Finance for HR

8/4/2019 Finance for HR

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Any Asset Can be Valued

You have a flat in Indira Nagar, Bangalore.

At what price will you sell it?

You have a restaurant in M G Road. Howwill you value it?

Two ways of valuing an asset:

Relative Valuation DCF Valuation


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Valuing a Stock

What do you get by buying a share? Dividend

Appreciation in Price (Capital gains)

Suppose, you expect a return of 10% from a stock.

The stock is expected to give a dividend of Rs.4 nextyear. It is also expected to trade at Rs.106 next year. What price should you be willing to pay for the stock?

Suppose you expect a dividend of D1 per share nextyear and are expecting to sell the stock at P1 next

year. If the required rate of return is r, how muchshould you be willing to pay for the stock?

In general, the stock price will be the present value ofall dividends.


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Case of Constant Growth Rate

Why should there be some growth in all thestocks?

Suppose, the dividend is expected to increase atthe rate of g per annum. The implied stock valueper share is given by: D1/(r-g).

Suppose, you think Bajaj Auto will be able toincrease its dividend at the rate of 5% a year. Howmuch price will you be willing to pay for it?

The implied value per share = 22*1.05/(0.1505-0.05) = Rs.230

What are the implications?

What growth rate would you expect if the price ofRs.700 is to be justified?


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Two stage Growth Model

Lets assume that the dividend of Bajaj

Auto will increase at the rate of 10% for

the next five years and then will fall to 5%.How much price will you pay for the stock?

In general, now there can be a n-period

growth model.


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Lets value Wall-Mart (WMT)

What is Earnings

per Share (EPS?


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HR Accounting (HRA)


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Lev and Schwartz Model

E(Vj) =expected value of an individuals human

capital

I(t) = persons annual earning in year t

i= discount rate specific to the person

The individual is r years old, and is expected to

retire in year T.

,)1(

)()(

1!

!T

rtrtj

i

tIVE


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Critique of Lev and Schwartzs Model

Earnings and not profit used.

An employee may leave the company

before retirement. There may be a change in role.

Brand Value and HR Value mixed up.


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Modified Lev and Schwartzs Model

Here, P(t) is the probability that the

individual does not die

!

v!

T

rt

rt

i

tPtI1

)1(

)()(


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Example

Year i

er ice

r f

t i

T tal

salar

Expecte

alar

rese t

al e

.9 .

. 9 .

. .

. 9 .

. .

T tal al e


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Flamholtz Model for Valuing Human

Resources

Value: Present worth of the set of services

the person is expected to provide during

the period he or she is expected to remain

in the organization

Key Difference between Flamholtz Model

and Lev and Schwartz Model


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Terminology

Expected Conditional Value

It is the present worth of the potential services

that could be rendered to the organization

assuming the individual maintains a

relationship with the organization.

Expected Realizable Value


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Example

Service

States

Value Probability

1 (transfer) 7800 0.1

2 (same) 9700 0.5

3 (promote) 15100 0.3

Exit 0 0.1


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Expected Conditional Value

Four possible Service Sets

Remain in present position

Being transferred to a different office Being promoted to the next higher level

Leaving the firm


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Steps in Valuing Human Resources

Define the mutually exclusive set of states that anindividual may occupy in an organization

Determine the value in each state

Estimate the persons expected tenure in the company Find the probability that a person will occupy each

possible state

Discount the expected future cash flows to find thepresent value


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Valuation equation

!

!

!n

tt

m

i

ii

r

RPR

C1

1

1

)1(

)(*

)(

Ri is the value to be derived in service state i (there are m states

P(Ri) is the probability

t is time

m possible states


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Example

Service

States

Value Probability

1 (transfer) 7800 0.1

2 (same) 9700 0.5

3 (promote) 15100 0.3

Exit 0 0.1


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Estimation Issues

Service State Values

Expected Service Life

Mobility Probability


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Finding Mobility Probabilities

T+1

T

Senior Semi-senior

Assistant

Exit Total

Senior 30 0 0 20 50

Semi-Sr

20 20 0 20 60

Assistant

0 20 10 10 40


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Other Models

Historical Cost Method

Opportunity Cost Method


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HRA in India

BHEL

SAIL

Infosys Reliance

Satyam

Documents

Finance for HR