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INTRODUCTION
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1.1 PREAMBLE
It was oscar wilde who described a cynic as one who knows the price of everything,
but the value of nothing. Every asset, financial as well as real, has a value. The key to
successfully investing in and managing these assets lies in understanding not only what
the value is but also the sources of the value. Any asset can be valued, but some assets are
easier to value than others and the details of valuation will vary from case to case.
Valuation plays a key role in many area of finance -- in corporate finance, mergers and
acquisitions and portfolio management.
Risk, as we define it in finance, is measured based upon deviations of actual
returns on an investment from its' expected returns. There are two types of risk. The first,
which we call equity risk, arises in investments where there are no promised cash flows,
but there are expected cash flows. The second, default risk, arises on investments with
promised cash flows.
The value of a private firm is the present value of the cash flows it is expected to
generate, discounted back at a rate that reflects both the risk in the private firm and the
mix of debt and equity it uses. Value enhancement is clearly on the minds of many
managers today. The value of a firm can be increased by changing one of the four primary
inputs into valuation: the cash flow from assets in place, the expected growth rate during
the high growth period, the length of the high growth period and the cost of capital.
The first is that no value enhancement mechanism will work at generating value
unless there is a commitment on the part of managers to making value maximization their
primary objective.
mechanism will work. Value creation is hard work in competitive markets and almost
involves a trade-off between costs and benefits. Everyone has a role in value creation and
it certainly is not the sole domain of financial analysts.
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historical information regarding the firm might not be available. Here it valued on
assumption that the firm going to liquidate
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tough task rather than valuing a publicly trading firm. If the firm is going for liquidation
or planning for IPO, it should know its value then only it can fix better price.
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CHAPTER 2
COMPANY PROFILE
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of this product and block board, flush doors, Commercial plywood, produced in Indian
Factories came in to the market. Which were second to none in the world in quality and
diversity Industrial licensing is governed by industries (development and regulation) Act
1951 under which the wood. Based industry was covered.
There were no restrictions of putting up plywood mills up to 1970 the only criteria
was that the applicant was required to obtain an industrial license which was being
considered by the ministry of industry after consulting various ministries including
ministry of environment and forest.
During 1970 there was clear cut definition of small scale sector and units having
an investment of less than Rs 7.5 lacks in plant and equipment were covered under the
definition of small scale sectors that would be registered with the respective state director
of industries. From 1998 onwards any industry whether a small scale unit or large or
medium or new undertaking or substantial expansion would require industrial license
compulsory.
This industry has become an innocent victim of some gross misconceptions. The
unfounded impression that this industry exerting pressure on our natural forest resources
is factually incorrect. There is total disregard to its excellent role as an economic
substitute of social wood and thus preservation of natural forest and ecology. In all
fairness this industry should be regard as a timber saving industry which is helping
conservation of timber and yet meeting essential needs of the country and society.
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2.2
Mr c Hassan promoter and managing partner of the firm had a new idea ,in his
thinking and experienced mind about the commencement of a plywood manufacturing
concern , and was plotted a plant in chirakkal padi near to Manarkkadu , Kerala in the
name of HARAFA RUBBER WOOD VENEERS in 1998, it commence its business that
year itself . They are producing plywood sheets and it distributed across the country. It
concentrating on inter and intra state sales. their plant situating away from houses and it
have good wastage sewage system
2.2a Location
HARAFA RUBBER WOOD VENNERS
manarkkadu ,in the border of palakkadu and malappuram , in kerala. the registerd office
and factory are situated in same spot. there is a good climatic condition the healthiest
mixture of hot and cold. there is a good transport facility and have never difficulty for
travel . adequate water ,electricity and other infrastructural facilities are available there
.it has a office with all modern facilities . the place is rich with labour force and timber .
this is one of the main raw material used to produce plywood , it prefer soft woods. the
main raw materials used for production can be easily transformed from the area of
factory plant. storing of timber in water can be easily possible as part of its smooth
production. Around
forty
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WORKING PARTNERS
KM . MUHMMED
C.ABDUL RASHEED
C.MOHAMMED
RIYASUDHEEN
ABDHUL SALEEM
K M. ABOOBACKER
V. SAKEER HUSSAIN
SLEEPING PARTNERS
C . FASSELA
C . RASEENA
Managing Partner
Production supervisor
Manufacturing supervisor
General supervisor
Accountant
Skilled workers
Unskilled
workers
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Veneers are taken from the clipper to a veneer dryer where they are dried to
moisture contents that range from around 1 to 15 percent, dry basis. Face veneer moisture
contents can range up to 25percent, dry basis. Target moisture content depends on the type
of resin used in subsequent gluing steps. The typical drying temperature ranges from 150
to 200C (300 to 400F). The veneer dryer may be a longitudinal dryer, which circulates
air parallel to the veneer, or a jet dryer. The jet dryers direct hot, high velocity air at the
surface of the veneers in order to create a more turbulent flow of air. The increased
turbulence provides more effective use of dryer energy, thereby reducing drying time.
