Company Valuation

COMPANY VALUATION
 Company Purpose:
 Maximizing the value of the company's assets
 It means to maximize the present value of the
common stock price of the company.
 Factors that contribute to the value of
shares in the capital market:
 Company advantage
 Dividend
 Company growth rate
 Psychological factors.
 Concept of Value (1)
 Marketable securities consist of:
 Bonds (bonds / bonds)
 Preferred stock
 Common stock

 The value of a security is the value in the

form of money (price) or in the form of
other securities that occur at a certain
time.
 Concept of Value (2)
 Going Concern Value: the value of the
securities of a company that is operating
profitably, with unlimited future business
prospects.
 Firm value is determined by:
 Future profit
 Dividend
 Expected growth for the business
 Concept of Value (3)
 Liquidation Value:
 For a company that is about to die
 Is the net value (net value) of the assets
 Is a liquidation value.
 Market value:
 Because stocks or bonds are traded on a stock
exchange
 Is the value of bonds or shares in the market,
as a reflection of market perceptions of the
company's securities (bonds or stocks).
 Concept of Value (4)
 Book Value:
 Determined based on standardized accounting
techniques
 Calculated from Financial Statements (Balance Sheet).
 Intrinsic Value:
 Is the real value of a security derived from the current
market price.
 Estimated by appraisal of the fundamental factors
affecting the value of a security:
 Company asset value
 Future dividends and interest paid
 Future company profits
 Future growth rate.
 INTRINSIC VALUE ANALYSIS
 Is the process of comparing the real value
of a security with the current market price
or the proposed purchase price.
 In this analysis can happen:
 Over valued: if the real value of a security is
less than its selling price,
 Under valued: if the real value of a security is
higher than its selling price.
 Comparaison of Intrinsic value and
Actual Market Price
Assets: Market condition
Future profit Future growth
dividend
“determined”

intrinsic (real value) actual market price comparaison

intrinsic value > actual market price intrinsic value < market price
(stock price under valued) (stock price over valued)

