be taken as average of opening and closing balances

Capital Structure Ratios

Total Debt Total Debt Equity = ------------------------------------

Total Shareholders Equity

Long Term Debt . = -------------------------------------

Total Shareholders Equity

Earnings Before Interest & Tax Interest Coverage = --------------------------------

Interest CostEBITDA less tax PAT + Interest + Depn

DSCR = ---------------------------- = ---------------------------------Interest + Principal Interest + Principal

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Profitability Ratios

Gross Profit Gross Profit Margin = --------------------------------

Sales

Net Profit or Profit After Tax = ---------------------------------------

Sales

Operating Profit (PBIT) Op. Profit Margin = -----------------------------------

Sales

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Earnings Ratios

Net Profit less Pref. Dividend Earnings Per Share = ----------------------------------------

(EPS) No. of Equity Shares

Total Dividend Dividend Per Share = --------------------------------

(DPS) No. of Equity Shares

DPS Dividend Payout Ratio = -------------

EPS

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Return on Investment

EBITReturn on total assets = ------------------

Total Assets

PAT + Interest ExpensesReturn on total assets (post-tax) = -----------------------------------

Total Assets

PAT + Interest (1 tax)

Net Return on capital employed (post-tax)= --------------------------------Capital Employed

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Market Measures

Earnings Per Share

Earnings Yield = --------------------------------------------Market Price Per Share

Dividend Per Share Dividend Yield = --------------------------------------------

Market Price Per Share

Market Price Per SharePrice Earnings Ratio = ----------------------------------------

(P/E Ratio) Earnings Per Share

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Financial Analysis

Conclusion & key factors to consider

Are any adjustments required to reflect the true earningspotential of the company?

Is the overall trend in the business (revenues, profits,etc.) improving, stable or declining?

Does the company have adequate liquidity? Is workingcapital well-managed?

Is asset utilization acceptable?

Does the company have too much debt? Does thecompany have the ability to borrow in the future if

needed?Are the returns on equity acceptable?

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Financial Analysis

Conclusion & key factors to consider (contd)

How does the company compare with the industry?Your conclusions are a key factor in:

Assessing the risk of investing in the company

Developing forecast assumptions for the company

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Valuation Methodologies

Valuation Methods

Assets Earnings DCF Multiples

Liquidation

Replacemnt

PCEV

Dividend

FCFE

FCFF

Revenues

Earnings

Of two equivalent theories or explanations, all other things being equal, thesimpler one is to be preferred. -William Ockham

Assets

Special

Income Approach

Key inputs to income approach

Required/desired /expected rate of return

Estimates of future cash flow or normalized

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Income Approach

Income approach

Capitalized earnings

Estimate of normalized expected earnings is

growth prospects

Commonly referred to as PECV (Profit EarningsCapitalisation Value) method

Discounted cash flow

Forecasted cash flow available to investors isdiscounted to present value using an appropriate rateof return 52


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Income Approach Discounted Cash Flow

Theoretically correct method

Based on future cash flows

Considers the timing of cash flows

Considers the risk of the cash flows

Potentially dangerous

Reasonable inputs, unreasonable results

Easily manipulatedNot directly linked to market

Typically gives a control value53

Discounted Cash Flow

FORECAST PERIOD TERMINAL PERIOD

COMPONENTS

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Years go through ..n

VALUATION DATE

TERMINAL VALUE

Represents the value of all cash flows beyond

the forecast period


EBIT *(1-Tax Rate)(EBIT = Earnings Before

Interest & Taxes)

FREE CASH FLOW=

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Non-cash items (depreciation,Amortization, write-offs)

Incremental workingcapital and

Capex

PLUS

MINUS


Free Cash Flows calculationOperating Profit (EBIT)Less: Adjusted Taxes = (Tax paid + saved) = (EBIT * t)

Gives: Net Operating Profit Less Adjusted Taxes(NOPLAT)

Add: Book DepreciationAdd: Non-cash expenses/ amortization

Gives: Gross Cash FlowLess: Increase in net Working CapitalLess: Capital Expenditure

Gives: Free Cash Flows to Firm (FCFF)

