Valuation

Meaning of valuation.

The valuation of securities or financial assets is based on two assumptions

 The market is mispriced

 The market will take some time to correct itself. There is a limit to arbitrage.

Expression of Value

The term value means

Valuation Process

1. The reasons for valuation

 Tax purposes
 Non-tax purposes (M&A buy or sale, listing, IPO, litigation support etc.)
2. The underlying factors or drivers of valuation
3.

Approaches to valuation

No one single approach is appropriate for evaluation assignment. And therefore it is always good to
compare a

In financial management there are two major ways of valuation

 Discounted cash flow approach (DCF)

1. Free Cash flow model
2. Free cash flow to equity model
3. Adjusted present value approach
4. Dividend valuation techniques
 Relative

Fundamental Value

It is the present value of all the future expected cash flow, discounted using an appropriate rate.

Discounted Cash Flow (DCF) Technique

Under this approach, the value of an asset or a firm is simply the present value of relevant cash flow
using relevant discounting rate

Steps:

 Estimate the relevant cash flow

 Estimate the relevant discounting rate
 Compute present value

(Present value = value of asset or firm)