Valuation of a private firm and its value enhancement
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one ply of veneer, which is then placed between two plies of veneer that are not coated
with resin.
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Production sequence
LOG DEBARKING
LOG
AND BUCKING
STORAGE
VENEER CUTTING
VENEER DRYING
LOG HEATING
VENEER
LAYUP AND
GLUE SPREADING
PLYWOOD
PLYWOOD
CUTTING
PRESSING
PLYWOOD
FINISHING
FINISHED
PRODUCT
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2.4 PRODUCT
Plywood is a building material consisting of veneers (thin wood layers or plies)
bonded with an adhesive. There are two types of plywood: softwood plywood and hardwood
plywood. Softwoods generally correspond to coniferous species. The most commonly used
softwoods for manufacturing plywood are firs and pines. Hardwoods generally correspond to
deciduous species. For hardwood plywood, commonly used wood species include oak,
poplar, maple, cherry, and larch.
Softwood plywood is manufactured by gluing several layers of dry softwood veneers
together with an adhesive. Softwood plywood is used for wall siding, sheathing, roof
decking, concrete form boards, floors, and containers. Softwood plywood is classified under
Standard Industrial Classification (SIC) code 2436, and North American Industrial
Classification System (NAICS) code321212 for Softwood Plywood and Veneer.
Hardwood plywood is made of hardwood veneers bonded with an adhesive. The outer
layers(face and back) surround a core which is usually lumber, veneer, particleboard, or
medium density fiberboard. Hardwood plywood may be pressed into panels or plywood
components (e.g., curved hardwood plywood, seat backs, chair arms, etc.). Hardwood
plywood is used for interior applications such as furniture, cabinets, architectural millwork,
paneling, flooring, store fixtures, and doors. Hardwood plywood is classified under SIC code
2435 and NAICS code 321211, for Hardwood Plywood and Veneer.
Softwood plywood plants typically produce softwood veneers and softwood plywood
on the same plant site. However, most hardwood plywood and veneer plants either produce
hardwood plywood or hardwood veneer. Hardwood veneer plants cut and dry hardwood
veneers. Hardwood plywood plants typically purchase hardwood veneers and press the
veneers onto a purchased core material. the firm using soft wood, glue, and water as raw
material to produce plywood and land, labor, capital, and organization are the factors of
production used by the firm. This manufacturing firm providing a good employment
opportunity towards the society ,and they are keeping all the criteria to avoid pollution to the
environment.
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2.5ACCOUNTING PRACTICE
This firm using the double entry system to do the book not the single entry system.
they are maintaining cash book ,purchase book ,sales book and, stock statement other ledgers
etc. they preparing balance sheet and profit and loss account as part of their financial
statement. they also conducting the audit work without any intervention.
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CHAPTER 3
REVIEW OF LITERATURE
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REVIEW OF LITERATURE
This chapter deals with reviews of the earlier works of researchers in the relevant
area. now effective valuation is the foremost objective of any firm, many researches were
held on this topic both India as well as abroad. In this chapter, various literatures relating to
valuation of firm and related with it have been reviewed to get insight into subject.
Stuart C. Gilson, Edith S. Hotchkiss and Richard S. Ruback (2000), they compares the
market value of the firm that recognize in bankruptcy's with estimates of value based on
management 's published cash flow projection. We estimate of values based on management
published cash flow projection. we estimate firm value using models that have been shown
in other context to generate relatively precise estimation
methods generally yield unbiased estimated values ,but the dispersion of valuation errors is
very wide - the ample ratio of estimated value to the market varies from less than 20% to
greater than 25%. cross sectional analysis indicates that the variation in these errors is
related to empirical proxies for claimholders 's incentives to overstate or understate the
firm's value
Steven N. Kaplan and Richard S. Ruback (1995 ), They compares the market value of
highly leveraged transactions (HLTs) to the discounted value of their corresponding cash
flow forecasts. For our sample of 51
valuations of discounted cash flow forecasts are within 10 percent, on average, of the market
values of the completed transactions. Our valuations perform at least as well as valuation
methods using comparable companies and
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C. J. Exley and A. D. Smith(2006), they saying that Most businesses have assets
financed by capital providers. The cost of capital is a measure of the returns required by
those capital providers. Its main use is to set a target for the profits, which must be achieved
on the firm's assets in order to satisfy equity and bond holders. This paper describes the
classical theory of the cost of capital, and then applies it to the special case of banking and
insurance firms. We develop implications for product pricing, performance measurement and
capital structure optimization
Myron J. Gordon and Paul J. Halpern(1974) , They presents, tests, and illustrates the
use of a model for arriving at the cost of capital for a non-traded firm or division of a firm.
