Basic valuation concept final


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Basic valuation concept final

  1. 1. BASIC VALUATION CONCEPTSPECIFICALLY WITH REFERENCE TO CORPORATE M.M.M ( SEM – II ) 2011-2014. Subject : Financial Management Prof. Arun D. Chandarana
  2. 2. PRESERNTED BY GROUP :- 3Roll No . 31 Sunil Sathe (Group Leader)Roll No . 25 Ganesh OrpeRoll No . 19 Prashant MahamulkarRoll No . 15 Amol JadhavRoll No . 24 Shyam MoreRoll No . 07 Satishkumar Biradar
  3. 3. Valuation The process of determining how much an asset, company, or anythingelse is worth. Valuation is highly subjective, but it is easiest when one is consideringthe current value of tangible & intangible assets. Forexample, determining how much a willing buyer will pay a willingseller for a house, right now is easier than determining the value ofwhat a companys brand recognition might be in 10 years. The process of estimating the worth of something. The estimated worth given to something.
  4. 4. Concept of valuation Going-concern value Liquidation value Book Value Market Value Bond Valuation Discounted Cash Flow – DCF Intrinsic Value
  5. 5. Going-concern value Going - Concern value is the value of a company sold as acontinuing operation. Runs on assumption to exist for foreseeable future . Going concern value v/s asset / liquidation value = Goodwill. Plays major role in merger & acquisitions. Going concern value = entire company sold + intent to keep itrunning with new owner. Liquidation value = entire company sold + tangible asset soldoff. Going concern value = liquidation value + intangible asset. Going concern value > liquidation value.
  6. 6. How it calculate One calculates the going-concern value by adding the value of itsgoodwill and income to its net asset value. This is an importantcalculation when determining the appropriate purchase price ina merger or acquisition. A Discounted Cash Flow Business Valuation is generally used byinvestors to calculate the Return on Investment (ROI) theywould receive if they purchased the company. It is based on thepresent value (PV) of future cash flows.
  7. 7. Liquidation value The total worth of a companys physical assets when it goes out ofbusiness or if it were to go out of business. Liquidation value isdetermined by assets such as the real estate, fixtures, equipment andinventory a company owns. Intangible assets are not included in a companys liquidation value.Intangible assets include a businesss intellectual property, goodwilland brand recognition. If a company were to be sold rather than liquidated, both liquidationvalue and intangible assets would be considered to determine thecompanys going-concern value, investors will look at the differencebetween a companys market capitalization and its going-concern valueto determine whether the companys stock is currently a good buy. Liquidation value can also refer to the cash value of a single asset.
  8. 8. How it calculate The business liquidation value in itself is a very straightforwardcalculation. It is arriving at a value for assets such as inventory, plantand equipment, vehicles, etc. that complicate the valuation. You can see that the asset values dropped considerably uprevaluation based on their worth on the open market. After liabilitieshave been paid off from the asset liquidation, shareholders are leftwith a Rs 60,000 loss.Book Value Liquidation Value Book Value Liquidation ValueAssets LiabilitiesCash Rs15,000 Rs15,000Bank debt Rs30,000 Rs30,000Accountsreceivable Rs35,000 Rs23,000Accounts payable Rs15,000 Rs15,000Inventory Rs50,000 Rs27,000Fixed assets Rs50,000 Rs25,000Total liabilities Rs45,000 Rs45,000Shareholdersequity Rs105,000 Rs45,000Total assets Rs150,000 Rs90,000Total liabilitiesand shareholdersequity Rs150,000 Rs90,000
  9. 9. Book Value The value at which an asset is carried on a balance sheet.To calculate, take the cost of an asset minus theaccumulated depreciation. The net asset value of a company, calculated by totalassets minus intangible assets ( non physical substancesuch as patents, goodwill) and liabilities. Since book value is a more accurate measure of valuationfor companies which arent growing quickly, book value isof more interest to value investors than growth investors. Book value is the accounting value of a firm. It has twomain uses:1. It is the total value of the companys assets thatshareholders would theoretically receive if a companywere liquidated.2. By being compared to the companys market value, thebook value can indicate whether a stock is under- oroverpriced.
  10. 10. How it calculate Book Value = Assets - Liabilities A company or corporations book value, as an asset held by aseparate economic entity, is the company or corporationsshareholders equity, the acquisition cost of the shares, or themarket value of the shares owned by the separate economicentity. Book Value and Shareholder Equity are not quite the same thing.To find a companys book value, you need to take theshareholders equity and exclude all intangible items. This leavesyou with the theoretical value of all of the companys tangibleassets (those which can be touched, seen, and felt). For thisreason, book value is sometimes also called "Net TangibleAssets".
