MODULE 1: BASICS OF BUSINESS

VALUATION
Introduction, Purpose of valuation,
distinction between price and value,
Principles and Techniques of Valuation, Role
of Valuation, key areas of valuation, Concepts
of value:- Market Value, Fair value, Book
Value, Intrinsic value, Investment value,
Liquidation value, Replacement value. Role of
valuation in Business acquisition and
Corporate finance, Valuation process.
 Valuation-Meaning
• The technique of estimation or
determining the fair price or
value of property such as
building, a factory, other
engineering structures of
various types, land etc.
• By valuation the present value
of a property is defined
• The present value of property
may be decided by its selling
price, or income or rent it may
fetch
• The value of property depends
on its structure, life,
maintenance, location, bank
interest etc.
 Valuation-introduction
• A process and a set of
procedures used to estimate
the Economic value of an
owner's interest in a business
• Used by financial market
participants to determine the
price they are willing to pay
or receive to effect a sale of a business
• Used 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
 Purpose of Valuation
• Buying or selling property
• Taxation
• Rent fixation
• Security of loans or
mortgage
• Compulsory acquisition
• To claim insurance return
• Court fee stamp
• Partitions
 Difference between price &
value
Basis for
Price Cost Value
Comparison
Cost is the amount
Price is the amount
incurred in Value is the utility of
paid for acquiring
Meaning producing and a good or service
any product or
maintaining
service
something
Ascertained from Ascertained from Ascertained from
Ascertainment the consumer's the producer's the user's
perspective perspective perspective
Estimation Through Policy Through Fact Through Opinion

Impact of variations Prices of product Cost of inputs rise or Value remains

in market increase or decrease fall unchanged

It can also be
It can be calculated It is not calculated in
Money calculated in
in terms of money. terms of money.
monetary terms.
 Principles of valuation
• The value of a business is defined
only at a specific point in time
• Value primarily varies in
accordance with the capacity of a
business to generate future cash
flow
• The market commands what the
proper rate of return for acquirers
is
• The value of a business may be
impacted by underlying net
tangible assets
• Value is influenced by
transferability of future cash
flows
• Value is impacted by liquidity
 Techniques of valuation

Corporate
Valuation

Discounted Relative Option

Book Value Stock and Debt
Cash flow Valuation Valuation
Approach Approach
Approach Approach Approach
 Concepts of value-Market
Value
• Commonly used to refer to the
market capitalization of a
publicly traded company
• Obtained by multiplying the
number of its outstanding
shares by the current share
price
• Easiest to determine for
exchange-traded instruments
such as stocks and futures
• Challenging to ascertain for
over-the-counter instruments
like fixed income securities
 Fair value
• Investment-it refers to an
asset's sale price agreed
upon by a willing buyer and
seller, assuming both parties
are knowledgeable and enter
the transaction freely.
• For example, securities have
a fair value that's determined
by a market where they are
traded.
• Accounting: represents the
estimated worth of various
assets and liabilities that
must be listed on a
company's books.
 Book Value
• Book value is equal to its
carrying value on the balance
sheet, and companies calculate
it netting the asset against its
accumulated depreciation.
• Book value is also the net asset
value of a company calculated
as total assets minus
intangible assets (patents,
goodwill) and liabilities.
• For the initial outlay of an
investment, book value may be
net or gross of expenses such
as trading costs, sales taxes,
service charges and so on.
 Intrinsic value
• Intrinsic value is the
perceived or calculated
value of an asset, an
investment, or a
company
• The term finds use in
fundamental analysis to
estimate the value of a
company and its cash
flows
 Investment value
• The amount of money an
investor would pay for a
property
• It refers to an asset’s
specific value based on
certain parameters
• It is an individual’s
measurement of the asset’s
property value
• Important to potential
buyers of a property
because of anticipated rate
of return
 Liquidation value
• Liquidation value is the total
worth of a company's
physical assets if it were to go
out of business and the assets
sold
• The liquidation value is the
value of company real estate,
fixtures, equipment, and
inventory
• Intangible assets are
excluded from a company's
liquidation value
• Important in the case of
bankruptcies and workouts
 Replacement value
• The amount that an entity would
have to pay to replace an asset at
the present time, according to its
current worth
• Replacement cost is the actual
cost to replace an item or
structure at its pre-loss condition
• For insurance policies for
property insurance, a contractual
stipulation that the lost asset
must be actually repaired or
replaced before the replacement
cost can be paid is common
• Prevents overinsurance, which
contributes to arson and
insurance fraud
 Role of valuation
• Portfolio management
• Fundamental analysis
• Activist investors
• Chartists
• Information traders
• Market timers
• Efficient marketers
Role of valuation in business
acquisition
• Better Knowledge of
Company Assets
• Understanding of
Company Resale Value
• Obtain a True Company
Value
• Better During
Mergers/Acquisitions
• Access to More
Investors
 Role of valuation in
corporate finance
• Expansion decision
• Venture capital and
private equity
• Tool of value
enhancement
 Valuation process

Understand your business in which you are operating

Have an estimate of the company performance

Select the appropriate valuation model suitable for your business

Convert estimates to a valuation

Applying the inputs of valuation

End of Module 1