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Free Cash Flows calculation


A Corporation Ltd.Profitability Statement

Particulars year1 year2 year3

A Corporation Ltd.Statement of Affairs

Particulars year1 year2 year3

Shareholders 1,700 1,900 2,100evenues , , ,

CoGS -750 - 900 -1,050

Cash S G & A -200 - 210 - 220

Depreciation -100 - 120 - 130

Operatg Profit 450 570 700

Less: Interest 100 90 80PBT 350 480 620

Taxes@40% 140 192 248

PAT 210 288 372

Debt-holders 1,400 1,500 1,600

Funds Sourced 3,100 3,400 3,700

Net Block of Assets 2,700 2,900 3,100

Investments 100 100 100

Net Wkg Capital 250 350 450

Cash 50 50 50

Funds Applied 3,100 3,400 3,700

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Free Cash Flows calculation


Particulars Year2 year3

Operating Profit 570 700

Less: taxes 40% -228 -280

NOPLAT 342 420

Add: Depreciation 120 130

Add: Non-cash expenses 0 0

Gross Cash Flow 462 550

Less: Increase in W/C -100 -100

Less: Capex -320 -330

Free Cash Flow to the Firm 42 120

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DCF Free Cash Flows

Free Cash Flows to Firm (FCFF)

Not the same as operating CFResidual CF after meeting all cash operatingexpenditure, but prior to any payments to financingstakeholderNet of working capital and capex needed to supportfuture forecast FCFAlways post-taxCash available to all finance providers = Debt cashflow + Equity cash flow

Wed rather be vaguely right than precisely wrong. -J M Keynes

FCFF and FCFE


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DCF WACC

Discounting Factor

Generally, WACC

WACC = [(Kd*D)+(Ke*E)] /(D+E)

o Kd = post-tax cost of debto Ke = cost of equityo D = market value of debto E = market value of equity

Cost of Debt

Kd = Rd (1 Tc)Where

DCF WACC

o = -o Rd = coupon rate of interesto Tc = effective rate of tax paid by firm

E.g. if a firm borrows debt at interest rate of12% and lies in 30% effective tax bracket, itsKd is8.4%. since 12% (1-30%) = 8.4%

Cost of Equity CAPM

Ke = Rf + (Rm Rf)where:

o Ke = cost of equity

DCF WACC

o = -o = risk factor of the cash-flowso Rm = rate of return on a diversified

portfolio (SE benchmark index)

E.g., if the Rf is 6% and the Rm is 10%, theKe of a firm with of 2 is14%. since 6% + 2 (10% - 6%) = 14%

Beta ( )

Measures volatility of firms stock pricerelativeto that of given market index

DCF WACC

,o covariance of selected stock with well-

diversified market portfolio ando the variance of that portfolio

= Covariance of asset with Market/Varianceof the market

Uncertainty is not a result of ignorance or the partiality of human knowledge,but is a characteristic of the world itself. --M Taylor


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Beta ( )

Symbolic representation of riskiness of theunderlying cash flows, vis--vis those of awell diversified portfolio

DCF WACC

market conditionsE.g. if benchmark index moves up by 5% andsimultaneously scrip moves:

o by 7%, its beta is 1.4o by 9%, its beta is -1.8

Beta ( )

In case of calculations based on stock marketdata

DCF WACC

n- evere n us ry segmen average e a sconsideredu = lv / [1+ (D:E)*(1-t)]

Re-levered to target companys target D:Eratiorlv = u * [1+ (Dt:Et)*(1-t)]

Beta is a highly sensitive value driver To be chosen/calculated carefully. Varies with

choice of:market index (for e.g., Sensex, Nifty, BSE200 NSE 100 etc.

DCF WACC

time period covered by underlyingobservational data points (one year, twoyears, five years, etc.)return interval (daily, weekly, monthly, bi-monthly, quarterly, semi-annually, annually,

etc.)

