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Project Report
On
Business Valuation Methods and Techniques
Submitted by
Tamutgiri Shishir Vijaykumar
Under the guidance of
Vidula Adkar
Submitted to
Savitribai Phule Pune University
In the Partial fulfillment of the Requirement for the award of Degree of
Master of Business Administration (MBA)
Through
Vishwakarma Institute of Management
Pune
2014-15
Declaration
I, Tamutgiri Shishir Vijaykumar student of MBA II have undertaken a Dissertation
Project entitled Business Valuation Methods and Techniques as a part of academics of
the MBA Programme. The basic aim behind this is to get familiar with the corporate actions
like M&A and to get a knowledge about specified area.
This project report is written and submitted by me to the University of Pune, in partial
fulfillment of the requirement for the award of degree of Master of Business Administration
under the project guidance of Prof. Vidula Adkar in my original work and the conclusions
drawn therein are based on the material collected by myself.
Place: Pune
Date
Signature of Student
Table of Contents
Sr. No.
Chapters
Page No.
1.
Executive Summary
2.
Introduction
5-24
3.
Literature Review
25-26
4.
27
5.
28-34
6.
Findings
35-37
7.
Conclusion
38
8.
39
CHAPTER I
EXECUTIVE SUMMARY
Business valuation is a process and a set of procedures used to estimate the economic
value of an owners interest in a business. Valuation is used by financial market participants
to determine the price they are willing to pay or receive to effect a sale of a business. In
addition to estimating the selling price of a business, the same valuation tools are often used
by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation,
allocate business purchase price among business assets, establish a formula for estimating the
value of partners' ownership interest for buy-sell agreements, and many other business and
legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some
cases, the court would appoint a forensic accountant as the joint expert doing the business
valuation.
Once the floor or lowest value of the business has been determined, the financial history of
the business is reviewed to determine if any goodwill or blue sky exits. If the business is
more profitable than the average business of its type, the owner has done something to create
these excess earnings and should be compensated for that extra effort. Information is
published regularly regarding profit as it relates to sales and assets.
Another method commonly used is the capitalization of earnings at the rate of return required
by the buyer. This capitalization of earnings yields a value for the business applicable to one
individual buyer. Some buyers require only a return equal to the cost of borrowing (after
owners compensation) while some buyers require more.
In addition to the information requested on the Business Valuation Documents Request
Datasheet, a buyer should provide
Chapter II
INTRODUCTION
Conceptual Background Related to Variables
Business valuation is a process and a set of procedures used to estimate the economic
value of an owners interest in a business. Valuation is used by financial market participants
to determine the price they are willing to pay or receive to effect a sale of a business. In
addition to estimating the selling price of a business, the same valuation tools are often used
by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation,
allocate business purchase price among business assets, establish a formula for estimating the
value of partners' ownership interest for buy-sell agreements, and many other business and
legal purposes such as in shareholders deadlock, divorce litigation and estate contest. In some
cases, the court would appoint a forensic accountant as the joint expert doing the business
valuation.
STANDARD AND PREMISE OF VALUE
Before the value of a business can be measured, the valuation assignment must specify the
reason for and circumstances surrounding the business valuation. These are formally known
as the business value standard and premise of value. The standard of value is the hypothetical
conditions under which the business will be valued. The premise of value relates to the
assumptions, such as assuming that the business will continue forever in its current form
(going concern), or that the value of the business lies in the proceeds from the sale of all of its
assets minus the related debt (sum of the parts or assemblage of business assets).
STANDARD VALUE
Fair market value - a value of a business enterprise determined between a willing buyer
and a willing seller both in full knowledge of all the relevant facts and neither compelled
to conclude a transaction.
Investment value - a value the company has to a particular investor. Note that the effect
of synergy is included in valuation under the investment standard of value.
Intrinsic value - the measure of business value that reflects the investor's in-depth
understanding of the company's economic potential.
capitalization and discount rates are derived from statistics concerning public companies. IRS
Revenue Ruling 59-60 states that earnings are preeminent for the valuation of closely held
operating companies.
However, income valuation methods can also be used to establish the value of a severable
business asset as long as an income stream can be attributed to it. An example is licensable
intellectual property whose value needs to be established to arrive at a supportable royalty
structure.
