IS VALUATION AN

ART OR A SCIENCE
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Discounted Cash Flow

Relative Valuation

Applications
-Start ups
-Projects
-Intangibles
-Real Options

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ART, SCIENCE, CRAFT:
THE VALUATION
DIASPORA, NUMBERS
AND SCIENCE
Video 1: Numbers and Story

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VALUATION AS A “Be transparently wrong

BRIDGE than opaquely right”

 BRIDGING THE GAP

Note: This slide is from AD’s website

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LEARNING FOR
DIFFERING AUDIENCES

Video 2: Learning

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8
BUSINESS MODEL
REGULATORY GLITCH
Video 3: Theranous

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Bridging concepts in Finance to Valuation
A RECAP
THE STORY OF FINANCE
(SINGLE PERIOD)
You go to Kunnamangalam market and buy a apple for Rs. 10. You
consume it on your way back and as soon as you reach your hostel,
there is a arm wrestling bout, and you decided to participate in it.
You defeat a opponent whom you normally don’t defeat and win a
prize money of Rs.12.
What is the value of the apple to you??
 Rs.10
 Rs.12
 Rs.2
Value is what a asset earns for you over its life time..
THE STORY OF FINANCE
(MULTIPERIOD)
Everything remains the same, except that just about the time when
the (arm wrestling) club owner was about to give you your prize, the
post man comes and hands over a letter from IIMK.. His kid got
admission in IIMK and so he now promises to pay you the money
after six months.
What is the value of the apple to you??
 < >Rs.10
 < > Rs.12
 < > Rs.2 Depends
Who on
canthe uncertainty
help us with the uncertainty?
There are two dominant view points to valuing a company:
(i) From the view point of all investors

(ii) from the view point of equity investors (9947653367)

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DISCOUNTED CASHFLOW
VALUATION: BASIS FOR
APPROACH

where CFt is the cash flow in period t, r is the discount rate appropriate
given the riskiness of the cash flow and t is the life of the asset.
Proposition 1: For an asset to have value, the expected cash flows have
to be positive some time over the life of the asset.
Proposition 2: Assets that generate cash flows early in their life will be
worth more than assets that generate cash flows later; the latter may
however have greater growth and higher cash flows to compensate.
HOW DO YOU ADJUST
FOR THE RISK OF
GETTING THE MONEY
AFTER 6 MONTHS
Discount @ inflation
Discount @ Bank FD
Discount @ some random rate
EQUITY VALUATION
VERSUS FIRM
VALUATION
Value just the equity stake in the business
Value the entire business, which includes, besides equity, the other
claimholders in the firm
 EQUITY
VALUATION:FCFE/K E
Let us 0look at CF to Equity
1 2 Gedankexperiment:
3 4 5
Sales Given below ForisNPV
a investment proposition with
Initial
investment -VC calculations - These cash
Capex Contribution
800 initial Capex
flowsofare
800 and the investment
discounted at the costinof
45NWC is 30% of subsequent year’s
NWC 30 -FC
EBDIT Why54equity
do you 42
subtract 48
change insales…
NWC and
Sales -D 100 150 180
not NWC?140 160
Investment EBIT 15 9 -12 6
in WC -I
EAIBT
-Taxes
PAT No Body wants to hazard a
+D What
guessdoes this much debt is
on how
OCF
-CapEx
mean? in each year?
borrowed
-Chg NWC
Discretionary
Net debt repaid = -(Principal
-Principal repaid (Debt)
+ New Debt issued
repaid – New debt issued) Why ?
FCFE
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