BFD – Business Valuation

By Ahmed Raza Mir & Taha Popatia

Business Valuation

A) P/E Ratio

P/E ratio = Market value per share

EPS

B) Cashflows Based Valuation

Free Cashflows to Company

Free Cashflows to Equity
Revenue xxx
Free Cashflows to Company xxx
Operating expenses (xxx)
(excluding non-cash items) Interest Payment (xxx)

Taxes (xxx) Tax saving on interest xxx

(excluding tax saving on interest of debt)
Debt Repayment (xxx)
Working Capital Changes (xx)/xx
Issue of Debt xxx
Capital Expenditure (xxx)
(operations related only) xxx
xxx

 It will be discounted directly by using Ke.

 It will be discounted using WACC.
(because it directly represents the cashflows
 After discounting Deduct the market
available to the shareholders unlike Free
value of debt (because it represents the
cashflows to company method because it
total value of the company i.e. its
represents the total cashflows available to the
market value of Debt + Equity).
Financers of the Business i.e. E+D

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 BFD – Business Valuation
By Ahmed Raza Mir & Taha Popatia

C) Others
i. Dividend Valuation Method (DVM)

In Case of constant dividend,

Po = Do / Ke
In Case of dividend growth at fixed rate,
Po = Do (1 + g)
Ke – g
Estimation of Growth Rate
Past Dividend Patterns Earning retention model (Gordon’s
growth model)
1/n
Current Dividend g=bxr
-1
Dividend n years ago Where:
g = annual growth rate in dividends in
Where: perpetuity
b = proportion of earnings retained (for
n (periods of growth) = No. of Years - 1 reinvestment in the business)
r = rate of return that the company will
make on its investments
Note: If separate % of r is not given then,
assume r is equal to existing return on
equity.

ii. Dividend Yield Method

Dividend per Share
Current market price per share
iii. Earnings Yield Method

Earnings per share

Current market price per share

D) Maximum Premium Payable / Synergy

Value of Combined Company (A + B) xxxx

Less: Value of Company A (xxxx)

Less: Value of Company B (xxxx)

xxxx

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