Present Value of FCFs

FCFs are discounted to their present value, using theWACC

DCF Prevent Value of FCF

Free Cash Flows to the Firm 42 140

Present Value Factor @14% 0.77 0.67

PV of the FCFs 32.32 94.50

Sum of the PV FCFs (yr1) 126.81


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DCF Terminal Value

Terminal Value

Business, as a going concern, is assumed tobe carrying on operations in perpetuity, i.e.,infinity

TV is firms value at end of explicit forecastperiod

TV captures firms value for operationsbeyond explicit forecast period

Do not count your chicken before they stopped breeding. --Aesopeus

DCF Terminal Value

Terminal Value

FCFF(n+1)/ (WACC g) where:

FCFF(n+1) = FCFF in year after explicit

FCFF(n+1) = FCFFn * (1+g) g = steady state growth rate of FCF till

infinity E.g., if FCFF for last forecast year is 1000,

WACC is 18% and terminal growth rate is3%, the TV is

6867, being 1000*1.03 / (0.18-0.03)

DCF Terminal Value

Terminal Value

Perpetuity formula does not work where g WACC

-perpetuity implies the business eventuallywould be larger than the whole economy!!

DCF Enterprise/Equity Value

Enterprise ValuePV of FCFs during forecast periodAdd: PV of terminal value

E uit ValueEnterprise valueLess: Net debt, being

o Market value of debto Less: Cash & equivalents


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DCF Enterprise Value

Enterprise Value broad steps in DCF-basedcalculation

Cost of Debt Cost of EquityForecast FCFs

WACCGrowth rate

PV of FCFs

Enterprise Value

Terminal Value

PV of TV

Net Debt Equity value

DCF criticism and defense

DCF is difficult and subjective

So, arent others?

any va ue r vers nee to e com ne to pro uce aDCF valuation

Multiples also consider same factorsDCF focuses on all value drivers rather than combiningthese into one multiple

Markets can remain irrational longer than you can remain solvent. -J M Keynes

DCF requires WACC and nobody seems to have a clueof what it is

Differences in required return is a key factor in

valuation

DCF criticism and defense

DCF is very sensitive to long term growth assumptionsSo are multiples. The problem is mitigated by usingzero value adding long term growth assumptions

Take every gain without remorse for missed profits. --Joseph de la Vega

DCF conclusion

DCF and related techniques are powerful valuation tools

DCF is a very robust methodology, but can only work rightif

the assumptions are reasonablee app ca on s rea s c

Investing should be dull. It shouldn't be exciting. Investing should be more likewatching paint dry or watching grass grow. If you want excitement, take $800

and go to Las Vegas. -Paul Samuelson


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Comparable Multiples

Advantages Disadvantages Easy to understand and

compute Can be used for all

businesses

One key for all locks Ignores the peculiarities

or specialties of targetfirm

vis--vis its peers

Frequently used as asanity check of valuederived from othermethods


Value relative to a key statistic assumed to relate to thatvalue. Key statistics commonly used:

SalesBook Profits (EBIT, EBT, PAT, etc.)Cash Profits (EBITDA, Cash PBT/PAT)Assets (user, capacity unit, customer, etc.)

Valuation based on statistic multiplesP/E, P/BV, P/eyeball, P/customer, P/sales, P/click,P/bed, P/seat, etc..

One of the first questions to ask about a possible investment is 'Why is itmispriced?' If you don't have a reason, there's a good chance it isn't really

mispriced. -- Jeffrey Tannenbaum

EBITDA Margins PAT Margins PE EV/EBITDA

Rs mn MarketPrice MCap FY07 FY08 FY09 FY07 FY08 FY09 FY07 FY08 FY09 FY07 FY08 FY09

A 545 9,367 9.6 9.0 9.5 5.5 6.0 6.1 18.9 17.6 13.6 15.0 13.0 9.6B 133 9,628 23.6 21.3 18.6 9.1 7.5 6.8 30.3 16.3 15.2 17.2 8.4 8.4C 129 27,018 24.1 29.8 25.6 8.2 12.4 11.1 18.2 12.4 12.2 9.6 7.5 7.6

D 405 24,859 15.9 14.5 15.9 6.4 8.9 9.8 27.3 15.5 12.7 13.7 12.3 9.9E 6.8 8.2 11.8 2.6 3.5 6.1

Average 23.7 15.5 13.4 13.9 10.3 8.9


Market Cap(US$ mn)