  11. 11. Market Value Market value is the estimated amount for which a property shouldexchange on the date of valuation between a willing buyer & a willingseller in arm’s-length transaction after proper marketing where in theparties had each acted knowledgeably prudently & withoutcompulsion The market capitalization plus the market value of debt. Sometimesreferred to as "total market value". In the context of securities, market value is often different from bookvalue because the market takes into account future growthpotential. Most investors who use fundamental analysis to pickstocks look at a companys market value and then determine whetheror not the market value is adequate or if its undervalued incomparison to its book value, net assets or some other measure
  12. 12. How it calculate There are many or at least several ways but one of the mostpopular is a multiple of earnings per share based on there historyof earnings as a percentage of there market price (i.e. earningsare historically about 3% 0f there share market price or If theearnings are Rs3.00 per year the market price would be maybe 15times 3 0r Rs45.00 per share. Some use 10 or 15 or something inbetween based on projected earnings
  13. 13. Bond Valuation A debt investment in which an investor loans money to an entity (corporate orgovernmental) that borrows the funds for a defined period of time at afixed interest rate. Bonds are used by companies, municipalities, states and U.S.and foreign governments to finance a variety of projects and activities.Bonds are commonly referred to as fixed-income securities and are one of the threemain asset classes, along with stocks and cash equivalents.. A technique for determining the fair value of a particular bond. Bond valuationincludes calculating the present value of the bonds future interest payments, alsoknown as its cash flow, and the bonds value upon maturity, also known as its facevalue or par value. Because a bonds par value and interest payments are fixed, aninvestor uses bond valuation to determine what rate of return is required for aninvestment in a particular bond to be worthwhile Bond valuation is only one of the factors investors consider in determiningwhether to invest in a particular bond. Other important considerations are: theissuing companys creditworthiness, which determines whether a bond isinvestment-grade or junk; the bonds price appreciation potential, as determinedby the issuing companys growth prospects; and prevailing market interest ratesand whether they are projected to go up or down in the future.
  14. 14. How it calculate Here is the formula for calculating a bonds price, which uses thebasic present value (PV) formula:C = coupon paymentn = number of paymentsi = interest rate, or required yieldM = value at maturity, or par value
  15. 15. Discounted Cash Flow – DCF A valuation method used to estimate the attractiveness ofan investment opportunity.A Discounted Cash Flow Business Valuation is generallyused by investors to calculate the Return on Investment(ROI) they would receive if they purchased the company.It is based on the present value (PV) of future cash flows. Discounted cash flow (DCF) analysis uses future free cashflow projections and discounts them (most oftenusing the weighted average cost of capital) to arrive at apresent value, which is used to evaluate the potential forinvestment. If the value arrived at through DCF analysis ishigher than the current cost of the investment, theopportunity may be a good one. Discounted cash flow is also known as “ Time Value OfMoney”
  16. 16. Characteristics of DCF Valuation Forward looking and focuses on cash generation Recognize time value of money Allows operating strategy to be built into a model Only as accurate as assumptions and projections used Works best in producing a range of likely values
  17. 17. How it calculate
  18. 18. Intrinsic Value The actual value of a company or an asset based on anunderlying perception of its true value including all aspects ofthe business, in terms of both tangible and intangible factors.This value may or may not be the same as the current marketvalue. Value investors use a variety of analytical techniques inorder to estimate the intrinsic value of securities in hopes offinding investments where the true value of the investmentexceeds its current market value. For example, value investors that follow fundamental analysislook at both qualitative (business model, governance, targetmarket factors etc.) and quantitative (ratios, financial statementanalysis, etc.) aspects of a business to see if the business iscurrently out of favor with the market and is really worth muchmore than its current valuation
  19. 19. How it calculate The intrinsic value for an in-the-money option is calculated as theabsolute value of the difference between the current price (S) of theunderlying and the strike price (or exercise price) (K) of theoption, floored to zero. For a call option IVcall = max{0,S − K} while for a put option IVput = max{0,K − S} For example, if the strike price for a call option is Rs 1 and the price ofthe underlying is Rs 1.20, then the option has an intrinsic value of Rs0.20.
  20. 20. Thank you….!!!