This document discusses various methods for valuing a corporate business, including: 1. The discounted cash flow method, which values a business based on its future free cash flows discounted at the firm's weighted average cost of capital. 2. Relative valuation methods like comparable company analysis and comparable transaction analysis, which derive valuation multiples from similar public companies or M&A transactions. 3. Other methods like the net asset value approach and Tobin's Q, which value a business based on its asset book values. The document provides steps and considerations for each method to determine a company's economic worth based on its financials, industry, and investment characteristics.

1. Corporate Valuation: Principles and
Practices

2. Basic Concept
 Business Valuation is the process of
determining the "Economic Worth" of a
Company based on its Business Model and
External environment and supported with
reasons and empirical evidence.
 Corporate valuation depends upon
1. Purpose of valuation
2. Stage of Business
3. Past financials
4. Expected financial results
5. Industry scenario

3. Approach to Valuation
 Discounted free cash flow method
 Relative Valuation (Comparable company market
multiple method)
 Comparable Transactions (Mergers & Acquisition)
Multiple (CTM) method
 Price of recent investment method
 Net asset value method (NAV)

4. Discounted Free Cash Flow
Method
 Two alternative approach can be used
1. Measuring the discounted cash flow to the firm
2. Measuring the discounted cash flow to equity
Discounted Free Cash flow to the firm
 The DFCF to firm method expresses the present
value of the business attributable to all claimants
(like equity shareholders, debt holders, preference
shareholders, warrants etc) as a function of its
future cash earning capacity.
 This methodology work on the premise that the
value of business is measured in terms of future
cash flow streams, discounted to the present time at
appropriate discount rate
 This approach seeks to measure the intrinsic ability
of the business to generate cash attributable to all
the claimants.

5. Discounted Free Cash Flow
Method
Discounted Free Cash flow to equity
 The DFCF to firm method expresses the present
value of the business attributable to equity
shareholders as a function of its future cash
earning capacity.
 The value of equity is arrived at by estimating the
free cash flow to equity and discounting the same
at the cost of equity

6. Steps in measuring FCFF
Steps for finding FCFF
Earning before interest and Step 1: Arrive at EBIT
* taxes Step 2: Multiply with (1-tax rate)
(1-tax rate)
= Operating profit after tax Step 3: Arrive at Operating profit
+ Non Cash Cost after tax
Step 4: Add back non cash cost
- Capital expenditures (already subtracted earlier)
- Increase in NCWC Step 5: Subtract Capital
+ Terminal Value Expenditures
Step 6: Subtract increase in
NCWC
Step 7: Add terminal value of the
firm at the final year
= Free cash flow to firm

7. Steps in measuring FCFE
Steps for finding FCFFE
Profit Before Tax Step 1: Arrive at PBT
- Taxes Step 2: Less taxes
= Profit After Tax Step 3: Arrive at PAT
+ Non Cash Cost Step 4: Add back non cash cost
(already subtracted earlier)
- Capital expenditures Step 5: Subtract Capital
- Increase in NCWC Expenditures
± Changes in Debts Step 6: Subtract increase in
NCWC
+ Terminal Value Step7: Take into account the effect
of changes in debt
Step 8: Add terminal accruing to
equity holder at the final year
= Free cash flow to equity
= Discounted Free Cash Step 8: Discount the FCFE for

8. Arriving at cost of capital
 Key things to remember
 Cost of capital for the firm should be comparable
with firm with similar business and financial risk
 CAPM can be utilized to calculate ß debt, ß
equity ß asset for publicly listed firm from the
historical data. Hence beta have a historical
character
 Return on risk free security can be estimated
based on 10 year Indian Government Bond Yield
 Equity risk premium can be arrived from market
information for the return on broad based index
for a comparable period

9. Comparable company market
(CCM)multiple method
 CCM multiple method uses the valuation ratios of a
publicly traded company and applies that ratio to the
company being valued
 The valuation ratio typically expresses the valuation
as a function of measure of financial performance or
book value (e.g. turnover, EBIDTA, EBIT, EPS or book
value)
 Methodology is based on current market stock price
 Limitations:
1. Difficulty in selecting comparable firms with similar
business and financial risk (EBIDTA or Cash Flow)
2. Measuring the multiple (mean or median value can
be used)

10. Comparable Transactions (M&A)
Method (MTM)
 This methodology helps in arriving the value of
the company on the basis of similar deals
matured in the market
 This provides and indicative value as it helps in
reaching the value which market is providing to
similar companies
 Can be arrived through sales multiple, EBIDTA
multiples or PAT multiples

11. NAV Method
 NAV is the net value of all the assets of the company.
If you divide it by the number of outstanding shares,
you get the NAV per share.
 One way to calculate NAV is to divide the net worth of
the company by the total number of outstanding
shares. Say, a company’s share capital is Rs. 100
crores (10 crores shares of Rs. 10 each) and its
reserves and surplus is another Rs. 100 crores. Net
worth of the company would be Rs. 200 crores (equity
and reserves) and NAV would be Rs. 20 per share
(Rs. 200 crores divided by 10 crores outstanding
shares).
 NAV can also be calculated by adding all the assets
and subtracting all the outside liabilities from them.
This will again boil down to net worth only. One can
use any of the two methods to find out NAV.

12. Tobin’s q
 Tobin's q was developed by James Tobin (Tobin
1969) as the ratio between the market value and
replacement value of the same physical asset.
 Tobins q= (Market Value of Equity+ Book Value
of Debt)
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(Book Value of Equity + Book Value
of Debt)