Discount or Capitalization Rates
A discount rate or capitalization rate is used to determine the present value of the expected
returns of a business. The discount rate and capitalization rate are closely related to each
other, but distinguishable. Generally speaking, the discount rate or capitalization rate may be
defined as the yield necessary to attract investors to a particular investment, given the risks
associated with that investment.
In DCF valuations, the discount rate, often an estimate of the cost of capital for the
business is used to calculate the net present value of a series of projected cash flows. The
discount rate can also be viewed as the required rate of return the investors expect to
receive from the business enterprise, given the level of risk they undertake.
On the other hand, a capitalization rate is applied in methods of business valuation that
are based on business data for a single period of time. For example, in real estate
valuations for properties that generate cash flows, a capitalization rate may be applied to
the net operating income (NOI) (i.e., income before depreciation and interest expenses) of
the property for the trailing twelve months.
There are several different methods of determining the appropriate discount rates. The
discount rate is composed of two elements:
(1) The risk-free rate, which is the return that an investor would expect from a secure,
practically risk-free investment, such as a high quality government bond.
(2) A risk premium that compensates an investor for the relative level of risk associated with
a particular investment in excess of the risk-free rate. Most importantly, the selected discount
or capitalization rate must be consistent with stream of benefits to which it is to be applied.
Where:
= Risk free rate of return (Generally taken as 10-year Government Bond Yield)
= Beta Value (Sensitivity of the stock returns to market returns)
= Cost of Equity
= Market Rate of Return
SCRP = Small Company Risk Premium
ASSET-BASED APPROACH
The value of asset-based analysis of a business is equal to the sum of its parts. That is the
theory underlying the asset-based approaches to business valuation. The asset approach to
business valuation is based on the principle of substitution: no rational investor will pay more
for the business assets than the cost of procuring assets of similar economic utility. In contrast
to the income-based approaches, which require the valuation professional to make subjective
judgments about capitalization or discount rates, the adjusted net book value method is
relatively objective. Pursuant to accounting convention, most assets are reported on the books
of the subject company at their acquisition value, net of depreciation where applicable. These
values must be adjusted to fair market value wherever possible. The value of a companys
intangible assets, such as goodwill, is generally impossible to determine apart from the
companys overall enterprise value. For this reason, the asset-based approach is not the most
probative method of determining the value of going business concerns. In these cases, the
asset-based approach yields a result that is probably lesser than the fair market value of the
business. In considering an asset-based approach, the valuation professional must consider
whether the shareholder whose interest is being valued would have any authority to access
the value of the assets directly. Shareholders own shares in a corporation, but not its assets,
which are owned by the corporation. A controlling shareholder may have the authority to
direct the corporation to sell all or part of the assets it owns and to distribute the proceeds to
the shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot
access the value of the assets. As a result, the value of a corporation's assets is not the true
indicator of value to a shareholder who cannot avail himself of that value. The asset based
approach is the entry barrier value and should preferably to be used in businesses having
mature or declining growth cycle and is more suitable for capital intensive industry.
Adjusted net book value may be the most relevant standard of value where liquidation is
imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth
less than its assets; or where net book value is standard in the industry in which the company
operates. The adjusted net book value may also be used as a "sanity check" when compared
to other methods of valuation, such as the income and market approaches.
MARKET APPROACH
The market approach to business valuation is rooted in the economic principle of
competition: that in a free market the supply and demand forces will drive the price of
business assets to certain equilibrium. Buyers would not pay more for the business, and the
sellers will not accept less, than the price of a comparable business enterprise. The buyers and
sellers are assumed to be equally well informed and acting in their own interests to conclude
a transaction. It is similar in many respects to the "comparable sales" method that is
commonly used in real estate appraisal. The market price of the stocks of publicly traded
companies engaged in the same or a similar line of business, whose shares are actively traded
in a free and open market, can be a valid indicator of value when the transactions in which
stocks are traded are sufficiently similar to permit meaningful comparison.
The difficulty lies in identifying public companies that are sufficiently comparable to the
subject company for this purpose. Also, as for a private company, the equity is less liquid (in
other words its stocks are less easy to buy or sell) than for a public company, its value is
considered to be slightly lower than such a market-based valuation would give.
