Valuation Steps

1. First Read the assumptions (it should include terminal growth rate, YOY growth rate (both
pre and post current year), Risk free rate, tax, interest, WACC %, Working Capital %).

Terminal growth rate varies if you are from buyer side or target company side, 0% or max %
growth rate assume depending on your position.

COGS is calculated = Opening stock +Purchases – Closing Stock. After this compute with sales
to find the %. Take average of % from all the year and then taking average of these to find
out the estimated % for the next estimated years.

Depreciation rate will be given or Calculate depreciation from SML method or Double
Declining Balance Method. Then % with sales and the proportions to find the estimated
years.

2. Once you know the YOY growth rate – both pre and post current year, you get predict the
sales and till EAT/PAT.
3. If working capital is not given as a percentage, use the formula, Total Current Assets- Total
Current Liabilities = Net Working Capital.
4. Find these for the estimated year as well.
5. After finding out the estimated year values, compute the FCFF. The formula for FCFF is
PAT+EBIT(1-Tax) - (Capital Expenditure-Depreciation & Ammonization) +/- Change in the
Working Capital.
𝐿𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝑜𝑓 𝐹𝐶𝐹𝐹∗(1+𝑇𝐺𝑅)
6. Next Step is to find out the Terminal Value of FCFF. The formula is
(𝐶𝑂𝐸−𝑇𝐺𝑅)
𝑇𝑉
7. Next, Present Value of TV =
(1+𝐶𝑂𝐸)^5
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤
8. Present value of FCFF =
(1+𝐶𝑂𝐸)^5
9. Firm Value = step 7 +step 8
10. Enterprise value = PV of FCFF all the expected years.
11. Intrinsic value = Enterprise Value/ No. of Outstanding shares.

Why valuation is necessary?

 Better knowledge about company’s assets.

o accurate business valuation assessment.
o Estimates are not acceptable
o Specific numbers are to be gained from valuation so that business owner know how
much to obtain proper insurance coverage, know how much to reinvest in a
company and how muxh to sell a company to make profit.

 Understand of Company Resale Value

 Obtain a True Company Value
 Better During Mergers/Acquisitions
 Access to More Investors