P/E EV/EBITDA (X)

FY08/CY07 FY09/CY08 FY08/CY07 FY08/CY07

F 1,144.8 8.8 7.4 4.0 3.4

G 386.2 16.0 10.4 8.8 6.6

H 999.5 12.7 10.7 7.7 6.6

I 435.1 13.7 12.3 4.7 4.2

J 121.4 5.9 5.9 4.1 3.2

K 157.1 4.7 3.7 4.1 3.2

Average 10.3 8.4 5.6 4.6



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Comparable MultiplesDate Target Company Bidder Company Seller Company Deal Value

USD(m)Enterprise

ValueUSD(m)

RevenueUSD(m)

RevenueMultiple

EBITDAMultiple

EBITMultiple

PEMultiple

2008Ranbaxy

LaboratoriesLimited (60.62%)

Daiichi Sankyo

Company, Limited

4,625.00 7,622.66 1,213.69 6.28 30.42 34.58 59.78

2008IL&FS InvestsmartLimited (93.21%stake)

HSBC Securitiesand CapitalMarkets (India) PvtLtd.

ETrade MauritiusLimited; IL&FS;Softbank AsiaInfrastructure

306.00 328.23 - NotAvailable

NotAvailable

NotAvailable

23.85

un

2008UTV SoftwareCommunicationsLtd (35.8%)

The Walt DisneyCompany

302.00 844.02 46.74 18.06 103.52 113.57 42.71

2007 New DelhiTelevision Limited(NDTV) (20%stake)

Prannoy Roy;Radhika Roy;RRPR Holdings PvtLtd

140.00 698.29 64.33 10.86 96.57 241.89 201.16

2007India Infoline Ltd

(6.48% stake)

Orient Global 140.00 2,166.90 - Not

Available

71.60 80.75 110.37

2007Infomedia IndiaLimited (formerlyTata infomediaLimited) (40%)

Television EighteenIndia Ltd

ICICI VentureFundsManagementCompany Ltd

45.00 113.03 32.96 3.43 26.98 44.68 131.81

Some Finer Points

Valuation Finer Points Nominal v/s. real cash-flows

Inflation impact Value to be the same under either case

Appropriate capitalization rate Depends on expected return/ beta/ D:E ratio

Tax rate for WACC Marginal rate of tax All differences are timing differences

Target, D:E ratio Target, long-term, future, sustainable ratio Ignore minor variations

Valuation Finer Points Book vs market value of debt

Can impact the value in case the difference in bookand market values is high

Short-term interest costs Two schools of thought (so, whats new??) Adjusted taxes

Impact of MAT/ Deferred taxes Terminal growth rate

A very sensitive value driver Mid-year v/s year-end discounting

Best approximated by mid-year discounting for annualCFs Year-end often used as an approximation


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Valuation Finer Points Sensitivity analysis

Scenarios building

Synergy/ control value Non-core assets Mid- eriod valuations

Adjustment required to valuation at last balance sheetdate to current date

Adjusted Present Value (APV) Value of un-levered firm Add: PV of leverage benefits

Valuation Finer Points Economic Value Added (EVA)

Based on principle that firms profit should reflect allfinancing costs

Surplus value created on firms investment over itscost of capital

More of a management appraisal tool Market Value Added (MVA)

Difference b/w market valuation and book value PV of future expected EVAs

Case Studies

Case Study 1

As an investor you are interested in the emerging marketsof Asia. You are trying to value some stocks in Malaysia,which does not have a long history of financial markets.

During the last three years, the stock market has gone up60% a year, while the government borrowing rate has, .

Would you use this as your risk premium, looking into thefuture?


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Case Study 2

Hitec Inc. has three divisions with the followingcharacteristics

Division Beta Market ValuePCs 1.60 $100 millionSoftware 2.00 $150 million

.

What is the beta of the firm? What would happen to the beta of the firm if it divested

itself of its software business? To value the software business for divestiture, which

beta would you use in your valuation?

gitam - valuation of equity

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