CA Aaditya Jain

CA Aaditya Jain
All India Satellite Classes:
011-47665500
BUSINESS VALUATION-27
AADITYA JAIN SATELLITE SFM CLASSASS
1.WHY VALUATION/INTRODUCTION
Valuation is a very complex term But in the same place it is also an exciting topic.
It changes from time to time,person to person and from place to place.It is never constant.
Valuation is the process of determining the worth of a company
2.DIVIDEND YIELD METHOD OR DIVIDEND CAPITALIZATION VALUATION METHOD
Dividend Yield =
(MPS) Share Per Price Market
(DPS) Share Per Dividend
Market Price Per Share =
Yeild Dividend
(DPS) Share Per Dividend
3.EARNING YIELD METHOD OR INCOME OR EARNING CAPITALIZATION VALUATION
METHOD :
Earning Yield =
(MPS) Share Per Price Market
(DPS) Share Per Earning
Market Price Per Share =
Yeild Earning
(DPS) Share Per Earning
4.CONTINUING VALUE OR TERMINAL VALUE APPROACH
Continuing Value is the value which we get after the forcasted period.Continuing Value is also known as
Terminal Value .This is the remaining value of the assets of the business at the end of the projected period
.This can be computed using :
(i) Perpetuity Approach :
Assuming Constant Cash Flow After 3 Years
(

+
+
+
+
+
+
+
=
e
3
e
3
e
3
2
e
2
1
e
1
0
K
Flow Cash
) K (1
1
) K (1
CF
) K (1
CF
) K (1
CF
P
Continuing Value
Assuming Growing Cash Flow After 3 Years
(