When there is a lack of comparison with direct competition, a meaningful alternative could
be a vertical value-chain approach where the subject company is compared with, for example,
a known downstream industry to have a good feel of its value by building useful correlations
with its downstream companies. Such comparison often reveals useful insights which help
business analysts better understand performance relationship between the subject company
and its downstream industry. For example, if a growing subject company is in an industry
more concentrated than its downstream industry with a high degree of interdependence, one
should logically expect the subject company performs better than the downstream industry in
terms of growth, margins and risk.
Guideline Public Company Method
Guideline Public Company method entails a comparison of the subject company to publicly
traded companies. The comparison is generally based on published data regarding the public
companies stock price and earnings, sales, or revenues, which is expressed as a fraction
known as a "multiple." If the guideline public companies are sufficiently similar to each other
and the subject company to permit a meaningful comparison, then their multiples should be
similar. The public companies identified for comparison purposes should be similar to the
subject company in terms of industry, product lines, market, growth, margins and risk.
However, if the subject company is privately owned, its value must be adjusted for lack of
marketability. This is usually represented by a discount, or a percentage reduction in the
value of the company when compared to its publicly traded counterparts. This reflects the
higher risk associated with holding stock in a private company. The difference in value can
be quantified by applying a discount for lack of marketability. This discount is determined by
studying prices paid for shares of ownership in private companies that eventually offer their
stock in a public offering. Alternatively, the lack of marketability can be assessed by
comparing the prices paid for restricted shares to fully marketable shares of stock of public
companies.
standard techniques) and undeveloped reserves as analyzed using the real options framework.
See Mineral economics.
Product patents may also be valued as options, and the value of firms holding these patents
typically firms in the bio-science, technology, and pharmaceutical sectors can (should)
similarly be viewed as the sum of the value of products in place and the portfolio of patents
yet to be deployed. As regards the option analysis, since the patent provides the firm with the
right to develop the product, it will do so only if the present value of the expected cash flows
from the product exceeds the cost of development, and the patent rights thus correspond to
a call option. See Patent valuation# Option-based method. Similar analysis may be applied
to options on films (or other works of intellectual property) and the valuation of film studios.
Discounts and Premiums
The valuation approaches yield the fair market value of the Company as a whole. In valuing a
minority, non-controlling interest in a business, however, the valuation professional must
consider the applicability of discounts that affect such interests. Discussions of discounts and
premiums frequently begin with a review of the "levels of value." There are three common
levels of value: controlling interest, marketable minority, and non-marketable minority. The
intermediate level, marketable minority interest, is less than the controlling interest level and
higher than the non-marketable minority interest level. The marketable minority interest level
represents the perceived value of equity interests that are freely traded without any
restrictions. These interests are generally traded on the New York Stock Exchange, AMEX,
NASDAQ, and other exchanges where there is a ready market for equity securities. These
values represent a minority interest in the subject companies small blocks of stock that
represent less than 50% of the companys equity, and usually much less than 50%.
Controlling interest level is the value that an investor would be willing to pay to acquire more
than 50% of a companys stock, thereby gaining the attendant prerogatives of control. Some
of the prerogatives of control include: electing directors, hiring and firing the companys
management and determining their compensation; declaring dividends and distributions,
determining the companys strategy and line of business, and acquiring, selling or liquidating
the business. This level of value generally contains a control premium over the intermediate
level of value, which typically ranges from 25% to 50%. An additional premium may be paid
by strategic investors who are motivated by synergistic motives. Non-marketable, minority
level is the lowest level on the chart, representing the level at which non-controlling equity
interests in private companies are generally valued or traded. This level of value is discounted
because no ready market exists in which to purchase or sell interests. Private companies are
less "liquid" than publicly traded companies, and transactions in private companies take
longer and are more uncertain. Between the intermediate and lowest levels of the chart, there
are restricted shares of publicly traded companies. Despite a growing inclination of the IRS
and Tax Courts to challenge valuation discounts, Shannon Pratt suggested in a scholarly
presentation recently that valuation discounts are actually increasing as the differences
between public and private companies is widening. Publicly traded stocks have grown more
liquid in the past decade due to rapid electronic trading, reduced commissions, and
governmental deregulation. These developments have not improved the liquidity of interests
in private companies, however. Valuation discounts are multiplicative, so they must be
considered in order. Control premiums and their inverse, minority interest discounts, are
considered before marketability discounts are applied.
