Valuation Of Firms


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Valuation Of Firms

  1. 1. Merger And Acquisitions<br />Valuation Of Firms <br />
  2. 2. Introduction<br />The Device to assess the worth of enterprise so that consideration amount could be quantified.<br />Different regulations under Companies Act 1956 and SEBI Takeover Regulations 1997 are there to regulate the process.<br />
  3. 3. Basis Of Valuation<br />Assets Based Method.<br />Capitalized earning Power.<br />Market value.<br />Investment Value.<br />Book Value.<br />Substitution Cost Basis. <br />
  4. 4. Valuation – Three Major Techniques<br /><ul><li>Asset Valuation Approach: Asset side of the Balance Sheet
  5. 5. Income Valuation Approach: Profit and Loss Statement
  6. 6. Market Multiple Valuation Approach: Liability side of the Balance Sheet</li></li></ul><li>Valuation Of Listed Co.<br />Market price of shares of Listed co. are Quoted at exchange which reflects their value.<br />However, there is two shortcomings : -<br />Investors don’t have complete and correct information about the company.<br />Insider trading Distort the market price of shares.<br />
  7. 7. Valuation of unlisted Co.<br />Proxy PE ratio of listed co. is used after suitable adjustment.<br />Other factors like shareholding pattern, voting powers, nature of industry, influence of cyclical business fluctuations, major competitors& their market share , should be taken into consideration while valuation.<br />
  8. 8. ASSET BASIS METHOD<br />Fair Value Approach<br />Open Market Value Approach<br />Other Approaches<br />Dividend Approach<br />Super Profit Approach<br />Capital Budgeting Approach<br />
  9. 9. Dividend Approach<br />If dividend is Rs 10 per share, Growth Rate 30%, Req rate of ret 15% then share price will be:- <br />Do(1+g)/i-g.<br />Calculation gives value of 35.26<br />
  10. 10. Super Profit Approach<br />Premium which the firm will fetch on sale in addition to value of net assets.<br />V = T + P-rT<br /> C <br /> Where, P=Future Profits, T=Value of Assets, r=Return on Assets, C=rate representing no. of years at which super profits are capitalised.<br />For Ex: if assets is 10,00,000, future profits 2,00,000, capitalisation rate 15%, rate of ret. is 10% <br />So , V=10,00,000+2,00,000-1,00,000<br /> 0.15<br />Thus, V=16,66,667<br />
  11. 11. Capital Budgeting Approach<br />Planning Expenditures of capital assets which provide return over a period of time for ex: advertising.<br />V = X(I-T)-I<br /> 1+K<br />Where, X= cash Inflows, I=Investment, K= Cost Of capital, T=Tax Rate. <br />
  12. 12. Buyer’s Valuation and Seller’s Valuation<br /><ul><li>All assets are not relevant to a buyer, but the seller has spent good bit of money to acquire them
  13. 13. Coca-Cola vs Parle
  14. 14. Parle’s assets: bottling plants, distribution network, warehouses, brands (Thums UP)</li></li></ul><li>EARNING CAPITALISATION METHOD<br />Earning Analysis: Traditional (Short term) view point-<br />Target company’s P/E Ratio is exit ratio<br />In share-for-share exchange, a company can increase its EPS by acquiring another company with a P/E ratio lower than its own provided that the earnings of the target company are capitalized at a rate above its capitalization rate<br />
  15. 15. EARNING CAPITALISATION METHOD<br />II. Factors affecting P/E ratio<br /><ul><li>Risk
  16. 16. Abnormal growth
  17. 17. Random Fluctuation</li></ul>III. Cash Flow or Future Earnings : Long run effect of Takeover on EPS<br />