Note on some additional Adjustments in valuation

1. Parent company stand-alone Vs Consolidated

a. Consider Investments while using stand alone
b. Consider adjustments with minority interest while using consolidated
2. As per DCF valuation, Value of firm is as follows
a. Present value of FCFF during the explicit forecast period + Present value of FCFF for
terminal growth period/stable growth period/continuing value period (Terminal
value). These FCFF are free cash flow from core business/operations

b. Since the above does not consider the liquid cash & marketable securities,
investments etc. for the year zero, one need to consider the same as adjustment
while valuing a firm. It is as follows:
i. Present value of FCFF from operations (Explicit forecast period and Terminal
value) + Value of Non-operating assets

Non-operating assets

Cash & Marketable securities

Quoted investments in associate companies

Quoted investments in subsidiaries

Unquoted investments in subsidiary companies

Excess real estate and unutilised assets

3. Computation of WACC/Discount rate – Book value vs Market value

Market value is preferred compared to book value if market price is available. One can
consider an average market value for the last few months and not necessarily the latest
market value.

i. Market value of equity – based on stock price and number of outstanding

shares
ii. Market value of bonds – based on the outstanding value of bonds, if
traded.
iii. Market value of loan - based on the weighted average cost of debt and
weighted average maturity of all the loans.
1. Example: Suppose the total interest expense on the loan is 12000
million for a firm is 1000 million and the face value weighted
average maturity of loan is 8 years. Assume that current cost of debt
of long term loan is 10% . Based on the above the present value of
loan is as follows:
a. Present value of interest - 1000 at 10% for 8 years (PVIFA
10%, 8 years) + Present value of principal of 12000 million
(PVIF 12000, 10%) = 10933 million

b. If the loans are distressed, a higher discount rate can be

applied to reflect the realistic value of the loans.
4. Working capital – While considering working capital, select only non-interest bearing short
term liabilities, as interest bearing liabilities are already considered in the cost of debt.