buy sell
Limitation of Intrinsic value Analysis
 If the market is too slow to “recognize”
the real value
 For stocks of highly speculative companies
(oil companies, etc.)
 High growth stocks.
 Current market value Approach
 Relates to market prices (and has nothing to do with
Intrinsic Value)
 If a security has a higher value (higher market value)
than the price offered, it is best to "buy" the security.
 "Buy" after it occurs:
 Depressed overall market (after a massive decline in share
prices)
 Industry comparison
 Cyclical lows (stock prices follow a cyclical pattern, buy
near the cyclical low, and sell near the high)
 Value of Bonds or Fixed Income
securities (1)
 Variable rate debt
 Prime rate: measures the interest rate
charged by the bank.
 LIBOR/ SIBOR/ JIBOR:indicator used to
determine the cost of money in International
Financing.
 A company, can obtain a loan whose interest
fluctuates against the prime rate or LIBOR.
 Value of Bonds or Fixed Income
securities (2)
 Fixed rate security (given maturity):
 The company has sold $500 million of 10-year
bonds, with a coupon rate of 8%.
 The bonds are sold at a price of $1,000, of
which interest is paid semi-annually (semester)
 After 1 year of issuance, it turns out that long-
term interest rates have fallen to 6%
 The bondholder wants to sell it on the market,
with the expectation that the price is > 1,000.
 Value of Bonds or Fixed Income
securities (3)
 The initial bond promises 8% interest
payable semiannually, so the owner
receives:
 1,000 (0,08/2) = 40
 PV1 = 40 (1/0,03)(1-1/(1,03)*18) = 550.14
 PV2 = 1,000/(1,06)*9 = 591.90
1,142.04
 intrinsic value or teal worth of bond (one year
after with interest rate 6% = 1,142.04
 Fixed Return Security
(no specified maturity)
 Call feature: the right to convert preference
shares into common stock
 Preferred stocks are “perpetual” (have cash
flows that must be paid or will be received
indefinitely)
 Vb = c/(1+Kb) + c/(1+Kb)*2 + …….
 Vb = c/Kb
 Vb : intrinsic value preferred stock
 C : annual cash payment / receipt
 Kb : discount rate factor
 Contoh:
 Perusahaan mempunyai saham preferensi dengan
nilai pari = 100, dengan dividen 14%. Saham ini
mempunyai similaritas dengan saham biasa yang
mempunyai yield sebesar 11,75%
 Maka nilai intrinsic saham biasa tersebut adalah PV
=100 (0,14) / 0,1175 = 119,15.
 Example:
 The company has preferred stock with a
par value = 100, with a dividend of 14%.
This stock has similarity to common stock
which has a yield of 11.75%
 Then the intrinsic value of the common
stock is PV = 100 (0.14) / 0.1175 =
119.15.
 Value of common stock
 Capitalization technique: a method for
converting future cash flows into a present
value or intrinsic value for a security.
 Common stock offers a potential growth
from future CFs
 1. Single Period Model
 Ke1 = (P1 – Po + d1)/ Po
 Ke1 : the rate of return generated in period 1
 P1: the final value of the security at the end of
period 1
 Po: initial value in period 0
 d1: cash (dividends) received between periods
0-1
 Example:
 An investor buys 100 shares of common stock
at a price of 4,000, plus an agent's commission
of 100. Within one year, he sells those shares
for 4500 and deducts 100 as commission. And
during that year, he received 250 in dividends.
 Rate of return (Ke1) = (4400 - 4100 + 250) /
4100
 = 13.4%
 Intrinsic Value for stock:
Po = 1/(1+Ke1) x (d1 + P1)
Example:
An investor buys 100 shares of common stock
which costs 7,000, and over a period of 1 year he
receives a dividend of 500. Investments in these
stocks require an 11% return before tax.
The intrinsic value of these 100 shares:
Po = 1/(1+0,11) x (500 + 7000) = 6.756,76
2. Perpetual Dividend (no growth)
 Valuation for Preferred Stock:
PV = c/Kb = d1/Ke(req),
where d1 = DPS1
 If growth rate = 0, then %RE = 0 (means
that all EPS is distributed in the form of
DPS)
 Po = eps1/Ke(req)
 3. Perpetual dividends
(constant growth)
 Dividend payout = DPS/EPS
 Po = DPS1/(Ke(req) – g), in accordance
with Gordon Model, Po = d1/(ks – g)
 Example:
A share has EPS = 5, and a DPR of 44%.
 Investors want a 16% return, and a growth
rate of 12%.
 Intrinsic value of the stock, Po = 5 (0,44)/
(0,16 – 0,12) = 55.
 Comparative approach to
valuation

 1. Comparing Multiple Price Earning.

 Intrinsicvalue = EPS / Ke (req)
 Ke = EPS / MP, where intrinsic value replaces
market price.
 PER (price earnings ratio) = MP / EPS, can be
used to determine the value of a security that
has not gone public (still private).
 Example:
 Company A, which is still privately owned,
owns
 EPS = 4, Firms B and C are two companies
that are similar in terms of risk and return,
and are publicly traded with PER = 7.
 The value of company A is obtained by
calculating Ke (req) = 1/7, so that the intrinsic
value of company A's shares is 4 / (1/7) = 28
 2. Comparing value with the Gordon
Model
 Assumption: the market price of a similar
firm also applies to the intrinsic value of
the firm.
 Market price = d1 / (Ke (req) - (Ke (act)
(% RE)))
 Ke (req) = d1 / MP + (Ke (act)) x (% RE).
 Example:
A private company has a growth rate of 5%,
and pays 600 dividends. A similar company
that has gone public sells its shares for 8000,
pays 400 dividends and has a growth of 8%
 Ke (req) = 400/8000 + 0.08 = 0.13
 The expected market price (intrinsic value) of
the private company = 600 / (0.13 - 0.05) =
7500.
 3. Relationship between Book
Value and Market Price:

 The book value of the company cannot be

directly used to determine the market
value or intrinsic value of a “going
concern”.
 Similar companies have similar market
value and book value ratios.
 Example:
 Go public companies have a book value of
3000 per share, and a market price of 4500
per share.
 The intrinsic value of similar companies with a
book value of 1000 per sheet is:
 Company I ratio of book value to market price
= 3000/4500
 Firm II = 1000 / (3000/4500) = 1500