BASIC VALUATION CONCEPT

SPECIFICALLY WITH REFERENCE TO CORPORATE

M.M.M ( SEM II ) 2011-2014.

Subject : Financial Management

Prof. Arun D. Chandarana

PRESERNTED BY GROUP :- 3
Roll No . 31 Sunil Sathe (Group Leader)
Roll No . 25 Ganesh Orpe

Roll No . 19 Prashant Mahamulkar

Roll No . 15 Amol Jadhav
Roll No . 24 Shyam More
Roll No . 07 Satishkumar Biradar

'Valuation'
The process of determining how much an asset, company, or anything

else is worth.
Valuation is highly subjective, but it is easiest when one is considering

the current value of tangible & intangible assets. For example,

determining how much a willing buyer will pay a willing seller for a
house, right now is easier than determining the value of what a
company's brand recognition might be in 10 years.
The process of estimating the worth of something.
The estimated worth given to something.

Concept of valuation
Going-concern value
Liquidation value
Book Value
Market Value
Bond Valuation
Discounted Cash Flow DCF
Intrinsic Value

Going-concern value
Going - Concern value is the value of a company sold as a

continuing operation.
Runs on assumption to exist for foreseeable future .
Going concern value v/s asset / liquidation value = Goodwill.
Plays major role in merger & acquisitions.
Going concern value = entire company sold + intent to keep it
running with new owner.
Liquidation value = entire company sold + tangible asset sold
off.
Going concern value = liquidation value + intangible asset.
Going concern value > liquidation value.

How it calculate
One calculates the going-concern value by adding the value of its

goodwill and income to its net asset value. This is an important

calculation when determining the appropriate purchase price in
a merger or acquisition.
A Discounted Cash Flow Business Valuation is generally used by

investors to calculate the Return on Investment (ROI) they

would receive if they purchased the company. It is based on the
present value (PV) of future cash flows.

Liquidation value
The total worth of a company's physical assets when it goes out of

business or if it were to go out of business. Liquidation value is

determined by assets such as the real estate, fixtures, equipment and
inventory a company owns.
Intangible assets are not included in a company's liquidation value.
Intangible assets include a business's intellectual property, goodwill
and brand recognition.
If a company were to be sold rather than liquidated, both liquidation
value and intangible assets would be considered to determine the
company's going-concern value, investors will look at the difference
between a company's market capitalization and its going-concern value
to determine whether the company's stock is currently a good buy.
Liquidation value can also refer to the cash value of a single asset.

How it calculate
The business liquidation value in itself is a very straightforward
calculation. It is arriving at a value for assets such as inventory, plant
and equipment, vehicles, etc. that complicate the valuation.
You can see that the asset values dropped considerably up
revaluation based on their worth on the open market. After liabilities
have been paid off from the asset liquidation, shareholders are left
with a Rs 60,000 loss.
Book Value
Assets
Cash
Accounts
receivable
Inventory
Fixed assets

Total assets

Rs15,000
Rs35,000
Rs50,000
Rs50,000

Rs150,000

Liquidation Value

Book Value

Liabilities
Rs15,000 Bank debt
Rs23,000 Accounts payable
Rs27,000
Rs25,000
Total liabilities
Shareholders
equity
Rs90,000
Total liabilities
and shareholders
equity

Liquidation Value

Rs30,000

Rs30,000

Rs15,000

Rs15,000

Rs45,000

Rs45,000

Rs105,000

Rs45,000

Rs150,000

Rs90,000

Book Value
The value at which an asset is carried on a balance sheet.

To calculate, take the cost of an asset minus the

accumulated depreciation.
The net asset value of a company, calculated by total
assets minus intangible assets ( non physical substance
such as patents, goodwill) and liabilities.
Since book value is a more accurate measure of valuation
for companies which aren't growing quickly, book value is
of more interest to value investors than growth investors.
Book value is the accounting value of a firm. It has two
main uses:
1. It is the total value of the company's assets that
shareholders would theoretically receive if a company
were liquidated.
2. By being compared to the company's market value, the
book value can indicate whether a stock is under- or
overpriced.

How it calculate
Book Value = Assets - Liabilities
A company or corporation's book value, as an asset held by a

separate economic entity, is the company or corporation's

shareholders' equity, the acquisition cost of the shares, or the
market value of the shares owned by the separate economic
entity.
Book Value and Shareholder Equity are not quite the same thing.