+
+
+
+
+
+
+
=
g K
CF
) K (1
1
) K (1
CF
) K (1
CF
) K (1
CF
P
e
4
3
e
3
e
3
2
e
2
1
e
1
0
Continuing Value
(ii) Multiplier Approach : Application of Price Earnings Multiple to the final year's net income for calcu-
lating market value at the end of forcast period .
Terminal Value = P/E Ratio Last Year Earning of Forcasted period
(iii) Any other method which may be given in question
Note : Cash Flows may be Dividend or it may be Earning as may be given in question .
VALUATION OF BUSINESS
CA Aaditya Jain
CA Aaditya Jain
All India Satellite Classes:
011-47665500
BUSINESS VALUATION-28
AADITYA JAIN SATELLITE SFM CLASSASS
Note : Continuing Value or Terminal value is calculated because as time goes on, it is harder to come to a
realistic estimate of the cash flows so we take a uniform assumption at the end of forcast period .
Note:In place of Ke we may use Ko if we are required to calculate Value Of Overall Company.
5.DISCOUNTED CASH FLOW(DCF) APPROACH/FREE CASH FLOW APPROACH
DCF analysis uses future free cash flow projections and discounts them to arrive at a present value, which
is used to evaluate the potential for investment.In other words it is a method of evaluating an investment by
estimating future cash flows and taking into consideration the time value of money.
Note : How To Calculate Free Cash Flow :
EBDITA xxx
(-)Depreciation xxx
(-)Amortization xxx
(-)Interest xxx
EBT xxx
(-)Tax xxx
EAT xxx
+ Deprecciation xxx
+Amortization xxx
-Increase In Working Capital xxx
+Decrease In Working Capital xxx
-Capiital Expenditure xxx
Free Cash Flow xxx
6.ECONOMIC VALUE METHOD (EVA)
The concept of EVA was developed by Stern Stewart & Co. EVA is defined in terms of returns earned by
the company in excess of the minimum expected return required by Investors .
Symbolically : EVA = Net Operating Profit After Taxes - Cost Of Capital Employed
Where Net Operating Profit After Taxes [NOPAT] NOPAT = EBIT(1 - Tax)
Cost Of Capital Employed is Weighted Average Cost Of Capital Average Capital Employed
Weighted Average Cost Of Capital =
P p d d r r e e
W K W K W K W K + + +
Note : In calculating NOPAT , Net of Tax of Interest is not to be taken i.e Interest is not to be adjusted for
tax .
Note : Total Funds / Capital Employed includes : Equity Share Capital + Reserves + Debentures +Prefer-
ence Share Capital +Long Term Loan - Profit and Loss Account ( Dr.) - Fictitious Asset
CA Aaditya Jain
CA Aaditya Jain
All India Satellite Classes:
011-47665500
BUSINESS VALUATION-29
AADITYA JAIN SATELLITE SFM CLASSASS
Note : Financial Leverage =
[EBT] Tax Before Profit or Earning
[EBIT] Tax and Interest Before Profit or Earning
Note : In India . EVA has emerged as a popular measure to understand and evaluate financial performance
of a company.Several companies have started showing the EVA during a year as a part of the Annual
Report.Hero Honda Ltd. , BPL Ltd.,Hindustan Lever Ltd.,Infosys Technologies Ltd.,and Balrampur Chini
Mills Ltd. are a few of them .
7.PRICE EARNING [P/E] RATIO VALUATION METHOD
Price Earning Ratio [ P/E Ratio ] =
EPS
MPS
EPS Ratio P/E MPS =
Note : Total Market Value can be calculated by multiplying MPS with Number of Equity Share .
Note : If we take total earning in the above formula we will directly get Market Value .
8.VALUE OF FIRM USING FUTURE MAINTAINABLE PROFITS
Value Of Business =
Rate tion Capitaliza Relevant
Profit le Maintainab Future
Calculation Of Future Maintainable Profits :
Average Past Year Profits xxxx
Add :
All Actual Expenses and Losses not likely to occur in future xxxx
All Profits likely to arise in Future xxxx
Less : All Expenses and Losses expected to arise in future (xxxx)
Less : All Profits not likely to occur in future (xxxx)
Future Maintainable Profits ( FMP ) xxxx
9.MARKET VALUE ADDED(MVA)
MVA is yet another concept which is used to measure the performance and value of the firm .
Symbolically :
From Equity Point Of View
MVA =Current Value of the securities of the Company in the Market - Total Amount of Shareholder's
Funds[Balance Sheet Fig. ]
Note: Shareholder's Funds[Balance Sheet Fig.]includes Equity Share Capital + Retained Earning - Accu-
mulated Loss - P/L Account ( Debit Balance )
From Overall Company's Point Of View [ Refer Que No. 2]
MVA = Value of the Company Bases On Free Cash Flows - Total Capital Employed or Amount Invested
10.WALTER 'S MODEL
CA Aaditya Jain
CA Aaditya Jain
All India Satellite Classes:
011-47665500
BUSINESS VALUATION-30
AADITYA JAIN SATELLITE SFM CLASSASS
Current Market Price ( Po) =
e
K
DPS
+
e
e
K
DPS) (EPS
K
r
11.GROWTH 'S MODEL
Po=
g K
DPS
e
1
or Po =
g K
g) 1 ( DPS
e
0

+
or
g K
b) EPS(1
P
e
0

=
12.MODIGLINI & MILLER VALUATION MODEL
n Po =
Ke 1
I E P m) (n
1 1 1
+
+ +
13.NET ASSET VALUE
Net Assets = [ Total Assets - Total External Liability ]
Net Asset Per Share =
g Outstandin Share Equity Of Number
Asset Net
Note : Total Asset and Total External Liability may be taken on the basis of Market Value , Liquidation
Value or Book Value as the case may be .
Note:If question is silent always use Market Value Approach
14.CHOP-SHOP APPROACH/BREAK-EVEN APPROACH TO VALUATION
The chop-shop approach suggests that the sum of the individual parts of a firm may be worth more than
the current value of the whole.
The chop-shop approach to valuation was first proposed by Dean Lebaron and Lawrence Speidell of
Batterymarch Financial Management.
The chop-shop approach involves three steps.
Step 1: Identify the firms various business segments and calculate the average capitalization ratios for firms
in those industries.
Step 2: Calculate a theoretical market value based upon each of the average capitalization ratios.
Step 3: Average the theoretical market values to determine the chop-shop value of the firm.
15.PRESENT VALUE OF EVA
PV Of EVA = EVA/Ko
QUESTION NOPAT = Rs.15 lakhs;Ko=10%;Capital Employed = Rs. 100 lakhs.Calculate PV Of EVA.
Solution : EVA = NOPAT - Capital Employed x Ko = 15 Lakhs - 100 Lakhs x 10 % = Rs. Rs. 5 Lakhs
PV of EVA = 5 /10 % = Rs. 50 Lakhs
CA Aaditya Jain
CA Aaditya Jain
All India Satellite Classes:
011-47665500
BUSINESS VALUATION-31
AADITYA JAIN SATELLITE SFM CLASSASS
16.PRESENT VALUE COMPANY BY USING EVA METHOD
Present Value Of Company Using EVA Method =
(

