methods of business valuation

8/8/2019 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

methods of business valuation

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