BASIC VALUATION CONCEPT

SPECIFICALLY WITH REFERENCE TO CORPORATE

y

M.M.M ( SEM II ) 2011-2014. Subject : Financial Management Prof. Arun D. Chandarana

PRESERNTED BY GROUP :- 3
Roll No . 31 Sunil Sathe (Group Leader) Roll No . 25 Ganesh Orpe Roll No . 19 Prashant Mahamulkar Roll No . 15 Amol Jadhav Roll No . 24 Shyam More Roll No . 07 Satishkumar Biradar

'Valuation'
y The process of determining how much an asset, company, or anything

else is worth.
y Valuation is highly subjective, but it is easiest when one is considering

the current value of tangible & intangible assets. For example, determining how much a willing buyer will pay a willing seller for a house, right now is easier than determining the value of what a company's brand recognition might be in 10 years.
y The process of estimating the worth of something. y The estimated worth given to something.

Concept of valuation
y Going-concern value y Liquidation value y Book Value y Market Value y Bond Valuation y Discounted Cash Flow y Intrinsic Value

DCF

Going-concern value
y Going - Concern value is the value of a company sold as a y y y y y y y

continuing operation. Runs on assumption to exist for foreseeable future . Going concern value v/s asset / liquidation value = Goodwill. Plays major role in merger & acquisitions. Going concern value = entire company sold + intent to keep it running with new owner. Liquidation value = entire company sold + tangible asset sold off. Going concern value = liquidation value + intangible asset. Going concern value > liquidation value.

How it calculate
y One calculates the going-concern value by adding the value of its

goodwill and income to its net asset value. This is an important calculation when determining the appropriate purchase price in a merger or acquisition.
y A Discounted Cash Flow Business Valuation is generally used by

investors to calculate the Return on Investment (ROI) they would receive if they purchased the company. It is based on the present value (PV) of future cash flows.

Liquidation value
y The total worth of a company's physical assets when it goes out of

business or if it were to go out of business. Liquidation value is determined by assets such as the real estate, fixtures, equipment and inventory a company owns. y Intangible assets are not included in a company's liquidation value. Intangible assets include a business's intellectual property, goodwill and brand recognition. y If a company were to be sold rather than liquidated, both liquidation value and intangible assets would be considered to determine the company's going-concern value, investors will look at the difference between a company's market capitalization and its going-concern value to determine whether the company's stock is currently a good buy. y Liquidation value can also refer to the cash value of a single asset.

How it calculate
y The business liquidation value in itself is a very straightforward

calculation. It is arriving at a value for assets such as inventory, plant and equipment, vehicles, etc. that complicate the valuation. y You can see that the asset values dropped considerably up revaluation based on their worth on the open market. After liabilities have been paid off from the asset liquidation, shareholders are left with a Rs 60,000 loss.
Book Value Assets Cash Accounts receivable Inventory Fixed assets Rs15,000 Rs35,000 Rs50,000 Rs50,000 Liquidation Value Liabilities Rs15,000 Bank debt Rs23,000 Accounts payable Rs27,000 Rs25,000 Total liabilities Shareholders equity Rs90,000 Total liabilities and shareholders equity Book Value Rs30,000 Rs15,000 Liquidation Value Rs30,000 Rs15,000

Rs45,000 Rs105,000

Rs45,000 Rs45,000

Total assets

Rs150,000

Rs150,000

Rs90,000

Book Value
y The value at which an asset is carried on a balance sheet.

To calculate, take the cost of an asset minus the accumulated depreciation. y The net asset value of a company, calculated by total assets minus intangible assets ( non physical substance such as patents, goodwill) and liabilities. y Since book value is a more accurate measure of valuation for companies which aren't growing quickly, book value is of more interest to value investors than growth investors. y Book value is the accounting value of a firm. It has two main uses: 1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. 2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.

How it calculate
y Book Value = Assets - Liabilities y A company or corporation's book value, as an asset held by a

separate economic entity, is the company or corporation's shareholders' equity, the acquisition cost of the shares, or the market value of the shares owned by the separate economic entity.

y Book Value and Shareholder Equity are not quite the same thing.

To find a company's book value, you need to take the shareholders' equity and exclude all intangible items. This leaves you with the theoretical value of all of the company's tangible assets (those which can be touched, seen, and felt). For this reason, book value is sometimes also called "Net Tangible Assets".

Market Value
y Market value is the estimated amount for which a property should

exchange on the date of valuation between a willing buyer & a willing seller in arm s-length transaction after proper marketing where in the parties had each acted knowledgeably prudently & without compulsion referred to as "total market value".

y The market capitalization plus the market value of debt. Sometimes y In the context of securities, market value is often different from book

value because the market takes into account future growth potential. Most investors who use fundamental analysis to pick stocks look at a company's market value and then determine whether or not the market value is adequate or if it's undervalued in comparison to it's book value, net assets or some other measure

How it calculate
y There are many or at least several ways but one of the most

popular is a multiple of earnings per share based on there history of earnings as a percentage of there market price (i.e. earnings are historically about 3% 0f there share market price or If the earnings are Rs3.00 per year the market price would be maybe 15 times 3 0r Rs45.00 per share. Some use 10 or 15 or something in between based on projected earnings

Bond Valuation
y A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.. y A technique for determining the fair value of a particular bond. Bond valuation includes calculating the present value of the bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for an investment in a particular bond to be worthwhile y Bond valuation is only one of the factors investors consider in determining whether to invest in a particular bond. Other important considerations are: the issuing company's creditworthiness, which determines whether a bond is investment-grade or junk; the bond's price appreciation potential, as determined by the issuing company's growth prospects; and prevailing market interest rates and whether they are projected to go up or down in the future.

How it calculate
y Here is the formula for calculating a bond's price, which uses the

basic present value (PV) formula:

C = coupon payment n = number of payments i = interest rate, or required yield M = value at maturity, or par value

Discounted Cash Flow DCF

y A valuation method used to estimate the attractiveness of

an investment opportunity. A Discounted Cash Flow Business Valuation is generally used by investors to calculate the Return on Investment (ROI) they would receive if they purchased the company. It is based on the present value (PV) of future cash flows. y Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. y Discounted cash flow is also known as Time Value Of Money

Characteristics of DCF Valuation

y Forward looking and focuses on cash generation y Recognize time value of money y Allows operating strategy to be built into a model y Only as accurate as assumptions and projections used y Works best in producing a range of likely values

How it calculate

Intrinsic Value
y The actual value of a company or an asset based on an

underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value. look at both qualitative (business model, governance, target market factors etc.) and quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation

y For example, value investors that follow fundamental analysis

How it calculate
y The intrinsic value for an in-the-money option is calculated as the y y y y y

absolute value of the difference between the current price (S) of the underlying and the strike price (or exercise price) (K) of the option, floored to zero. For a call option IVcall = max{0,S K} while for a put option IVput = max{0,K S} For example, if the strike price for a call option is Rs 1 and the price of the underlying is Rs 1.20, then the option has an intrinsic value of Rs 0.20.

Thank you .!!!