+
+
+
+
+
+
g Ko
EVA
Ko) (1
1
Ko) (1
EVA
Ko) (1
EVA
Amount Invested Current
Year3
2 2
2 Year
1
1 Year
Note:Assuming Growth Rate becomes constant after 2 years.
17.DETERMINATION OF THE CORRECT VALUE OF COMPANY
For determining the Correct Value Of Company we should always give importance to Market Value
weights and not Book Value weights.
18.VALUE OF EQUITY BASED ON CAPITAL EMPLOYED CONCEPT
g Ke
) g 1 ( FCFE
P
0

+
=
Where FCFE = Free Cash Flow For Equity
Calculation Of Free Cash Flow For Equity (FCFE)
EPS xxx
+Depreciation x Weight Of Equity xxx
-Capital Expenditure x Weight Of Equity xxx
-Increase In Working Capital x Weight Of Equity xxx
Cash Flow From Equity xxx
19.INCREMENTAL VALUE OF NEW STRATEGY
Incremental Value Of New Strategy = Value Of New Strategy - Value Of Old Strategy
20.VALUE BASED ON OPERATING ASSET & NON-OPERATING ASSET
Operating Cash Flow are those Cash Flow which are generated from day to day activity of a firm .
While determining Operating Cash Flow we do not take into account non-operating Cash Flow such as
non-trade investment income .
Valuation For Firm :
EBIT xxxx
Less : Non Operating Income xxxx
Operating Profit xxxx
Less : Tax xxxx
NOPAT xxxx
+ Depreciation xxxx
Operating Cash Flow xxxx
Discount Rate xxxx
Value Of Operating Assets xxxx
+Value Of Non Operating Asset xxxx [It will be given in question]
Total Value Of Firm xxxx
21. VALUATION OF COMPANY/FIRM
CA Aaditya Jain
CA Aaditya Jain
All India Satellite Classes:
011-47665500
BUSINESS VALUATION-32
AADITYA JAIN SATELLITE SFM CLASSASS
Value Of Firm = Value Of Equity + Value Of Debt
Note:Use Of Discount Rate
Value Of Firm Ko
Value Of Equity Ke
Value Of Debt Kd
22. EFFECT ON VALUE OF FIRM WHEN DIVIDEND IS PAID ACCORDING TO EVA VALUE
When Dividend is paid according to EVA Value,the Value of Firm will decrease as the Company could have
invested the same amount to earn higher return
23. BASIS OF ALLOCATION FOR FULLY & PARTLY PAID SHARREHOLDERS
PLZ REFER CLASS REGISTER FOR THIS CONCEPT
24. CALCULATION OF RANGE OF VALUATION
PLZ REFER CLASS REGISTER FOR THIS CONCEPT
25.TREATMENT OF SUNK/IRRELAVANT COST :
Only Relevant Costs are considered under Finance .Irrevant Costs or Sunk Cost should be ignored .
Example Of Sunk/Irrelavant Cost are Research & Development Cost,Allocated Fixed Cost etc.
26.BOOK VALUE VALUATION METHOD
Shares Equity Of Number
r Shareholde of Value Book Total
Share Per Value Book =
Shares Equity Of Number
Fund s r' Shareholde
=
Where Shareholder's Fund :
From Liability Side : Equity Share Capital + Reserve & Surplus + Retained Earnings - Accumulated loss -
P/L ( Debit balance )
From Asset Side : Assets less External Liabilities
27.VALUE OF EQUITY IN CASE OF EARLY REDEEMPTION OF BOND
PLZ REFER CLASS REGISTER FOR THIS CONCEPT
28.VALUE OF EQUITY WHEN APPLICATION OF PROBABILITY & JOINT PROBABILITY IS
USED
PLZ REFER CLASS REGISTER FOR THIS CONCEPT
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