Market Value Approach • Market value approach to value a firm is

simplest of all and can be found by using the market value of equity and debt of the firm at any point of time.Value of the firm

= Market Value of Equity and Debt= Nos. of shares x Market Price/share

+ Nos. of debentures x Market Price/ Debenture

Valuation & Corporate Governance 1Chapter 10

Economic Value Added• EVA is a period-to-period computation,

which can be used to monitor the process of value creation and record historically the growth of the enterprise.

Valuation & Corporate Governance 2Chapter 10

Computation Of EVA • The computation of EVA is a three-step

process.1.Compute the Net Operating Profit After Tax,

called NOPAT 2.Find out WACC for the firm, and the capital

employed and 3.Find EVA as below:

EVA = NOPAT – WACC x Capital Employed.

Valuation & Corporate Governance 3Chapter 10

Drawbacks Of Eva • EVA is not comparable across industries due

to differing efficiencies of capital in different industries. • Measuring EVA is not possible in respect of

projects that have not matured, for which the full economic potential is not realised. • EVA as an absolute value. To measure growth

the ratio of EVA with capital employed will be more appropriate.

Valuation & Corporate Governance 4Chapter 10

Corporate Governance• The split between ownership and management calls

for certain measures of good corporate governance.• 3-Tier governance structure in a company.

• Shareholders at the top, • Board of Directors in the middle, and • management at the bottom.

• Board of Directors ensures that the company management works in the best interest of the various stakeholders. • Company management is expected to work towards

the objectives, under the strategic direction of the board.

Chapter 10 Valuation & Corporate Governance 5

Corporate Governance

• Corporate Governance refers to a set of rules, processes, and structures to ensure that the company affairs are run in a transparent and accountable manner, in the best interest of the stakeholders.

Chapter 10 Valuation & Corporate Governance 6

Principles of Corporate Governance

• Transparency,• Accountability, • Protection of shareholders’ rights, • Involvement of stakeholders.

Chapter 10 Valuation & Corporate Governance 7

Regulatory Framework For Corporate Governance• The corporate regulatory framework

focuses upon the issues of • composition and conduct of board and its

committees; • reporting and disclosure guidelines; • grievance redressal mechanism;• norms on certification and compliance.

• Sarbanes-Oxley Act (2002)• Clause 49 of the listing arrangement

Chapter 10 Valuation & Corporate Governance 8