Discount For Lack Of Control
The first discount that must be considered is the discount for lack of control, which in this
instance is also a minority interest discount. Minority interest discounts are the inverse of
control premiums, to which the following mathematical relationship exists: MID = 1 [1 / (1
+ CP)] The most common source of data regarding control premiums is the Control Premium
Study, published annually by Merger stat since 1972. Merger stat compiles data regarding
publicly announced mergers, acquisitions and divestitures involving 10% or more of the
equity interests in public companies, where the purchase price is $1 million or more and at
least one of the parties to the transaction is a U.S. entity. Merger stat defines the "control
premium" as the percentage difference between the acquisition price and the share price of
the freely traded public shares five days prior to the announcement of the M&A transaction.
While it is not without valid criticism, Merger stat control premium data (and the minority
interest discount derived therefrom) is widely accepted within the valuation profession.
companies, because there is no established market of readily available buyers and sellers. All
other factors being equal, an interest in a publicly traded company is worth more because it is
readily marketable. Conversely, an interest in a private-held company is worth less because
no established market exists. The IRS Valuation Guide for Income, Estate and Gift Taxes,
Valuation Training for Appeals Officers acknowledges the relationship between value and
marketability, stating: "Investors prefer an asset which is easy to sell, that is, liquid." The
discount for lack of control is separate and distinguishable from the discount for lack of
marketability. It is the valuation professionals task to quantify the lack of marketability of an
interest in a privately held company. Because, in this case, the subject interest is not a
controlling interest in the Company, and the owner of that interest cannot compel liquidation
to convert the subject interest to cash quickly, and no established market exists on which that
interest could be sold, the discount for lack of marketability is appropriate. Several empirical
studies have been published that attempt to quantify the discount for lack of marketability.
These studies include the restricted stock studies and the pre-IPO studies. The aggregate of
these studies indicate average discounts of 35% and 50%, respectively. Some experts believe
the Lack of Control and Marketability discounts can aggregate discounts for as much as
ninety percent of a Company's fair market value, specifically with family-owned companies.
Restricted Stock Studies
Restricted stocks are equity securities of public companies that are similar in all respects to
the freely traded stocks of those companies except that they carry a restriction that prevents
them from being traded on the open market for a certain period of time, which is usually one
year (two years prior to 1990). This restriction from active trading, which amounts to a lack
of marketability, is the only distinction between the restricted stock and its freely traded
counterpart. Restricted stock can be traded in private transactions and usually do so at a
discount. The restricted stock studies attempt to verify the difference in price at which the
restricted shares trade versus the price at which the same unrestricted securities trade in the
open market as of the same date. The underlying data by which these studies arrived at their
conclusions has not been made public. Consequently, it is not possible when valuing a
particular company to compare the characteristics of that company to the study data. Still, the
existence of a marketability discount has been recognized by valuation professionals and the
Courts, and the restricted stock studies are frequently cited as empirical evidence. Notably,
the lowest average discount reported by these studies was 26% and the highest average
discount was 40%.
Option Pricing
In addition to the restricted stock studies, U.S. publicly traded companies are able to sell
stock to offshore investors (SEC Regulation S, enacted in 1990) without registering the
shares with the Securities and Exchange Commission. The offshore buyers may resell these
shares in the United States, still without having to register the shares, after holding them for
just 40 days. Typically, these shares are sold for 20% to 30% below the publicly traded share
price. Some of these transactions have been reported with discounts of more than 30%,
resulting from the lack of marketability. These discounts are similar to the marketability
discounts inferred from the restricted and pre-IPO studies, despite the holding period being
just 40 days. Studies based on the prices paid for options have also confirmed similar
discounts. If one holds restricted stock and purchases an option to sell that stock at the market
price (a put), the holder has, in effect, purchased marketability for the shares. The price of
the put is equal to the marketability discount. The range of marketability discounts derived by
this study was 32% to 49%. However, ascribing the entire value of a put option to
marketability is misleading, because the primary source of put value comes from the
downside price protection. A correct economic analysis would use deeply in-the-money puts
or Single-stock futures, demonstrating that marketability of restricted stock is of low value
because it is easy to hedge using unrestricted stock or futures trades.
