Estimating Equity Value Per

Share
Aditya Jadhav

TAPMI
Value of Equity Holdings from
Operations
FCFE Valuation Approach

FCFF Valuation Approach Value of Debt

Value of Debt to be same as used for
calculating WACC and should reflect market
expectations
Equity Value Per Share
Eq. value per share = Value of Equity/ no. of
equity shares

But equity value per share is impacted by:

Value of non-operating assets

Dilution
Non-operating assets
Cash & Cash Equivalents

Risky security investments

Holdings in other firms

Other non-operating assets
Cash & cash equivalents
How much cash does a firm need for
operations?

Industry: Organized or unorganized

Tax issues

Economy: Developed v/s under-developed
Non-operating Cash holdings
Consolidated valuation v/s separate valuation
Cash to be discounted at cost of capital/ cost of
equity?
Beta for excess cash holdings?

When will you discount cash
Idle cash not generating market returns?
Management discretion on use of cash?
Risky Securities
Investment in risky securities:
1. Higher Returns:
Valuation: Market Value

2. Undervalued Securities:
Higher Returns than Market Returns?
Valuation: Market Value
Risky Securities
3. Strategic Investments:
Made to forge relationships with other firms
Synergies to be incorporated in operating asset
values
Valuation: Market Value

4. Business investments: Shares pledged by
parties during course of business.
Valuation: Market value
Holding in Other Companies
Minority Passive Investments:
1% to 20%

Minority Active Investments
20% to 49%

Majority Investments
>=51%
Minority Passive Investments
Held till Maturity
Book value + present value of gains

Investments available for sale
Market value

Trading Investments (short-term)
Market value
Minority Active Investments (MAI)
Recorded at book value as holding in
associates
Income/losses recorded in income statement.
Tax as per the regulations.
Dividends received recorded in cash (post tax)
Retained income through holding of
associates added to book value.
Income/losses will transfer to reserves.
Valuation of MAI
Value parent company separately (stand-
alone).
Value associate separately
Calculate equity value of subsidiary
Calculate proportionate equity holding value
Add to value of parent company
Majority Active Investment
Consolidated Accounts
Minority Interest shown in the liability side.

Value parent company separately (stand-
alone) and add value of subsidiary holdings.

Valuation of minority interest according to
minority active investment valuation

Majority Active Investment
Valuation Approach for Subs. Hold. 1:
Find value of Firm and deduct value of minority
holdings.

Valuation Approach for Subs. Hold. 2:
Value subsidiary separately
Calculate equity value of subsidiary
Calculate proportionate equity holding value

Approach selection based on type of economy &
governance issues.
Other non-op assets
Unutilized land and other facilities

Identify unutilized assets

Deduct their book value and other benefits while
calculating value of operations

Find their market value and add to value of
operations.
Other non-equity Claims
Expected liabilities from law suits

Under-funded pension liabilities

Deferred tax liability
Value of Equity per share
(Value of Equity from Operations + Value of
excess cash + Value of risky investments + Value
of holdings in other companies + Value of non-
operating assets)
_______________________________________
No. of shares


No. of shares
Impacted by Dilutions
Convertible debentures & Convertible Preference
Shares
Management and Employee Options
Dual Class Voting Shares
Find the number of new shares that can be
issued.
Add to existing shares to arrive at diluted number
of shares to be used to identify value per share.
Dilution
Convertible debentures & Convertible
Preference Shares
When will they be converted?
Proceeds from conversion if any? (to be added to
FCFF/FCFE)
Tax savings if converted at discount? (to be added
to FCFF/FCFE)
No. of new shares added
Dilution
Management and Employee Options
Exercise of options can lead to dilution.
Identify options that might be exercised (In-the-
Money options)
Proceeds from exercise if any? (to be added to
FCFF/FCFE)
Tax savings if exercised at discount? (to be added
to FCFF/FCFE)
Add these new shares issued

Dilution
Dual Voting Class Shares
What type of voting structure permitted?
How much is the premium or discount?
In case you are aware of the discount then:

Value per share =
Status Quo Equity Value / (No. of regular shares +
(discount factor) x no. of lower voting right shares)

Dilution
In case discount/premium not known:
What type of voting rights?
Find out whether the firm will be an acquisition
target?
If yes then what will be the value added post
acquisition?
Status Quo value/Total Shares = Value of non voting
share;
Value added per share/No. of voting shares =
Premium
Value of voting share = Value of non-voting share +
premium
Thank you & Questions