To find a company's book value, you need to take the

shareholders' equity and exclude all intangible items. This leaves
you with the theoretical value of all of the company's tangible
assets (those which can be touched, seen, and felt). For this
reason, book value is sometimes also called "Net Tangible
Assets".

Market Value
Market value is the estimated amount for which a property should

exchange on the date of valuation between a willing buyer & a willing

seller in arms-length transaction after proper marketing where in the
parties had each acted knowledgeably prudently & without
compulsion

The market capitalization plus the market value of debt. Sometimes

referred to as "total market value".

In the context of securities, market value is often different from book

value because the market takes into account future growth

potential. Most investors who use fundamental analysis to pick
stocks look at a company's market value and then determine whether
or not the market value is adequate or if it's undervalued in
comparison to it's book value, net assets or some other measure

How it calculate
There are many or at least several ways but one of the most

popular is a multiple of earnings per share based on there history

of earnings as a percentage of there market price (i.e. earnings
are historically about 3% 0f there share market price or If the
earnings are Rs3.00 per year the market price would be maybe 15
times 3 0r Rs45.00 per share. Some use 10 or 15 or something in
between based on projected earnings

Bond Valuation
A debt investment in which an investor loans money to an entity (corporate or

governmental) that borrows the funds for a defined period of time at a

fixed interest rate. Bonds are used by companies, municipalities, states and U.S.
and foreign governments to finance a variety of projects and activities.
Bonds are commonly referred to as fixed-income securities and are one of the three
main asset classes, along with stocks and cash equivalents..
A technique for determining the fair value of a particular bond. Bond valuation
includes calculating the present value of the bond's future interest payments, also
known as its cash flow, and the bond's value upon maturity, also known as its face
value or par value. Because a bond's par value and interest payments are fixed, an
investor uses bond valuation to determine what rate of return is required for an
investment in a particular bond to be worthwhile
Bond valuation is only one of the factors investors consider in determining
whether to invest in a particular bond. Other important considerations are: the
issuing company's creditworthiness, which determines whether a bond is
investment-grade or junk; the bond's price appreciation potential, as determined
by the issuing company's growth prospects; and prevailing market interest rates
and whether they are projected to go up or down in the future.

How it calculate
Here is the formula for calculating a bond's price, which uses the

basic present value (PV) formula:

C = coupon payment
n = number of payments
i = interest rate, or required yield
M = value at maturity, or par value

Discounted Cash Flow DCF

A valuation method used to estimate the attractiveness of

an investment opportunity.
A Discounted Cash Flow Business Valuation is generally
used by investors to calculate the Return on Investment
(ROI) they would receive if they purchased the company.
It is based on the present value (PV) of future cash flows.
Discounted cash flow (DCF) analysis uses future free cash
flow projections and discounts them (most often
using the weighted average cost of capital) to arrive at a
present value, which is used to evaluate the potential for
investment. If the value arrived at through DCF analysis is
higher than the current cost of the investment, the
opportunity may be a good one.
Discounted cash flow is also known as Time Value Of
Money

Characteristics of DCF Valuation

Forward looking and focuses on cash generation
Recognize time value of money

Allows operating strategy to be built into a model

Only as accurate as assumptions and projections used
Works best in producing a range of likely values

How it calculate

Intrinsic Value
The actual value of a company or an asset based on an

underlying perception of its true value including all aspects of

the business, in terms of both tangible and intangible factors.
This value may or may not be the same as the current market
value. Value investors use a variety of analytical techniques in
order to estimate the intrinsic value of securities in hopes of
finding investments where the true value of the investment
exceeds its current market value.

For example, value investors that follow fundamental analysis

look at both qualitative (business model, governance, target

market factors etc.) and quantitative (ratios, financial statement
analysis, etc.) aspects of a business to see if the business is
currently out of favor with the market and is really worth much
more than its current valuation

How it calculate
The intrinsic value for an in-the-money option is calculated as the

absolute value of the difference between the current price (S) of the
underlying and the strike price (or exercise price) (K) of the option,
floored to zero.
For a call option
IVcall = max{0,S K}
while for a put option
IVput = max{0,K S}
For example, if the strike price for a call option is Rs 1 and the price of
the underlying is Rs 1.20, then the option has an intrinsic value of Rs
0.20.

Thank you.!!!