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Sales Operating Cost EBITDA Interest EBTDA Tax Cash Flow Capex Change in WC FCFE Discount rate Terminal

Value PV of Cashflows Enterprise Value

2008-09 3800 3496 304 30 274 55 219 76 55 88 12%

Y1 Y2 Y3 Y4 2009-10 2010-11 2011-12 2012-13 4560 5472 6566 7880 4241 4925 5778 6698 319 547 788 1182 32 55 0 0 287 492 788 1182 57 98 142 213 230 394 646 969 91 109 131 158 66 79 94 113 73 206 420 698 12% 12% 12% 12% 65 164 299 444

VALUE OF THE FIRM

Net Debt Enterprise Value to Equity Holders Number of Shares Outstanding Fair Price of the Stock

308 3.Y5 2013-14 9456 7848 1607 0 1607 289 1318 189 136 993 12% 563 12% 21251 12058 13594 166.75 13427.389.025 uity Holders standing .48 44.

Cash) /EBITDA Price/Book Market price per share/ Book Value per share EPS PAT/No.Ratio P/E Ratio Trailing P/E ratio Formula Market price for share/Trailing EPS Forward P/E ratio Increase in P/E Decrease in P/E Market price for share/Forward EPS PEG Ratio P/E / Annualised rate of expected earnings growth EV/EBITDA (Market Value of Equity + Market Value of Debt . of outstanding shares .

In India today. Example: Companies that tend to be in the news as an acquisition target will usually trade at a premium. A stock may have lower price/book ratio due to weak earnings growth prospects. the public sector banks trade at a much lower P/B ratio than the private sector banks. Indicates the price per estimated EPS over next year. Book Value is the value at which shareholder's equity is carried on balancesheet.Sales/Sft is used in the retail industry This measure allows for comparison across companies and time . Indicates market price per EPS over last year. PEG of 1 indicates a fairly valued stock. EV/reserves is used to value mining companies.EV is not affected by capital structure as both equity and debt are included in our calculations. EV is the takeover price that an acquirer needs to pay incase of an acquisition. There are some valuation ratios that are industry specific: Enteprise Value/Screen is used to value multiplexes. This is backward looking ratio. Expansion or re-rating Contraction or de-rating For a growing company in a fairly valued situation the P/E ratio ought to be equal to the rate of EPS growth.Explanation Price that investors are ready to pay for each unit of profit earned over the previous four quarters. Usage in Valuation Expected Market Price = Forecasted EPS * Weighted P/E Forecasted Market Price= CMP*( Current P/E/Future P/E) P/E Relative = Company P/E/(Index P/E) Pg 159-162 of Reference Textbook.

PSR (Price to Sales Ratio) .

Current Market Capitalisation /Historical revenues of previous 12 months .

PSR= Market Capitalisation/ One year revenue Market Capitalisation = Shares Outstanding * Current Market Price+ Current Long Term Debt .

FREE CASH FLOW TO EQUITY METHOD(FCFE) EBIT Less Interest Less Tax Plus Depreciation Less Capex Less Working Capital Changes Less Principal repayments Plus Proceeds from new debt FCFE Example Equity Method Income Expenses Interest Tax@35% CF to Equity PV of Equity Value FCFF Method Tax CF to Firm PV of CF Year 1 24409 45331 45331 ABC Limited cost to equity is 15% and growth rate of 20% Year 2 Year 1 204800 135060 2450 23551.8 54397.8 52486.5 43738.2 45640.5 43738.FCF FCF constitute the money earned from operations that a business an use without any constraints This approach assumes that the growth is constant forever and that the cost of capital will not change over time.3642 Year 2 29290.8421 0.2 47716.5 186698.14 245760 162072 2940 28261.17391 .

