The document discusses several valuation models: 1. Discounted cash flow (DCF) model, which discounts future cash flows. 2. Tobin's Q model, which compares a firm's market value to replacement cost of assets. 3. Market multiples model, which uses multiples like price-to-earnings to value firms. 4. Valuation football field (FBF) provides an overview of valuations from different sources.

1. Valuation Models
Dr S S N Raju Indukoori

2. Valuation Models
A. Discounted Cash Flow (DCF) Model.
B. Tobin’s Q Model
C. Market Multiples model
D. Valuation Foot Ball Field (FBF)
E. Equity residual
F. APV
Dr Raju Indukoori

3. A. DDM / DCF Model
• Per Share
– Dividends
– EPS
• Cash Flows
– Free Cash Flows for the Firm (FCFF)
– Free Cash Flows for Equity Share Holders (FCFE)
Dr Raju Indukoori

4. Earnings
Discounting Model
• Without Growth
• With Growth
• Growth forever
• Multiple Growth

5. Dr Raju Indukoori
Earnings Discount Model – Stable Earnings for ever
(Perpetual)
       









k
E
k
E
k
E
k
E
IV
1
.............
111
3
3
2
2
1
1
k
E
IV 

6. Dr Raju Indukoori
Earnings Discount Model – Stable earnings for ever (Perpetual)
Problem 2
25.0
50.3
IV 14Rs
If a buyer expects Rs3.50 EPS of a company for ever with a required rate of
return of 25 percent calculate the intrinsic value.

7. Dr Raju Indukoori
Earnings Growth Forever (Perpetual)
 
 
 
 
 
 
 
 













k
gE
k
gE
k
gE
k
gE
IV
1
1
.....
1
1
1
1
1
1 0
3
3
0
2
2
0
1
1
0
gk
E
IV

 1
 
gk
gE
IV



1
0 1

8. Dr Raju Indukoori
Earnings Growth Forever (Perpetual)
Problem 3
55
05.0
75.2
Rs 
10.015.0
10.0150.2


IV
A company had and EPS of Rs 2.50 per share for the current year. The
company has expects the earnings to grow by 10 percent next year and is expected
to continue forever. An acquirer is considering the purchase of the shares of this
company with a required rate of return of 15 percent. Calculate intrinsic value of
the company’s share.

9. Dr Raju Indukoori
Uneven Earnings and Growth Forever (Perpetual)
- ‘Two Stage Model’
       
 
  n
n
n
n
kgk
gE
k
E
k
E
k
E
k
E
IV











1
1
1
.........
111
3
3
2
2
1
1
 
 
   




n
t
n
n
t
t
kgk
gE
k
E
1 1
1
1
 
 
  n
n
n
t
t
t
kgk
gE
V
k
E
V
Where
VVIV







1
1
1
2
1
1
21

10. Dr Raju Indukoori
Uneven Earnings and Growth Forever (Perpetual)
- ‘Two Stage Model’ : Problem 4
     
 
  3321
20.110.020.0
10.150.3
20.1
50.3
20.1
00.3
20.1
00.2

IV
        728.110.0
85.3
728.1
50.3
44.1
00.3
20.1
00.2

22.28RsCr2.03RsCr2.08RsCr1.67Rs 
A target firm earned Rs 1.75 cr during the current FY. It is expected to earn
Rs 2 Cr during the next year. Analysts forecast a earnings of Rs 3 Cr and Rs 3.50 Cr
respectively during the two subsequent years. After that it is expected that annual
earnings will grow at 10 percent per year into an indefinite future. If the acquiring
firm’s WACC is 20 percent, what would be the intrinsic value of the earnings of the
target firm.
Cr28.06Rs

11. Dr Raju Indukoori
Tobin’s Q Model
• <1 and = 1 are not attractive companies
• > 1 are potential companies with growth and
intangible assets.
AssetsitsofCosttReplacemen
firmtheofValueMarket
QT 

12. Multiples Model
• Price / Earnings (P/E)
• Price / Cash flow (P/C)
• Price / Book Value (P/B)
• Price / Sales (P/S)
Dr Raju Indukoori

13. Valuation ‘Foot Ball Field’
• Summary of all valuation sources
• It has range for each source
• Valuations are represented through multiples
• It gives an aerial view of the valuation
Dr Raju Indukoori

14. Valuation “Football Field” - Example
Preliminary Value Range (C$ per share)
Comparable Companies with brand Premium
Comparable Companies
Analyst Target Prices (1)
52 Week High - Low
Historical Average Trading Multiples (2)
Target Companies Valuation
Acquiring Company’s Valuation
Implied P/E
220
1.5
260
1.7
300
2.0
180
1.2
275
200 250
285
250
280
280180
Current Price
200
265
230
210
240
250
Dr Raju Indukoori
225

15. Valuation ‘Foot Ball Field’
• Summary of all valuation sources
• It has range for each source
• Valuations are represented through multiples
• It gives an aerial view of the valuation
Dr Raju Indukoori

16. Sources of doing valuation
• Respective company’s website
• Thomson Reuters
• Bloomberg
• Capital Line
• Prowess
Dr Raju Indukoori