The illustration represents the application of the model to a public utility. The ideas
presented below were developed in response to a request by the United States Postal
represents the application of the model to a public utility. The ideas presented below were
developed in response to a request by the United States Postal represents the application of
the model to a public utility. The ideas presented below were developed in response to a
request by the United States Postal represents the application of the model to a public utility.
The ideas presented below were developed in response to a request by the United States
Postal
Aswath Damodaran, In this paper, he begin with a generic discounted cash flow
model, and consider the ways in which value can be created or destroyed in a firm. he then
look at two of the most widely used value enhancement measures, Economic Value Added
and Cash Flow Return on Investment, and consider where these approaches yield similar
results to those obtained from traditional valuation models, and where (and why) there
might be differences. In conclusion, he show that there is little that is new or unique in
these competing measures, and while they might be simpler than traditional discounted
cash flow valuation, the simplicity comes at a cost that is substantial for high growth firms
with shifting risk profiles.
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CHAPTER 4
THEORITICAL FRAME WORK
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VALUATION -STEPS
To calculate a value a firm we need to find out some of the variable related
with that . Find outing that variables treated as the step of the valuation. following
are the steps used for value a firm
Step 1: Estimating discount
The expected cash flows need to be discounted back at a rate that reflects the
cost of financing these assets. The cost of capital is a composite cost of financing,
that reflects the costs of both debt and equity, and their relative weights in the
financing structure. Here cost of capital treated as discount rate. To get discount
rate we want to calculate following the following variables
Beta
In the CAPM beta of an investment is the risk that the investment add to the
market portfolio here using historical data on market prices for individual
investment. The cost of equity should reflect the risk added on by an investment to
a diversified portfolio and can be measured with a beta (in the single-factor model)
or betas.
cost of equity
The cost of equity is the return that stockholders require for their investment in a
company. In financial theory, the return that stockholders require for a company.
On this basis, the most commonly accepted method for calculating cost of equity
comes from the Nobel Prize winning capital asset pricing model (CAPM): The
cost of equity is expressed formulaically below
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Where:
Re = the required rate of return on equity
rf = the risk free rate
rm rf = the market risk premium
= beta coefficient = unsystematic risk
Rf Risk-free rate - This is the amount obtained from investing in securities
considered free from credit risk, such as government bonds from developed
countries. The interest rate of U.S. Treasury Bills is frequently used as a proxy for
the risk-free rate.
(Rm Rf) = Equity Market Risk Premium (EMRP) - The equity market risk
premium (EMRP) represents the returns investors expect to compensate them for
taking extra risk by investing in the stock market over and above the risk-free rate.
In other words, it is the difference between the risk-free rate and the market rate. It
is a highly contentious figure. Many commentators argue that it has gone up due to
the notion that holding shares has become more risk
cost of debt
Here the particular firm don't have any long-term debt, so in this analysis it is
excluded
Step 2:estimating growth
In valuation, it is the expected future cash flows that determine value. While
the definition of the cash flow, still holds, it is the forecasts of earnings, net capital
expenditures and working capital that will yield these cash flows. One of the most
significant inputs into any valuation is the expected growth rate in operating
income. While one could use past growth or consider analyst forecasts to make this
estimate, the fundamentals that drive growth are simple.
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Tax rate
It is the rate at which firms income are taxed. here using effective tax rate to
calculate
Valuation of a private firm and its value enhancement
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The illiquidity discount tends to be smaller for firms with higher revenues, decreases as
the block offering decreases and is lower when earnings are positive and when the investor
has a customer relationship with the firm. In particular, the discounts tend to be smaller for
large firms (at least as measured by revenues) and for healthy firms
Step 5: calculation of value of firm
by using the above variable, it is possible to determine the conventional value of the firm
VALUE ENHANCEMENT
The firm can enhance their value . the following activities which is
influence the value of the firm.
cash flows generated by assets in place currently
expected growth rate in earnings
length of the high growth period
cost of capital that is applied to discount the cash flows
In the analysis part we are examine the effect of these variable in the value of the firm
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CHAPTER 5
ANALYSIS AND INTERPRETATION
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VALUATION
Here doing a conventional valuation of the firm.
