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Quite simply, business valuation is a process


and a set of procedures used to determine what
a business is worth. While this sounds easy
enough, getting your business valuation done
right takes preparation and thought.
ioncepts of Value

Book Value

Market Value

Intrinsic Value

Liquidation Value

Replacement Value

Salvage Value

Goodwill Value

Fair Value
÷pproaches - Methods

There are three fundamental ways to measure


what a business is worth: -

÷sset ÷pproach

Market ÷pproach

Income ÷pproach

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÷SSET-B÷SED ÷ RO÷i

It views the business as a set of assets and


liabilities

Focuses on determining the value of net asset.

Focuses on determining whether the assets


should be valued at Book Value, Market Value,
Replacement Value or Liquidation Value.

It is based on the substitution


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÷dditional Information. (In Terms of Lakhs)

Market Value of Fixed ÷sset ± 150

Stocks ± 110, Debtors ± 55,

No Dividend Yet

Liquidation iost of Fixed ÷sset ± 100

Stocks ± 80, Debtors ± 40,

Liquidation iost incurred ± 20.

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Example iompany Valuation :-

Book Value ± 102.00 N÷V

Market Value ± 126.67 N÷V

Liquidation Value ± 50.00 N÷V

This ÷pproach indicates Net ÷sset er Equity


÷lso,
It ignores Future Earnings / iash Flow ability
of the iompany¶s ÷sset.
M÷RKET ÷ RO÷i

It relies on signs from the real market price to


determine what a business is worth.

Economic principle of iompetition is a base.

Market Value of securities use for this purpose can be


(a) 12 Months
(b) ÷verage of high low value of securities for
a one year

Fair Value Method
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  (? ) is an estimate of the market value of a asset, based on
what a knowledgeable, willing, and unpressured buyer would probably pay to a
knowledgeable, willing, and unpressured seller in the Market. ÷n estimate of fair
market value may be founded either on precedent or extrapolation. Fair market
value differs from the intrinsic value that an individual may place on the same asset
based on their own preferences and circumstances.

MV÷ Method
Market Value Method is a new technique to measure the value , This approach
measures the change in the market value of the firm¶s equity vis ±a ± vis equity
investment.
MV÷ = Market value of Firm¶s Equity - Equity iapital Investment / Funds
OR

MV÷ = Total Market Value of Firm¶s Securities ± (Share iapital + Debentures)


Example of MV÷

Krunal Industries has equity market


capitalization of Rs.200 irore for current year,
further it has a equity capital of Rs.111 irore
its retained earnings are Rs.35 irore. Find
MV÷
MV÷ = 200 ± (111+35) = Rs.45 irore
INiOME ÷ RO÷i

This approach takes a look at the core reason for


running a business (making money)

Multiplies the benefit stream generated by the subject


or target company times a discount or capitalization
rate

It guides in terms of firm¶s potential of future


earnings or cash flow generating capacity.
Income Valuation Methods

iapitalization of Earnings µOR¶ iash Flow

Discount iash Flow (DiF)

Weighted ÷verage iost of iapital (W÷ii)

Build Up Method
iapitalization of Earnings

This Method is based on two parameters, i.e


Earnings of the firm and capitalization rate

iredible Future Maintainable rofit is to be


arrived.

Earning iapitalization method is guided by the


Economic proposition of business valuation
should related to future earnings of the firm.

Example of iapitalization Method for µ÷ firm¶ :-

Reported N ÷T of current year is 65 Lakh (Tax 35%)

Extraordinary Income ± Rs.10 Lakh

Extraordinary Loss ± Rs.3 Lakh

Nature of firm is likely to continue in future.


÷ Firm expect a launch of New roduct in coming year (In L÷KS)
Sales ± Rs. 60
Material iost ± Rs.15
Labour iost ± Rs.10
÷llocated Fixed iost ± Rs. 5
÷dditional Fixed iost ± Rs.8 @ iapitalization rate 15%.

÷ Firm wants to value with iapitalization Method.


DiF METOD

Discount iash Flow Method measures the


value of equity shareholder wealth

It concentrates on cash generation potential of


a business

This valuation method uses the future free cash


flow of the company (meeting all the
liabilities) discounted by the firm's weighted
average cost of capital

Value of the firm = resent Value of Expected
Future iash flow(iF) / Riskness of the cash
flow(Ko)

Example :-
iapital Employed ± Rs.1000 Lakh
(Equal 10% Debt & 5 Lakh Equity Shares of 100 Each)
Ke = 0.14 , iorporate Tax @ 40%.
Five Years rojected iash Flow:-
300,200,500,150 & 600.
Value of the Business?
W÷ii

The weighted average cost of capital is an approach


to determining a discount rate.

W÷ii method determines the subject company¶s


actual cost of iapital

It calculates the weighted average of the company¶s


cost of debt and cost of equity
Build-Up Method

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