Pre-IPO Studies
Another approach to measure the marketability discount is to compare the prices of stock
offered in initial public offerings (IPOs) to transactions in the same companys stocks prior to
the IPO. Companies that are going public are required to disclose all transactions in their
stocks for a period of three years prior to the IPO. The pre-IPO studies are the leading
alternative to the restricted stock stocks in quantifying the marketability discount. The preIPO studies are sometimes criticized because the sample size is relatively small, the pre-IPO
transactions may not be arms length, and the financial structure and product lines of the
studied companies may have changed during the three year pre-IPO window.
Where:
Where:
For anyone involved in the field of corporate finance, understanding the mechanisms of
company valuation is an indispensable requisite. This is not only because of the importance
of valuation in acquisitions and mergers but also because the process of valuing the company
and its business units helps identify sources of economic value creation and destruction
within the company.
The methods for valuing companies can be classified in six groups:
have different values for different buyers due to economies of scale, economies of scope, or
different perceptions about the industry and the company. A valuation may be used for a wide
range of purposes:
1. in company buying and selling operations:
- For the buyer, the valuation will tell him the highest price he should pay.
- For the seller, the valuation will tell him the lowest price at which he should be
prepared to sell.
2. Valuations of listed companies:
- The valuation is used to compare the value obtained with the shares price on the stock
market and to decide whether to sell, buy or hold the shares.
- The valuation of several companies is used to decide the securities that the portfolio
should concentrate on: those that seem to it to be undervalued by the market.
Strengths
Weaknesses
The value of the firm is equivalent to the capital required to produce income equal to
a projected future income stream from continuing operations of the firm. The rate of
return used is adjusted to take into account the level of risk assumed by a buyer in
purchasing the business as a going concern.
Strengths
The value of the firm is based on projected future results, rather than assets.
Can be used with either net earnings or net cash flow.
Useful when future results are expected to be different (up or down) from recent
history.
Weaknesses
May understate the value of balance sheet assets.
Discounts the valuation based on the level of risk. A business perceived as riskier
typically receives a lower valuation than a more stable business.
Projections are not guarantees; unforeseen future events can cause income or earnings
projections to be completely invalid.
Capitalization of Earnings
CHAPTER III
LITERATURE REVIEW
Study of Business Valuation Methods and Techniques is important because of
the in day to business and future forecasting purpose it is very important to
study very deeply. When firm carries the wellbeing business then its important
to take care of that because of that the to maintain and sustain this business in
future kind of way.
Business Valuation and Methods is the increase the efficiency and effective of
entire and impact individual companys ability. Often this are only manner to
looking future kind of the business and to implement the various thoroughly.
In the Research Paper submitted by the Pablo Fernndez (IESE Business School
University of Navarra) in that study the topic discuss that the Company
Valuation Methods. The Most Common Errors in Valuation.
He said that what is main common errors occur in the Business valuation
Methods and Techniques and how to identify this errors to minimizing the risk
the of market and to protect the future consequence to avoid loss of the
company and to create of the investor point of view.
There are number of Methods used by finance managers for valuing a business.
The most appropriate methods is the selected keeping in view the circumstance
of each case.
The author speak about the generally speaking, a companys value is different
for different buyers and it may also be different for the buyer and the seller.
Value should not be confused with price, which is the quantity agreed between
the seller and the buyer in the sale of a company. This difference in a specific
companys value may be due to a multitude of reasons. For example, a large and
technologically highly advanced foreign company wishes to buy a well-known
national company in order to gain entry into the local market, using the
reputation of the local brand. In this case, the foreign buyer will only value the
brand but not the plant, machinery, etc. as it has more advanced assets of its
own.
However, the seller will give a very high value to its material resources, as they
are able to continue producing. From the buyers viewpoint, the basic aim is to
determine the maximum value it should be prepared to pay for what the
company it wishes to buy is able to contribute.
From the sellers viewpoint, the aim is to ascertain what should be the minimum
value at which it should accept the operation. These are the two figures that face
each other across the table in a negotiation until a price is finally agreed on,
which is usually somewhere between the two extremes.
