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V l ti
Valuation
IntroductiontoValuation
Prof.PitabasMohanty
Content
Module1:TheoryofDCFValuation(5Sessions)
M d l 1 Th
f DCF V l ti (5 S i )
Module2:PracticeofDCFValuation(56Sessions)
Module3:RelatedIssues(4Sessions)
M&AValuation
PrivateCompanyValuation
VentureCapitalValuation
Module4:NonDCFValuation(3Sessions)
MultiplierMethods
RealOptionsMethod
ClassTestsin2sessions
Session5or6(Quiz1)
Session12or13(Quiz2)
GroupProject
Groupsizeof5.Eachgrouptovalue2companiesfromthesamesector.Atleast
oneIndiancompany.
SubmissiontobemadewithinaweekafterModule2isover.Thegroupwill
S b i i t b
d ithi
k ft M d l 2 i
Th
ill
looseonegradepointforeveryweeksdelayedsubmission.
Yourgroupmaybeaskedtomakeasurprisepresentationoftheinterimprogress
reportintheclass.Randomlyselectedmembersofthegroupmaybe
interviewedtoknowtheprogressmadeintheproject.
CourseMaterial
Photocopiesofmybook(tobepublished)
ClassSlides(Canbedownloadedfrommywebsite)
Project:25%
ClassAttendance:10%
5marksforclassattendance(@1markforeveryclassattendedforwhich
attendance is taken)
attendanceistaken)
Endterm:35%
Additionalassignment(shortpaperfortheFPMstudents):25%
Meetmeinmyofficeseparatelyfordetails.
Code of Conduct
Nocellphonetobeused.
N
ll h
t b
d
Ifyouarefoundusingaphone,phonewillbeconfiscated.
Nocopyinginquizzes,examsandproject.
Allreferencesmustbeappropriatelyreferencedattheendofthepage(ina
ll f
b
i l
f
d
h
d f h
(i
footnote).
Ifyouhavecopiedandpastedapicturefromawebsite,thesourceofthe
website(anddateaccessed)mustbeputnexttothepicture.
Norequestforpostponementof
Quizzes
Submissionofdeadlines
Ifyourequestforextensionofdeadlineorpostponementofquizzes,
youwillgetFinthatparticularcomponent.
To Understand Company
p y Valuation You
Must be an Expert in
CorporateFinance
C
t Fi
TimeValueofMoney
RiskandReturn
Stock and Bond Valuation
StockandBondValuation
CapitalStructureTheory
FinancialAccounting
IndustrialEconomics
I d t i lE
i
Statistics(RegressionAnalysis)
RelativeValuationMethod
AlsoknownasMultiplierMethod
l k
l i li
h d
RealOptionsValuationMethod
CostMethod
Examples
Sales
Earnings
BookValue
MarketValue P/S
P/E
P/B
HP
$84,229
$7,264
$38,526
$115,700
1.37
15.9
3.0
Lenovo
14,590
161
1,134
6,381
0.44
39.6
5.6
Dell
61 133
61,133
2947
3 735
3,735
R
Recap
off DDM and
d MM
BusinessAnalysisandValuation(BAV)
Investorisdiversified
Investor
is diversified
rremainsconstantovertime
Neitherassumptionisneeded.Buttheysimplifythecalculations.
risnormallycomputedusingCAPMequation.
ristherequiredrateofreturn andnottheexpectedrateofreturn.Inan
efficientmarket,onecan,ofcourse,usethesetwotermsinterchangeably.
Example:ExpectedP1(exdividend)=$105.ExpectedD1=$5.Youneedaminimum
returnof10%fromthestockbasedonitsrisk.Thisistherequiredrateofreturn.Sothe
maximum price you should be willing to pay for the stock today is $100 Suppose the
maximumpriceyoushouldbewillingtopayforthestocktodayis$100.Suppose,the
stockisundervaluedandtradesat$90.Thenyourexpectedreturnis20/90=22.22%.
Constant Dividend
An Example
Example contd
Example,
contd.
Iftheexpectedgrowthrateis0,thenthepayoutratiowillbe100%.
If th
t d
th t i 0 th th
t ti ill b 100%
Theexpecteddividendpersharewillbe$10.Thepricewillbegiven
by:P0=10/0.2=$50pershare.
SincetheROEandtherequiredrateofreturnrareequal,growth
Since the ROE and the required rate of return r are equal growth
willhavenoeffectonthestockprice.
BookValuepershareisdefinedasNetWorthdividedbythenumber
of shares
ofshares.
Forthiscompany,thebookvalueisgivenby:$100million/2million=
$50pershare.Sincethepriceisalsoequalto$50pershare,the
price to book ratio is 1
pricetobookratiois1.
Infact,whenevertheROEandrareequal,thePBVratiowillequal
1.Thatiswhy,1issometimesusedasthebenchmarkPBVratio.
Year0
Year1
NW0 (1)
NW0 + PAT1(1b1)
(5)
Year2
Return on Equity*
ROE1 (2)
ROE2 (6)
Net Income
PAT1 =
(NW0 ROE1) (3)
PAT2= [NW0+PAT1(1
b1)]ROE2 (7)
Payout Ratio
b1 (4)
b2 (8)
ROE 2 (1 b1 )
NW0 ROE1
( ROE 2 ROE1 )
...2(5a )
ROE1
ThetrickistofindtheimpliedretentionratiobydividingtheprojectedROE
withthegrowthrate.Thencomputethepayoutratioandfinallyprojectthe
dividend.
dividend.
DPS
g
Price
2014
63
1 180 83
1,180.83
2015
2016
2017
2018
2019
2020
70.0196 79.69573 91.00455 103.9181 118.6641 125.7839
11.14% 13.82% 14.19% 14.19% 14.19%
6.00%
1648 89
1648.89
2014
63
DPS
g
Price
1,180.83
ROE
25.83%
EPS
186.49
P
PayoutRatio
R i
0.3378197
0
3378197
DPSAdjusted
63
CorrectIntrinsicValue
2,416.35
2015
2016
2017
2018
2019
2020
70.0196 79.69573 91.00455 103.9181 118.6641 125.7839
11.14% 13.82% 14.19% 14.19% 14.19%
6.00%
1648.89
25.83% 25.83% 25.83% 25.83% 25.83% 25.83%
207.2691 235.912 269.3879 307.6141 351.2645 372.3404
56 86% 46.50%
56.86%
46 50% 45.06%
45 06% 45.06%
45 06% 45.06%
45 06% 76.77%
76 77%
117.86
109.70
121.40
138.62
158.29
285.85
3,747.18
Example of NPVGO
ThenetworthofZLimitedason31.3.2015isRs.100million.TheROEis
20%.Therefore,theprofitaftertaxfortheyearended31.3.2016is
Rs.20million.Therequiredrateofreturnis16%.Thereare4million
shares outstanding
sharesoutstanding.
ThevalueofthestockisRs.31.25intheabsenceofgrowth.
ThevalueincreasestoRs.34.09iftheprojectedgrowthrateis5%.
SotheVGOisgivenby:
VGO=Rs.34.09 Rs.31.25=Rs.2.84
ThisisactuallyequaltothepresentvalueoftheNPVsofthenewprojectsthe
co pa y s go g to est to ac e e 5% g o t .
companyisgoingtoinvestintoachieve5%growth.
Some Terminology
Valueorenterprisevalue?
V l
t
i
l ?
Businessriskandfinancingrisk
Unleveredcostofequity(unleveredbeta)
Leveredcostofequity(leveredbeta)
MM without Tax