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VALUATION TECHNIQUES
SUBMITTED BY:-
DIVYA GUPTA
MBA-IB III SEM
Introduction
Valuation is the device to assess the worth of
the enterprise which is the subject to merger
or takeover so that consideration amount
could be quantified and the price of the one
enterprise for the other could be fixed. Such
valuation helps in determining the value of
the shares of the acquired company as well as
acquiring company.
Need for Valuation
Valuation is needed to enable shareholders of
both the companies, to take decision in favour
of amalgamation and once they are satisfied
and have approved it with requisite majority,
the court approves the same while
sanctioning their scheme of amalgamation
because it is in the interest of shareholders
which will suffer in the event of wrong
valuation.
Valuation answers
1. What is the maximum price that should be paid to the
shareholder of the merged company?
2. How is the above price justified with reference to the
value of assets, earnings, cash flows, balance sheet
implications of the amalgamation?
3. What should be the strength of the surviving
company reflected in market price or enhanced
earning, capacity with reference to the acquirers
strategies, plans, management perception and
potential market benefits to justify the consideration
of the merged company either in cash or in terms of
exchange of shares?
Basis of Valuation
1. Assets value
2. Capitalised earnings
3. Market value of listed stock
4. Investment value
5. Book value
6. Cost basis valuation
7. Reproduction cost
8. Substitution cost
Basis of Valuation
1. Assets value
2. Capitalised earnings
3. Market value of listed stock
4. Investment value
5. Book value
6. Cost basis valuation
7. Reproduction cost
8. Substitution cost
Valuation of listed companies Valuation of unlisted companies
• Shares of listed companies • A representative P/E ratio of
are quoted at stock a group of quoted
exchange and are available companies can be taken
openly. after suitable adjustment.
• Market price of the shares • Other factors to be taken
reflect their value. into consideration are
1. Company analysis
2. Industry analysis and high or
low growth industry
Modes of Valuation
1. Valuation based on earnings
2. Valuation based on assets
3. Discounted cash flow method
Valuation based on earnings
• Here the pre-determined rate of return expected by
investor on investment is used which is equal to
simple rate of return on capital employed.
• From the earnings, last declared by the company,
the items such as tax, preference dividends, are
deducted and net earnings are taken for calculation.
• This valuation is based on past performance of the
company. Whereas , reliable forecast of future
earnings is necessary.
Valuation based on earnings
A. Earnings Analysis: Short-Term View Point
(Note:- Target company’s P/E ratio is exit ratio and higher the ratio means the acquirer has
to pay more. If the exit ratio of target company is less than of the acquirer then
shareholders of both companies benefit.)
Case
Before Takeover After Takeover
EPS 10 10 10.91
P rT
Where, V T
V= Valuation c
T= Net tangible assets
P= Maintainable future profits
r= Normal return expected on assets
c= Rate at which super normal profits are realised
X 1( I T ) I X 2( I T 2) I 2 Xn(1 Tn) In
Vo ...
(1 K 1) (1 K 1)(1 K 2) (1 K 1)(1 K 2)...(1 Kn)
Valuation on assets basis
3. Other Approaches
iii. Capital Budgeting Basis for Valuation
X 1( I T ) I X 2( I T 2) I 2 Xn(1 Tn) In
Vo ...
(1 K 1) (1 K 1)(1 K 2) (1 K 1)(1 K 2)...(1 Kn)
Where,
X = Cash Inflows
I = Investment
K = Cost of Capital
T= Rate of Tax
Valuation on assets basis
3. Other Approaches
iii. Capital Budgeting Basis for Valuation:- It is known for planning
expenditures of capital assets which provide return over a
period of time. Even outlays on advertising and promotions,
R&D providing benefits over a period of time are included in
capital budgeting.
X 1( I T ) I X 2( I T 2) I 2 Xn(1 Tn) In
Vo ...
(1 K 1) (1 K 1)(1 K 2) (1 K 1)(1 K 2)...(1 Kn)
Where,
X = Cash Inflows
I = Investment Note:-Frequently in
K = Cost of Capital vogue in USA and other
T= Rate of Tax developed nations.
Case in million
CFt
• Where, = anticipated revenue in year ‘t’
k is discounting rate
g is growth rate of revenue
Questions
• Different modes of valuation.
• Different method of valuation on the assets
basis
• What is open market valuation technique?
• What is capital budgeting?
THANK YOU