A company may also have different values for different buyers due to
economies of scale, economies of scope, or different perceptions about the
industry and the company.
A valuation may be used for a wide range of purposes:
1. In company buying and selling operations
2. Valuations of listed companies
3. Public offerings
4. Inheritances and wills
5. Compensation schemes based on value creation
6. Identification of value drivers
7. Strategic decisions on the companys continued existence
8. Strategic planning
CHAPTER IV
OBJECTIVE OF THE STUDY
To study and Analyze the Various Business Approaches.
Find answers to the questions that confront the owners and managers of finance
companies and the financial directors of all kinds of companies in the performance of
their duties.
Develop new tools for financial management.
Study in depth the changes that occur in the market and their effects on the financial
dimension of business activity.
CHAPTER V
DATA ANALYSIS AND INTERPRETATION
Asset Based Approaches to Business Valuation
Net Asset = Value of Asset Amount of Liabilities Amount due to Preference
Shareholders
1. Balance Sheet of Slack Ltd. is given to you. You are required to calculate the price
per equity share on the basis of net assets methods.
Liabilities
Equity Shares of
Reserves
Dividend Equalization Fund
Secured Loan
Staff Welfare Fund
Creditors
Accrued Expenses
Proposed Dividend
600000
1320000
200000
800000
20000
360000
100000
90000
3490000
Asset
Land and Building
Plant and Equipment
Motor Vehicles
Patents etc.
Stock
Debtors
Cash and Bank Balance
Deferred Advertisement
1600000
900000
120000
24000
400000
300000
66000
80000
3490000
Net profits of the company after tax and interest for the last 5 years were - 180000,
160000, 210000 and 200000. The fixed assets have been valued by independent experts
as follows:
Land and Building 2150000, Plant and Equipment 960000 and Motor Vehicles 90000.
The applicable price earnings ratio is 8. Compute the value per equity share of the company
based on Net Assets Methods.
Particulars
Computation of Net Asset
Land and Building
Plant and Equipment
Motor Vehicles
Intangibles
Stock
Debtors
Cash and Bank
Total (a)
Secured Loan
Creditors
Accrued Expenses
Total (b)
Net Assets (a-b)
Number of Equity Shares
Value of per Equity Share
2150000
960000
90000
0
400000
300000
66000
3966000
800000
360000
100000
1260000
2706000
60000
45.1
Additional income expected in the future years due to new product etc.
Profits or Loss from the sale of fixed assets;
Loss due to theft or natural calamities, strike, lock-outs;
Expenditure on Voluntary retirement;
Any other item which is which is extraordinary in nature and is not expected to
occur in the future years.
2. Super Tech Ltd. earned a profit of 478000 after tax and after preference dividend.
The capital structure of the company consisted of
Particulars
100000 Equity Shares of 10 each
12% Preference Share Capital
1000000
350000
350000
100000
120000
130000
50000
80000
28000
52000
Particulars
Sale of new product
Less Material Cost
Less Labor Cost
Contribution
Additional Fixed Cost
Operating Profit before Tax
Less Tax @ 35%
Profit After Tax
478000
42000
520000
800000
45000
845000
80000
925000
323750
601250
15%
4008333350000=3658333
EPS X P/E
3. From the details given in Problem number 1, we can calculate market price per share
on the basis of Price-earnings ratio.
Solution:
P/E method
Total Profit for the average maintainable profits
Total profit for the last 5 years
180000+160000+210000+180000+200000+930000
Average Profit = 930000/5 = 186000
Earnings Per Share = Average Profit/Number of equity shares = 186000/60000 = 3.10
P/E ratio = 8
Value Per Share = EPS X P/E ratio
= 3.10 X 8
= 24.80
B. Earnings Approaches to Business Valuations, Cash Flow Basis
Value of a Firm =
5000000
3000000
The Cash flows to all investors expected over the next 5 years are
3000000
1900000
2200000
3200000
4150000
Year
1
2
3
4
5
The corporate tax applicable to the company is 40%. Compute the Value of Business and also
value of firm from the perspective of equity shareholders. The capitalization rate is 14%.
