VALUATION of Enterprise

I need assistance P/E Ratio

Gordons Model

CAPM

DCF

Dividend Growth Model

Net Asset Value

Liquidation Value Method EV

What is Valuation?

What is Valuation?
Valuation is the first step toward intelligent investing. The object of investment is to find assets that are worth more than they cost Valuation is the process of estimating how much an asset is worth Valuation encompasses many considerations how the value of an asset is determined why the asset has a certain value, and not a higher or lower one how to compare asset values, as a basis for investment decision making

Reasons for Valuation

Reasons for Valuation

M&As Buyouts ESOP Estate Planning Keyman Life Insurance

Financing by Potential/New Investors

Who Uses Valuation

Who Uses Valuation

Investors (Active & Passive) Financial Analysts Chartists Traders Market Timers

Efficient Marketers

Concepts of Value

Concepts of Value
Net Book Value Adjusted Book Value
Replacement Value Liquidation Value

APPROACHES TO ASSET VALUATION

Balance Sheet Value method
(Net Book Value Method).

Adjusted Book Value method. Liquidation Value method. Replacement Cost method.

BALANCE SHEET METHOD

Net Book Value

Value of a asset will be represented by the book value reflected in the balance sheet.
Vo = [Total
assets at balance sheet values Total Liabilities(excluding networth) ] divided by Number of ordinary shares issued

Or, Vo = Share Capital + Reserves and Surplus Number of ordinary shares issued

BALANCE SHEET METHOD

Net Book Value

ILLUSTRATION:
The balance sheet of Ahuja Ltd shows share capital of Rs 100 crores. (10 CRORE SHARES OF Rs 10 Each) and reserves and surplus of Rs 100 crores. Estimate the value of the firms equity shares.

BALANCE SHEET METHOD

Net Book Value

SOLUTION:
Share Capital = Rs.100 Crs (10 crs shares of Rs.10 each). Reserves & Surpluses = Rs 100 Crs. Net Book Value = Rs. 200 Crs (100 Crs + 100 Cr) NBV per share = 200 Crs/10 Crs shares = Rs. 20 per share. One can compare NBV with the going market price while taking investment decisions.

BALANCE SHEET METHOD

Net Book Value

LIMITATIONS:
It does not take into account the future earning capacity of the business. It does not take into account the present value or the change in the historical value of the asset over a period of time as the valuation is based on the historical value of the assets. Technological advances renders some of the existing assets worthless which is not accounted for in this model. These limitations of the NBV method is somewhat rectified by the Adjusted Book Value method of valuation.

ADJUSTED BOOK VALUE METHOD

Improvement Over NBV

It involves determining the FAIR MARKET VALUE of the assets and liabilities of the firm as a going concern. Assets are not taken at historical costs but are valued at market price.

This fair market value of an asset can be determined by either Replacement Cost method, or Liquidation Value method.

REPLACEMENT COST METHOD

For Adjusted Book Value

The value of business is arrived at by determining the current cost of putting up similar facilities or buying similar assets.

Net book values are substituted by current replacement costs.

The Table on the next page illustrates how replacement costs for various assets are considered.

REPLACEMENT COST METHOD

For Adjusted Book Value

Debtors
Inventories

Valued at Face Value. Provide for bad debts if doubtful.

R.M. at most recent cost of acquisition WIP at Cost of R.M + Cost of processing FG at Realizable S.P (holding, transport & selling costs) Other C.A. like deposits, prepaid expenses and accruals valued at Book Value (Land, P&M, Buildings valued at Market Price ) + (transportation, installation & selling expenses if any).

Other C.A. Fixed Assets

Nonoperating assets

Financial securities, excess land & buildings valued at Fair Market Value

Replacement Cost per share

Total assets at replacement cost

Total liabilities (excluding networth)

No. of Outstanding shares

LIQUIDATION VALUE METHOD

For Adjusted Book Value

For approximating the fair market value of the assets on the balance sheet of a firm is to find out what they would fetch if the firm were liquidated immediately
The value of the business is arrived at by totaling up the realizable value of various assets of the unit minus the liabilities.

LIQUIDATION VALUE per share

The value realized from liquidating all the assets of the firm.

Less amount paid to all the creditors and preference share holders

No. of outstanding shares

LIQUIDATION VALUE METHOD

For Adjusted Book Value

LIMITATIONS:
This approach is relevant mainly for sick units that are beyond redemption. It is not suitable for going concerns as instead of valuing the company as a whole, it values it as a collection of assets to be sold individually. One of the major drawback of this model is that it does not take into account the future earning potential of the firm and just concentrates on the liquidation costs of the assets.

Enterprise Value (EV)

Measure of what the market believes company's ongoing operations are worth a

Enterprise value discusses the aggregate value of a company as an enterprise rather than just focus on its current market capitalization.

Enterprise Value (EV)

Equity value
Market value of shareholders equity (shares outstanding x current stock price)

Enterprise value
Measure of what the market believes a company's ongoing operations are worth Market value of all capital invested in the firm
Equity, debt (short-term and long-term), preferred stock, minority interest

Assets

Liabilities

Equity
Enterprise Value

Debt

Preferred Stock Minority Interest

Calculating EV
To calculate enterprise value, we start with a company's market cap, add debt (on a company's balance sheet), and subtract cash and Equivalents (on the balance sheet). To get total debt, add together long-term and short-term debt. Market Cap = Current share price * Total shares Outstanding

Debt

= Long Term Debt + Short Term Debt

E V = Market Capitalization + Debt Cash & Equivalents

Example
Tata Steel Ltd. Total shares Outstanding

55,34,72,856

Current share price (Rs.) = 347.70 Long-Term Debt (Rs. In 000 crores) = 24,681.80 Short-Term Debt (Rs. In000 crores) = 2,715.20 Cash & Equivalents Rs(in 000 crores) = 2,467.20 Market Cap = (55,34,72,856*347.70) In 000 crores = 19,244.25 Enterprise Value = 19,244.25 +(24,681.20 +2,715.20) 2,467.20 = Rs 44,173.45 thousand crores

EV/ Sales
Ratio measures the total company value as compared to its annual sales
A high ratio means that the company's value is much more than its sales. When valuing companies that do not have earnings, or that are going through unusually rough times

EV/ EBITDA
Higher the number, the more expensive the company is.
Best way to use EV/EBITDA is to compare it to that of other similar companies

Discounted Cash Flow Valuation

What is it: In discounted cash flow valuation, the value of an asset is the present value of the expected cash flows on the asset. Philosophical Basis: Every asset has an intrinsic value that can be estimated, based upon its characteristics in terms of cash flows, growth and risk.

Discounted Cash Flow Valuation

Information Needed: To use discounted cash flow valuation, you need
to estimate the life of the asset to estimate the cash flows during the life of the asset to estimate the discount rate to apply to these cash flows to get present value

Market Inefficiency: Markets are assumed to make mistakes in pricing assets across time, and are assumed to correct themselves over time, as new information comes out about assets.

Discounted Cashflow Valuation

where, n = Life of the asset CFt = Cashflow in period t r = Discount rate reflecting the riskiness of the estimated cashflows