3. Estimation Process - worth of an object/instrument
Examples:
Bike sale - Hero Honda Vs Bajaj
Real Estate - ECR beach side Vs Non beach
Valuation of Asset - fire sale Vs normal sale
4. Sale of shares by a person to another.
Merger of two or more companies
Absorption - capital restructuring
Tax Purposes
Acquisition/ transfer of shares in an Indian
company by a non-resident
Ascertainment of the premium at which shares
are to be issued
5. • DCF
• Maintainable Profits
• Dividend Discount
INCOME
BASED
• Comparable
• Transaction based
• Prior Sale of Biz. based
MARKET
BASED
• Asset liabilities valuation
NET ASSETS
BASED
6. Based on Free Cash Flows and riskiness of
capital
Valuation based on
a. Cash Flow Projections
b. Discount Rate
c. Terminal Value
7. Growth prospects & Earnings Capacity
Discontinuation of biz
Expansion of capacity
Turnaround Cases
Entire Biz Cycle
Consideration – Policy change
Operating Leverage – Utilization Capacity
Product Mix
Financing Policy
Capex
Expansion Capex
Maintenance Capex
Income Tax
8. CAPM Method
Leveraged Entity
Weighted Average Cost of Capital (WACC)
Deleveraged Entity
Cost of Equity
9. Equivalent to liquidation/sale value
Value of CF after forecast period
Methods - Perpetual Growth & Multiple
Approach
10. Step 1. Project free cash flow for the forecast period
Step 2. Determine a discount rate
Step 3. Discount the projected free cash flows to the
present and sum
Step 4. Calculate the perpetuity value and discount it
to the present
Step 5. Add the values from Steps 3 and 4, and divide
the sum by shares outstanding
11. DCF Model
Parameters Value/detail
Sales growth rate YoY 10%
Current Assets 35% of the sales
Current Liabilities 15% of the sales
Cost of Goods Sold 70% of the sales
Tax rate 35%
Dividend Payout ratio 40% of the PAT
Gross Fixed Assets to Sale 0.48
Interest Rate on Debt 9%
Debt Pricipal Repament 2,000,000 per year at the end of FY
Projection Period 5 years
Equity shares outstanding (FV - Rs.10) 100,000
Other Income 4% YoY
12. Dream Engineers Ltd
Income statement: Amount in `
Year 0 1 2 3 4 5
1 Sales 25,000,000 27,500,000 30,250,000 33,275,000 36,602,500 40,262,750
2 Cost of Goods Sold 19,250,000 21,175,000 23,292,500 25,621,750 28,183,925
3
Profit/(loss) before Other income,
Interest, depreciation & Taxes 8,250,000 9,075,000 9,982,500 10,980,750 12,078,825
4 Other Income 20,000 20,800 21,632 22,497 23,397
5
Profit/(loss) before Interest,
depreciation & Taxes 8,270,000 9,095,800 10,004,132 11,003,247 12,102,222
6 Depreciation 3,000,000 3,300,000 3,630,000 3,993,000 1,392,300
7 Interest on Debts 810,000 702,900 586,161 458,915 320,218
8 Profit/(loss) before Taxes 4,460,000 5,092,900 5,787,971 6,551,332 10,389,704
9 Tax @ 35% 1,561,000 1,782,515 2,025,790 2,292,966 3,636,397
10 Profit/(loss) after Taxes 2,899,000 3,310,385 3,762,181 4,258,366 6,753,308
11 Dividend @ 40% 1,159,600 1,324,154 1,504,872 1,703,346 2,701,323
12 Retained earnings 1,739,400 1,986,231 2,257,309 2,555,019 4,051,985
14. Free Cash Flow (FCF) Computation: Amount in `
Year 0 1 2 3 4 5
PAT 2,899,000 3,310,385 3,762,181 4,258,366 6,753,308
Add: Depreciation 3,300,000 3,630,000 3,993,000 1,392,300 1,531,530
Less: Loan Repayment (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)
Less: Capital Expentiture (1,200,000) (1,320,000) (1,452,000) (1,597,200) (1,756,920)
less: changes in WC (3,000,000) (550,000) (605,000) (665,500) (732,050)
Free Cash Flow (FCF) 0 (1,000) 6,390,385 7,150,181 4,985,166 7,552,788
Net Working Capital 2,500,000 5,500,000 6,050,000 6,655,000 7,320,500 8,052,550
15. Weighted Average Cost of Capital (WACC): 7.70%
Year 1 2 3 4 5
Sales 27,500,000 30,250,000 33,275,000 36,602,500 40,262,750
Net Profit 2,899,000 3,310,385 3,762,181 4,258,366 6,753,308
NPM 10.54% 10.94% 11.31% 11.63% 16.77%
Expected return (RM) 12.24%
Risk free Return ( RF) 9.00%
Beta Value 1.31 Sector:Engineering/Construction
Cost of Eqity ( CAPM ) 13.24%
Long Term Borrowings 9,000,000 0.75
Equity + Retained Earings 3,000,000 0.25
Total 12,000,000 1
Cost of debt 5.85% 9%*(1-0.35)
WACC 7.70%
16. Equity Valuation:
Amount in `
Weighted Average Cost of Capital (WACC) 7.70%
Long Term FCF growth rate 5.00%
Year 1 2 3 4 5
Free Cash Flow (FCF) (1,000) 6,390,385 7,150,181 4,985,166 7,552,788
Add: Terminal value 0 0 0 0 293,880,858
Total Cash flow (1,000) 6,390,385 7,150,181 4,985,166 301,433,646
Discount Factor 0.929 0.862 0.801 0.743 0.690
Discounted Free Cash Flow (929) 5,509,441 5,723,845 3,705,448 208,038,204
Sum of Discounted Cash Flow 222,976,009
Add: Cash 500,000
Enterprise Value 223,476,009
Less:Long Term Borrowings (9,000,000)
Equity Value 214,476,009
Value per Share in ` 2,144.76
17. MERITS
• Sound Model – Estimated Future CF
• Expectation of Biz performances
• Not vulnerable to creative accounting
• Suitable method for startup projects
DEMERITS
• Garbage in & Garbage Out
• Not considering qualitative factors
• Non linear growth in biz
• Risk Element
• Non-financial factors
18. Inconsistency in Govt. policy – Taxation (FII – MAT)
& Regulatory (PAN req. any purchase > 1 Lac)
Company performance will be affected operating
management
Discount rate & Terminal value estimation –
valuation impact
Macro Economic issues