1. Calculation of Overall cost of Capital
Capital
Equity
Amount
5000000
Cost
0.14
Proportion
0.625
WACC
0.0875
Debt
3000000
0.12 (1-0.40)=0.072
0.375
0.027
WACC
2. Value of Firm DCF Basis
Year
1
2
3
4
5
FCFF
3000000
1900000
2200000
3200000
4150000
PV Factor
0.897
0.805
0.722
0.648
0.582
( in Lakhs)
Particulars
Sales
Less: Operating Cost
Less: Interest Cost
Earnings before tax
Less: Tax (40%)
Earnings After Tax (EAT)
500
300
12
188
75.2
112.8
The firms capital consists of 150 lakh equity funds, having 15% cost and of
100 lakh, 12% debt. Determine the EVA during the year.
Solutions
(i)
Particulars
Sales
Less: Operating Cost
Less: Tax (40%)
Operating Profit After Tax
(ii)
500
300
80
120
Calculation of WACC
Capital
Equity Share Capital
12% Debenture
Amount
15000000
10000000
Cost
0.15
0.12(1-0.40)=0.072
Proportion
0.6
0.4
WACC
0.09
0.0288
(iii)
Economic Value Added = Net Operating Profit After Tax (Return expected on
Capital Employed)
CHAPTER VI
FINDINGS AND OBSERVATION
Business Valuation Methods and Techniques using for the to run the business good
kind of way to avoid the future consequence
For the above finding in various methods of Pricing the followings come to the study
point of view this are as follows.
Asset Based Valuation Approach: The assets may be valued on the basis of
the accounting principle of going concern or on the basis of the value on
winding up.
Earnings Based Valuation Approach: This Approach is totally based on the
future prospects of the business.
Market Value Based Valuation Approach: The MVA is the basis of
determination of market value quoted in the stock market.
Fair Value Valuation Method: This is based on the average of the values
determined by any two or of the other methods.
Economic Value Added: In this EVA approaches difference between
operating profit and cost of funds is the real profit of the company.
Market Value Added Approach: MVA is the value added to the equity during
a year. It is found out by subtracting from the Market value of a firms equity,
the amount of equity investment.
Identifying the most commonly happening errors in Business Valuation Methods.
1. Errors in the discount rate calculation and concerning the companys riskiness
A. Wrong risk-free rate used for the valuation
1. Using the historical average of the risk-free rate.
2. Using the short-term Government rate.
3. Wrong calculation of the real risk-free rate.
2. Using the historical beta of the company when the result goes
against common sense.
3. Assuming that the beta calculated from historical data captures the
country risk.
4. Using the wrong formulae for levering and levering the beta.
5. Arguing that the best estimation of the beta of a company from an
emerging market is the beta of the company with respect to the S&P
500.
6. When valuing an acquisition, using the beta of the acquiring
company.
CHAPTER VII
CONCLUSION OF THE STUDY
The Project entitled A Study and Analysis of Business Valuation Methods and
Techniques is mainly concentrated on the basis knowledge of the Corporate Finance
and Capital Market.
The Study has helped me to clarify my conceptual understanding about the Business
Valuation Methods and its Techniques. During this study I got Opportunity to avail a
thorough knowledge regarding the corporate finance and Capital market, How to
Calculate the Value through different Methods and techniques. Its give me clear idea
about the business requires the careful selection of method of Valuation of assets for
both tangible and intangible assets, fixed and current assets, existing liabilities and
contingent liabilities. Business Valuation the corporate restructuring has now these
affect the organization and outside the firm also, to how much this will effective to
various methods and techniques. In the new business era now taking into
consideration is the very importance to the various business valuation and methods.
Companies are now become very much serious about the regarding their business to
choosing appropriate business valuation methods and techniques because of the some
of the corporate entity wanted to earn huge revenue if at all they wanted to survive in
the highly competitive world and provide world class service to their client and
customer.
To sustain in the market and to maximize the profit volume and to creating smile on
the investor and customer face then you have to deals with various approaches.
CHAPTER VIII
REFERENCE AND BIBLIOGRAPHY
Books:
Websites
1. www.rbi.org.in
2. www.moneycontrol.com
3. www.investpoedi.com
Business Article
Company Valuation Methods. The most common Errors in Valuations (Pablo FernandezIESE Business School University of Navarra)