There are 2 methods of valuation of a business
1. Assets based method which focuses on net value of
assets.
2. Earnings ba...
 Assets based approach to valuation
 Value of assets determined to arrive at equity share
valuation
 NAV per share coul...
 Earnings Based approach to valuation
1. Earnings measure based on accounting –
capitalisation method
2. Price Earnings R...
 Earnings Based approach to valuation
1. Earnings measure based on accounting –
capitalisation method
Valuation of a firm...
 Earnings Based approach to valuation
 Price earnings ratio
 Most commonly used by finance managers,
investment analyst...
 Earnings Based approach to valuation
1. Earnings measure based on Cash flow basis(DCF
Approach)
Used to evaluate capital...
 Earnings measure on free cash flow basis(FCFF)
1. This method reflects the cash flows generated by a
company’s operation...
 Calculation of Free Cash Flows
After tax operating earnings
Plus: Depreciation, amortisation and other non cash items
Le...
The value of the firm: Present value of FCFF
FCFFs are available to all the capital providers of a
corporate enterprise, t...
Value of a firm= present value of cash flows during
explicit forecast period + continuing value of the firm
Continuing val...
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M&a val2

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  • Ratios are compared to industry averages.
    There are 14 to 16 common ratios grouped into 4 types.
    Dun and Bradstreet and Robert Morris Associates give industry average ratios for hundreds of industries.
    We will describe the types of ratios and focus on several important financial ratios.
    Financial Statements 
    1. Financial statements report a firm’s position at a point in time and on operations over some past period
    2. Investors use financial statements to predict future earnings/dividends
    3. Management uses financial statements to help anticipate future conditions and as starting point for planning actions that will affect future event
    Financial ratios
    1. Help evaluate a financial statement
    2. Facilitate comparison of firms
  • Ratios are compared to industry averages.
    There are 14 to 16 common ratios grouped into 4 types.
    Dun and Bradstreet and Robert Morris Associates give industry average ratios for hundreds of industries.
    We will describe the types of ratios and focus on several important financial ratios.
    Financial Statements 
    1. Financial statements report a firm’s position at a point in time and on operations over some past period
    2. Investors use financial statements to predict future earnings/dividends
    3. Management uses financial statements to help anticipate future conditions and as starting point for planning actions that will affect future event
    Financial ratios
    1. Help evaluate a financial statement
    2. Facilitate comparison of firms
  • Ratios are compared to industry averages.
    There are 14 to 16 common ratios grouped into 4 types.
    Dun and Bradstreet and Robert Morris Associates give industry average ratios for hundreds of industries.
    We will describe the types of ratios and focus on several important financial ratios.
    Financial Statements 
    1. Financial statements report a firm’s position at a point in time and on operations over some past period
    2. Investors use financial statements to predict future earnings/dividends
    3. Management uses financial statements to help anticipate future conditions and as starting point for planning actions that will affect future event
    Financial ratios
    1. Help evaluate a financial statement
    2. Facilitate comparison of firms
  • Ratios are compared to industry averages.
    There are 14 to 16 common ratios grouped into 4 types.
    Dun and Bradstreet and Robert Morris Associates give industry average ratios for hundreds of industries.
    We will describe the types of ratios and focus on several important financial ratios.
    Financial Statements 
    1. Financial statements report a firm’s position at a point in time and on operations over some past period
    2. Investors use financial statements to predict future earnings/dividends
    3. Management uses financial statements to help anticipate future conditions and as starting point for planning actions that will affect future event
    Financial ratios
    1. Help evaluate a financial statement
    2. Facilitate comparison of firms
  • Ratios are compared to industry averages.
    There are 14 to 16 common ratios grouped into 4 types.
    Dun and Bradstreet and Robert Morris Associates give industry average ratios for hundreds of industries.
    We will describe the types of ratios and focus on several important financial ratios.
    Financial Statements 
    1. Financial statements report a firm’s position at a point in time and on operations over some past period
    2. Investors use financial statements to predict future earnings/dividends
    3. Management uses financial statements to help anticipate future conditions and as starting point for planning actions that will affect future event
    Financial ratios
    1. Help evaluate a financial statement
    2. Facilitate comparison of firms
  • Ratios are compared to industry averages.
    There are 14 to 16 common ratios grouped into 4 types.
    Dun and Bradstreet and Robert Morris Associates give industry average ratios for hundreds of industries.
    We will describe the types of ratios and focus on several important financial ratios.
    Financial Statements 
    1. Financial statements report a firm’s position at a point in time and on operations over some past period
    2. Investors use financial statements to predict future earnings/dividends
    3. Management uses financial statements to help anticipate future conditions and as starting point for planning actions that will affect future event
    Financial ratios
    1. Help evaluate a financial statement
    2. Facilitate comparison of firms
  • Transcript of "M&a val2"

    1. 1. There are 2 methods of valuation of a business 1. Assets based method which focuses on net value of assets. 2. Earnings based method correlates the firm’s value to its potential future earnings or cash flow generating capacity
    2. 2.  Assets based approach to valuation  Value of assets determined to arrive at equity share valuation  NAV per share could be arrived on 1. Book value basis 2. Market value basis 3. Liquidation value basis
    3. 3.  Earnings Based approach to valuation 1. Earnings measure based on accounting – capitalisation method 2. Price Earnings Ratio 3. Earnings measure on cash flow basis(DCF method) 4. Earnings measure on free cash flow basis(FCFF)
    4. 4.  Earnings Based approach to valuation 1. Earnings measure based on accounting – capitalisation method Valuation of a firm is based on: Future maintainable profits Capitalisation rate applicable to such earnings Past profits of a firm say for a period of 3 years are averaged out .Apart from averaging ,adjustments in extraordinary items have to be made to arrive at a reliable future maintainable profits.
    5. 5.  Earnings Based approach to valuation  Price earnings ratio  Most commonly used by finance managers, investment analysts and equity shareholders to arrive at the market price of an equity share.  Earnings /profits are after deducting taxes, preference dividend and after adjusting for exceptional and extraordinary items  MPS=EPS *P/E Ratio
    6. 6.  Earnings Based approach to valuation 1. Earnings measure based on Cash flow basis(DCF Approach) Used to evaluate capital expenditure proposals in terms of their potential for creating NPV for the firm. Value of a business id equal to the present value of expected future cash flows to the firm, discounted at a rate that reflects the riskiness of the cash flows.
    7. 7.  Earnings measure on free cash flow basis(FCFF) 1. This method reflects the cash flows generated by a company’s operations for all the providers of capital(debt and equity) 2. This method takes into account after tax non operating income as well as adjustments for non operating assets.
    8. 8.  Calculation of Free Cash Flows After tax operating earnings Plus: Depreciation, amortisation and other non cash items Less: Investment in long term assets Less Investment in operating net working capital =Operating free cash flows Plus: After tax non operating income Plus: Decrease in non operating Assets,eg investment securities =Free cash flows to Firm(FCFF)
    9. 9. The value of the firm: Present value of FCFF FCFFs are available to all the capital providers of a corporate enterprise, the discount rate applied would be the weighted cost of capital. The equity valuation can be deducted by subtracting the total external liabilities from the value of the firm.
    10. 10. Value of a firm= present value of cash flows during explicit forecast period + continuing value of the firm Continuing value of a firm=Free cash flow (T+1) k0 - g g = expected growth rate in normal level of net operating profits less adjusted taxes k0 = weighted average cost of capital
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