CORPORATE VALUATION

Methods Of Business Valuation

Presented by :
Umesh Shinde – 49
Krunal Joshi – 22
• 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 easy
enough, getting your business valuation done
right takes preparation and thought.
 Concepts of Value
• Book Value
• Market Value
• Intrinsic Value
• Liquidation Value
• Replacement Value
• Salvage Value
• Goodwill Value
• Fair Value
 Approaches - Methods
• There are three fundamental ways to measure
what a business is worth: -
• Asset Approach
• Market Approach
• Income Approach

• Under each of the three broad approaches to business valuation, there are a number
of procedures, called business valuation methods, which you can use to calculate
the business value.
 ASSET-BASED APPROACH
• 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
 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
• Additional Information. (In Terms of Lakhs)
• Market Value of Fixed Asset – 150
• Stocks – 110, Debtors – 55,
• No Dividend Yet

• Liquidation Cost of Fixed Asset – 100

• Stocks – 80, Debtors – 40,
• Liquidation Cost incurred – 20.

Find Book Value, Market and Liquidation Value

Example Company Valuation :-
• Book Value – 102.00 NAV
• Market Value – 126.67 NAV
• Liquidation Value – 50.00 NAV

This Approach indicates Net Asset Per Equity

Also,
It ignores Future Earnings / Cash Flow ability
of the Company’s Asset.
 MARKET APPROACH
• It relies on signs from the real market price to
determine what a business is worth.
• Economic principle of Competition 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
• Fair Value Method
Fair 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 fair
market 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.

• MVA Method
Market Value Method is a new technique to measure the value , This approach
measures the change in the market value of the firm’s equity vis –a – vis equity
investment.
MVA = Market value of Firm’s Equity - Equity Capital Investment / Funds
OR
• MVA = Total Market Value of Firm’s Securities – (Share Capital + Debentures)
 Example of MVA
• Krunal Industries has equity market
capitalization of Rs.200 Crore for current year,
further it has a equity capital of Rs.111 Crore
its retained earnings are Rs.35 Crore. Find
MVA
MVA = 200 – (111+35) = Rs.45 Crore
 INCOME APPROACH
• 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 firm’s potential of future
earnings or cash flow generating capacity.
 Income Valuation Methods
• Capitalization of Earnings ‘OR’ Cash Flow
• Discount Cash Flow (DCF)
• Weighted Average Cost of Capital (WACC)
• Build Up Method
 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 be
arrived.
• Earning Capitalization method is guided by the
Economic proposition of business valuation
should related to future earnings of the firm.
• Example of Capitalization 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
Labour Cost – Rs.10
Allocated Fixed Cost – Rs. 5
Additional Fixed Cost – Rs.8 @ Capitalization rate 15%.

A Firm wants to value with Capitalization Method.

 DCF METHOD
• Discount Cash Flow Method measures the
value of equity shareholder wealth
• It concentrates on cash generation potential of
a 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
• 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?
 WACC
• The weighted average cost of capital is an approach
to determining a discount rate.
• WACC method determines the subject company’s
actual cost of Capital
• It calculates the weighted average of the company’s
cost of debt and cost of equity
 Build-Up Method
• The Build-Up Method is a widely-recognized
method of determining the after-tax net cash
flow discount rate, which in turn yields the
capitalization rate.
• The figures used in the Build-Up Method are
derived from various sources. This method is
called a “build-up” method because it is the
sum of risks associated with various classes of
assets