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    Introduction To Business Valuation

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    Sunanda Joshi
    Business valuation refers to estimating the value of a business based on the expected future cash flows it will generate. There are several approaches to valuation, including the asset, market, and income approaches. The income approach, also called the discounted cash flow (DCF) approach, values a business based on the present value of its projected future cash flows by discounting them using a rate of return. It is commonly used to value industries involving large upfront capital expenditures or amortization burdens. The market approach values a business using comparable market multiples like price-to-earnings or price-to-book ratios based on similar publicly traded companies. The asset approach values a business based on the fair market value of its identifiable net

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    Introduction To Business Valuation

    Uploaded by

    Sunanda Joshi
    185 views13 pages
    Business valuation refers to estimating the value of a business based on the expected future cash flows it will generate. There are several approaches to valuation, including the asset, market, and income approaches. The income approach, also called the discounted cash flow (DCF) approach, values a business based on the present value of its projected future cash flows by discounting them using a rate of return. It is commonly used to value industries involving large upfront capital expenditures or amortization burdens. The market approach values a business using comparable market multiples like price-to-earnings or price-to-book ratios based on similar publicly traded companies. The asset approach values a business based on the fair market value of its identifiable net

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    Overview of business valuation

    Original Title

    Introduction to business valuation

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    Business valuation refers to estimating the value of a business based on the expected future cash flows it will generate. There are several approaches to valuation, including the asset, market, and income approaches. The income approach, also called the discounted cash flow (DCF) approach, values a business based on the present value of its projected future cash flows by discounting them using a rate of return. It is commonly used to value industries involving large upfront capital expenditures or amortization burdens. The market approach values a business using comparable market multiples like price-to-earnings or price-to-book ratios based on similar publicly traded companies. The asset approach values a business based on the fair market value of its identifiable net

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    185 views13 pages

    Introduction To Business Valuation

    Uploaded by

    Sunanda Joshi
    Business valuation refers to estimating the value of a business based on the expected future cash flows it will generate. There are several approaches to valuation, including the asset, market, and income approaches. The income approach, also called the discounted cash flow (DCF) approach, values a business based on the present value of its projected future cash flows by discounting them using a rate of return. It is commonly used to value industries involving large upfront capital expenditures or amortization burdens. The market approach values a business using comparable market multiples like price-to-earnings or price-to-book ratios based on similar publicly traded companies. The asset approach values a business based on the fair market value of its identifiable net

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    Introduction to

    Business Valuation
    Introduction to Business Valuation

     Business valuation refers to estimation of business value

    Valuation is just to estimate


    What (cash flow) + When (time period) + How (risk),
    we receive in future out of the business
    “Values of business” derived by different perceptions

    Fair Value of all company Assets

    Replacement Value of recorded Assets

    Book Value (Balance Sheet)

    Added Value
    Approaches to Valuation

     Asset Approach / Cost Method


     Market Approach / Relative Valuation / Multiplier
     Income Approach / Discounted Cashflow
     Option pricing / Contingent Claim
    Asset Approach
     Book Value = Assets – Debt
     Shareholder’s Equity

    Cash = 200
    LT Liability = 350
    LT Assets = 400
    Current Liability = 150
    Other Current Assets = 250

    Book Value = ?

    Used for valuing Banks, Brokerages etc.


    Multiplier Approach
     Valuation using the comparable assets
    Price relative to book Value, Cashflow etc.
    e.g Price to Earnings, Price to Book

    InfoTele has an expected earnings of INR 20 / share. The tele industry


    stocks trade at a Price-to-Earnings multiple of 14x. What is the value of
    InfoTele stock? Total number of shares for InfoTele are 1 million

    Next year InfoTele is expected to earn a profit of INR 25 million. What is


    the one year forward P/E for the stock ?

    Useful for comparing multiple companies


    Usually multiples are compared wrt to benchmarks

    Are Low P/E Stocks Really a Bargain?


    Multiplier Approach
    Advantages
     Reflects the market perception. Useful for IPO valuation
     Segregate undervalued and overvalued securities
     Portfolio managers are judged based on their performance on a relative
    basis. This approach is inline with this evaluation

    Drawbacks
     Built on the assumption that market corrects any imperfections in
    individual securities
     Approach is based on implicit assumptions that may be wrong
    Cashflow Approach
     Cash flow is normally defined as earnings before interest, taxes,
    depreciation and amortization (EBITDA). 
     Focuses on the operating Business

    In the cashflow approach, the value is derived as the present value of the
    expected cash flows.
    To use discounted cash flow valuation, We need to estimate
    •life of the asset
    •cash flows during the life of the asset
    •discount rate to apply to these cash flows to get present value

    Commonly used to value industries that


     involve tremendous up-front capital expenditures
     companies that have large amortization burdens
    Cashflow Approach

    Firm Valuation / Going Concern


    Value Entire business
    Asset Liability

    Assets in Place Debt

    Liquidation Valuation
    Growth Assets Equity

    Equity Valuation
    Value Equity claim in
    the business
    Cashflow Approach
    Advantages
     Based on asset’s fundamentals, not affected by market movements
     Needs better understanding of the underlying business

    Drawbacks
     Requires more information and inputs compared to other methods
     Final valuation subject to manipulation as it is sensitive to the inputs.
     Valuation is unsatisfactory if the cashflows are negative or if firm has
    large number of unutilized assets
    Option Pricing Approach
     Any security that exhibit characteristics  of an option can be valued
    using the option pricing approach
     Value is derived from an underlying asset
     Option has a fixed life
     Payoff occurs when the value derived from the underlying is greater
    than the price of the option paid. Otherwise the options is worthless

    e.g A mining company buying mining lease, Patent owned by a firm

    A pharma company invests 8 crs in researching a new molecule. The


    probability of success is 5%. If the molecule is successful, the company
    will have to spend 3 crs more as marketing expenses and expects to earn a
    revenue of 300 crs. Should the company invest in this molecule research ?
    Option Pricing Approach
    Advantages
     Allows us to value assets, which otherwise cannot be valued using
    other methods
     Introduces a fresh insight into valuation. Higher risk & variability
    increases the value of the asset that exhibits option like characteristics

    Drawbacks
     Inputs required for valuation are difficult to obtain
     Valuation is based on an underlying asset. So there is an additional
    valuation step
     Danger of double counting e.g DCF valuation may assume higher
    growth rate accounting for Patents. Again the patents may be valued
    using option pricing, thereby causing double counting.
    Competitive advantage period
    Assets in Place
    Profit Margin
    Regulatory environment
    Taxes

    firm’s Investment
    Expected Return on
    Managers, people
    and corporate culture
    Value Drivers

    Actual business, barriers to entry

    Acquisition / Disposal

    Industry, Competitive structure


    growth

    New Business & Products


    Technology
    Expected Company
    Expectation of Future Cash flows

    Real options
    Risk-free
    VALUE OF FIRM

    Interest Rate Premium


    Market risk

    Industry & Country Law


    Control on Operations
    Risk

    Buyer / Target
    Operating
    Required return

    Risk perceived by the market


    Financing
    Liquidity
    Risk

    Size
    Financial

    Risk Management
    Market Communication

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