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