Basic Valuation Concept with regards to corporate

8/2/2019 Basic Valuation Concept with regards to corporate

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BASIC VALUATION CONCEPTSPECIFICALLY WITH REFERENCE TO CORPORATE

y M.M.M ( SEM II ) 2011-2014.

y

Subject : Financial Management

y Prof. Arun D. Chandarana


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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


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'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 consideringthe current value oftangible & intangible assets. For example,determining how much a willing buyerwill pay a willing seller for ahouse, right now is easier than determining the value of what acompany's brand recognition might be in 10 years.

y The process of estimating the worth of something.

y The estimated worth given to something.


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Concept of valuationy Going-concern value

y Liquidation value

y Book Value

y Market Value

y Bond Valuation

y Discounted Cash Flow DCF

y Intrinsic Value


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

continuing operation.

y Runs on assumption to exist for foreseeable future .

y Going concern value v/s asset / liquidation value = Goodwill.

y Plays major role in merger & acquisitions.

y Going concern value = entire company sold + intent to keep itrunning with new owner.

y Liquidation value = entire company sold + tangible asset soldoff.

y Going concern value = liquidation value + intangible asset.

y Going concern value > liquidation value.


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

goodwill and income to its net asset value. This is an importantcalculation when determining the appropriate purchase price in

a merger or acquisition.

y A Discounted Cash Flow Business Valuation is generally used byinvestors to calculate the Return on Investment (ROI) they

would receive if they purchased the company. It is based on thepresent value (PV) of future cash flows.


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Liquidation valuey 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 isdetermined 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, goodwilland brand recognition.

y If a company were to be sold rather than liquidated, both liquidation

value and intangible assets would be considered to determine thecompany's going-concern value, investors will look at the differencebetween a company's market capitalization and its going-concern valueto 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.


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How it calculatey 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 Liquidation Value Book Value Liquidation Value

Assets Liabilities

Cash Rs15,000 Rs15,000 Bank debt Rs30,000 Rs30,000

Accounts

receivable Rs35,000 Rs23,000 Accounts payable Rs15,000 Rs15,000

Inventory Rs50,000 Rs27,000

Fixed assets Rs50,000 Rs25,000 Total liabilities Rs45,000 Rs45,000

Shareholders

equity Rs105,000 Rs45,000

Total assets Rs150,000 Rs90,000

Total liabilities

and shareholdersequity Rs150,000 Rs90,000


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

To calculate, take the cost of an asset minus theaccumulated depreciation.

y The net asset value of a company, calculated by totalassets minus intangible assets ( non physical substancesuch as patents, goodwill) and liabilities.

y Since book value is a more accurate measure ofvaluationfor companies which aren't growing quickly, book value isof more interest to value investors than growth investors.

y Book value is the accounting value of a firm. It has twomain uses:

1. It is the total value of the company's assets thatshareholders 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- oroverpriced.


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How it calculatey

Book Value = Assets - Liabilities

y A company or corporation's book value, as an asset held by aseparate economic entity, is the company or corporation'sshareholders' equity, the acquisition cost of the shares, or themarket value of the shares owned by the separate economic

entity.

y Book Value and Shareholder Equityare not quite the same thing.To find a company's book value, you need to take theshareholders' equity and exclude all intangible items. This leaves

you with the theoretical value of all of the company's tangibleassets (those which can be touched, seen, and felt). For thisreason, book value is sometimes also called "Net TangibleAssets".


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Market Valuey Market value is the estimated amount for which a property should

exchange on the date of valuation between a willing buyer & a willingseller in arms-length transaction after proper marketing where in theparties had each acted knowledgeably prudently & without

compulsion

y The market capitalization plus the market value of debt. Sometimesreferred to as "total market value".

y In the context of securities, market value is often different from book

value because the market takes into account future growthpotential. Most investors who use fundamental analysis to pickstocks look at a company's market value and then determine whetheror not the market value is adequate or if it's undervalued incomparison to it's book value, net assets or some other measure


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

popular is a multiple of earnings per share based on there historyof earnings as a percentage of there market price (i.e. earnings

are historically about 3% 0f there share market price or If theearnings are Rs3.00 per year the market price would be maybe 15times 3 0r Rs45.00 per share. Some use 10 or 15 or something inbetween based on projected earnings


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Bond Valuationy 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 afixed 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, alsoknown as its cash flow, and the bond's value upon maturity, also known as its facevalue or par value. Because a bond's par value and interest payments are fixed, aninvestor uses bond valuation to determine what rate of return is required for aninvestment in a particular bond to be worthwhile

y Bond valuation is only one of the factors investors consider in determiningwhether to invest in a particular bond. Other important considerations are: theissuing company's creditworthiness, which determines whether a bond isinvestment-grade or junk; the bond's price appreciation potential, as determinedby the issuing company's growth prospects; and prevailing market interest ratesand whether they are projected to go up or down in the future.


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

basic present value (PV) formula:

C = coupon paymentn = number of paymentsi = interest rate, or required yield

M = value at maturity, or par value


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Discounted Cash Flow DCFy A valuation method used to estimate the attractiveness of

an investment opportunity.A Discounted Cash Flow Business Valuation is generallyused 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 f low (DCF) analysis uses future free cashflow projections and discounts them (most oftenusing the weighted average cost of capital) to arrive at apresent value, which is used to evaluate the potential forinvestment. If the value arrived at through DCF analysis ishigher than the current cost of the investment, theopportunity may be a good one.

y Discounted cash flow is also known as Time Value OfMoney


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Characteristics ofDCF Valuationy 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


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How it calculate


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

underlying perception of its true value including all aspects ofthe 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 inorder to estimate the intrinsic value of securities in hopes offinding investments where the true value of the investmentexceeds its current market value.

y For example, value investors that follow fundamental analysislook at both qualitative (business model, governance, targetmarket factors etc.) and quantitative (ratios, financial statementanalysis, etc.) aspects of a business to see if the business iscurrently out of favor with the market and is really worth muchmore than its current valuation


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

absolute value of the difference between the current price (S) of theunderlying and the strike price (or exercise price) (K) of the option,

floored to zero.y For a call option

y IVcall = max{0,S K}

y while for a put option

y IVput = max{0,K S}

y For example, if the strike price for a call option is Rs 1 and the price ofthe underlying is Rs 1.20, then the option has an intrinsic value of Rs0.20.


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Thank you.!!!

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Basic Valuation Concept with regards to corporate