2548 Year 4 42178.FCF= Operational Cash Flow.16 62983.968 52871.128 49695.752 78331.5293 Year 4 353894.5 43738.4 3528 33914.Capital Expenditure Value = C /(1+d)^n where n is life of company or asset Cash flow per share = Discounted CF/Number of outstanding shares Terminal Value in year n = Cash flow in year (n+1)/ d-g where d= discount rate of cash flows and g is the stable growth rate of cash flows 23551.84 .64 50228.6 40696.992 75580.44 47624.4 233383.16101 Year 3 35148.5 245760 Year 3 294912 194486.68 4233.96 65276.

Replacement Cost Method 3. Book Value Method 2.Book Value= Total Assets . Liquidation Method .Long term debt / Number of outstanding shares Price to book value ratio Value of Equity= Average P/BV ratio over the years* Present Book Value per share 1.

CONSTANT GROWTH MODEL Dividend Per Share Payout ratio Retention Rate High Dividend Yield implies that the share has been underpriced in the market.5 ratio Dividend(%) 40 50 50 60 40 50 50 60 70 40 50 60 70 80 90 96 102 110 120 130 160 Year End 199106 199206 199306 199406 199506 199606 199706 199806 199906 200006 200106 200206 200306 200406 200506 200612 200712 200812 200912 201012 201112 . Dividend Yield DIVIDEND GROWTH MODEL Bonus Share in 1994 in 1:2 ratio Dividend Growth Of Ambuja Cements Bonus Share in 1999 1:2 ratio Bonus Share in 2006 1:1. Whenever company ploughs back profits to settle loans or for expansion programs the yield will be low.

Dividend Growth (historical) Cost of Equity Average Retention Ratio Dividend Growth (Sustainable) .

D1 denotes the estimated dividend to be paid for the share one year ahead and k is the discount rate V= D1/ r-g where g = retention rate * cost of equity DPS= Total dividend payment/ Number of shares outstanding Payout Ratio = Dividend per share/ EPS*100 Retention Rate = 1.Rf historical avg.82 Cost of Equity= Rf current + Beta(Rm .) .V= D1/k where V is current value of security.Payout ratio DPS/Market price(cum dividend) per share *100 Beta is 0.

22 .18 15% 63% 17.

1.It also allows for comparison of firms that are reporting operating losses and diverge widely.B.RELATIVE VALUATION Price/earnings ratio (P/E) Price/cash flow ratio (P/CF) Price/Book value ratio (P/BV) Price/sales ratio (P/S) Price/ Replacement Cost of assets Indicates the price per rupee of share earnings.Highest market share Stronger trades at a higher premium Weaker trades at a discount Comparing it to the average or median value of the multiple for its peers. Premiums and Discounts to multiple However homegeneous an industry appears each company always has certain competencies which differentiate it from the r Example : Two companies in the same industry could have different features: Co. .A. Identify the right peer set 2. Helps investors compare the prices of stocks having different eps. Commonly used for a shorter period of time valuation exercise and relative ease. Identify the right multiple ratio 3.twice the debt level than its peers Co. Enterprise Value/ EBITDA This is typically used in large infrastructure projects where operating income can be largely reduced by depreciation.

hich differentiate it from the rest of the pack. .

This is used on an after tax basis since tax is deductible on interest on debt. Effective rate of interest of existing long term debt of the company.Cost of capital should be based on current market conditions so we must use market value of equity and debt as weights. Cost of Debt Cost of Equity Effective tax rate . Based on market conditions the WACC can change. Measures the average tax paid across all the income generated by a firm. Rate of return that stockholders in the company are expecting to make when they buy its stock. It is usually lower than the tax rate.WACC Average cost of equity and after tax cost of debt weighted by market values of equity and debt.

kd= rate of interest(1-Tax Rate) ke=Rf+ Beta(Rm-Rf) .

P(t)+D/ P(t) or r = Price Change + Cash Dividend/ Purchase Price *100 *(1+r1)(1+r2)…(1+rn)+^1/n-1 Exercise 1 Exercise 2 Geometric Mean .r= P(t+1) .