Discount rate
Cost of equity
Here the firm don't have any debt so here we are only considering cost of equity. cost of
equity took as cost of capital.
= 4.230638 + 2.527855(2.738869)
= 0.111541
Growth
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Reinvestment rate
Capital Expenditure - Depreciation + D Non-cash WC
EBIT (1 - tax rate)
= -0.00779
Return on Capital
= 0.026082
= -0.02%
Cash flow
Particulars
Amount
Total revenue
1017970
886456
131514
Tax rate
7.56%
EBIT(1-tax rate)
121577.6
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Tax rate
Effective tax rate =Tax due/taxable income
32500/97942
=
7.56%
= 122888.2
Liquidity discount
Here it is calculated on the basis of revenue and positive or negative of cash flow it
adjusted with ratio between cash and estimated value by using a regression formula
= 9.66%
Value of firm
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Particulars
Amount
Cost of equity
11.1541
Growth
-0.02%
122888.2
Liquidity discount
9.66%
993450.1
Equity value
Particulars
Value after liquidity
Cash
Equity value
Amount
993450.1
523461
1516911.1
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VALUE ENHANCEMENT
in this section just assuming that if the cash flow, growth and cost of capital change what
change that will make in value of the firm by keep in its exact value are default
Particulars
Amount
150000
Growth
-0.02%
11.1541%
k-g
0.111707
Value
1315071.8
Particulars
Amount
150000
Growth
4.00%
11.15%
k-g
0.111543
Value
1149924
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Particulars
Amount
122888.2
Growth
-2.03%
8.00%
K-g
0.100322
Value
1200043
Interpretation
Here trough above case ,it is proving that there have a positive relation between value
and cash flow ,growth rate. But in the case of cost of capital there have a negative relation
with firm value.
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CHAPTER 6
FINDINGS, SUGGESTION AND CONCLUSION
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5.1 FINDINGS
Beta of the firm is 2.527855
Reinvestment of firm is -0.00779
Return of capital of the firm 2.61%
Expected growth of the firm -0.02%
Cost of equity of the firm is 11.15%
Free cash flow of the firm 122888.2
Liquidity discount of the firm 9.66%
Value of the firm before adjusting liquidity is 1099727
Value of the firm after liquidity 993450.1
Equity value of the firm 1516911.1
This study proving that there have a positive relation between value and cash
flow, growth rate. But in the case of cost of capital there have a negative relation with
firm value. The firm has a good cash flow but it reinvestment rate and rate of return
are too low ,so it is leading to a small or a negative growth rate for the firm
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5.2 SUGGESION
The particular firm have a normal value. But they can enhance or create the value of
the firm by way of restructuring the firm ,such as include the debt in the finance mix. It will
lead to reduce the cost of capital and the firm can enhance the value .the growth rate of the
firm is not that much satisfactory. So they need to reinvest more in the firm to achieve a
satisfactory growth rate
They can increase the cash flow of the firm by way of reducing non cash working
capital, reducing net capital expenditure on existing investment, reducing the tax burden,
Improving operating efficiency, divest or liquidate poor investment. It will increase the value
of the firm
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5.3 CONCLUSION
financial theorists have long argued that the objective in decision making should be
to maximize firm value. Managers and practitioners have often criticized them for being too
single minded about value maximization and for not considering the broader aspects of
corporate strategy or the interests of other stakeholders. In the last decade, however,
managers seem to have come around to the view that value maximization should be, if not
the only, at least the primary objective for their firms. So in the modern management value
creation is also a part of their core function
This study aimed to calculate the value of particular firm and how the firm can
enhance the value .it is challenging task to determine the value of a private firm. The firm
can enhance their value by increasing cash flow ,growth rate and reducing cost of finance
A firm can increase its value by increasing cash flows from current operations,
increasing expected growth and the period of high growth and by reducing its composite
cost of financing. In reality, however, none of these is easily accomplished and is likely to
reflect all of the qualitative factors that we are often accused of ignoring in valuation - the
quality of management, the strength of brand name, strategic decisions and good
marketing.
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BIBILIOGRAPHY
Website:
http://people.stern.nyu.edu/adamodar/
http://www.rbi.org.in/home.aspx
http://www.moneycontrol.com/
Book referred
investment valuation by aswanth damodhar
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