Valuation Approach

8/4/2019 Valuation Approach

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PRESENTED BY

GANJANAN TANDALE 14

SUNIL KUMAR YADAV 39

POOJA PARKAR 23

SNEHA NARVANKAR 35

APPROACHES TO VALUATION


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Valuation Are Methodological Process Of Assessing TheIntrinsic Value Of Business Or An Assets. This Involve The Use

Of Both Qutifiable And Non Qutifiable Variable To Determine

A Value To Attach To An Asset.

Meaning of valuation


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METHODS/APPROACHES TO VALUATION

Asset-based Approach To Valuation

Market Value Based Approach

Fair Value Method

Market value added approach (MVA)

Economic value added approach (EVA)


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ASSET - BASED APPROACH TO VALUATION

y This approach aims at determining the value

of net assets. Assets can be valued at their

book value, market value, replacement value

or liquidation value and this method

determines the basis of assets valuation.

Net Assets = Total Assets - Total External Liabilities

Net Assets Per Share = Net Assets/Number Of Equity Shares

Issued & Outstanding.


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MARKET VALUE BASED APPROACH TO

VALUATION

The Market Value Approach Is One Of The Most Widely

And Frequently Used In Calculating The Value Of A

Business, Especially, The Larger Listed Companies.

The market values assigned could be either

12 months average of the prices prevailed in the stock

exchange,

the average of the low and high security values duringa year or

any other acceptable fair method of averaging can be

used


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FAIR VALUE METHOD OFVALUATION

y The fair value method is not an independent method by

itself, but is based on averaging or weighted averaging

of the results provided by one or more of the above

discussed methods.

y This method gives a balanced figure of valuation but

has limited application in business valuation.


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MARKET VALUE ADDED APPROACH (MVA)

y The MVA approach measures the change in the

firm's equity market value as a result of a

change in the equity investment which consists

of common stock capital and retained earnings.

MVA = Market Value OfFirm's Equity - Equity Capital Investment

MVA = [TotalMarket Value OfFirm's Securities - (Equity Shareholders'

Funds + Preference Capital + Debt.


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ECONOMIC VALUE ADDED APPROACH (EVA)

EVA denotes the difference between the total cost offunds and the operating income after taxes.

It is totally based on the past performance of thecompany.

If EVA is positive, it implies that the company is addingto the wealth of the shareholders.

If the EVA is negative, it implies that the company haseroded the existing value of the shareholders.

EVA = Net Operating Profits After Taxes - (Total Capital X WACC)


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THE DIVIDEND DISCOUNT MODEL (DDM)

Unlike common equity ,preferred stocks pay a

fixed dividend. As such, the value of a preferred stock

can be calculated using the dividend discount model.


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Example:Example:

Calculating The Value Of A Preferred StockCalculating The Value Of A Preferred Stock

y Assume that ABC cos preferred stock pays out

to an investor an annual dividend of Rs8 per

share. Given a rate of return of 10%, what is the

value of ABC cos preferred stock?

y Answer:

Value of ABC cos preferred stock

= (Rs8/0.10) = Rs80


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One-year Holding Period

Consider a one-year holding period, in this time

frame, an investor will receive a dividend and

the price of the common stock at the end of the

one year.


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ABC co Expects To Pay Its Shareholders dividend, Rs0.25Per Share This Year. The Investor Anticipates ABC cos

Stock Will Close The Year At Rs.30 Per Share. Given ARate Of Return Of 10%, What Is The Value Of ABC cosCommon Stock?

Answer:

Value of ABC cos common stock

= 0.25 + 30 = 27.50 per share(1.10) (1.10)

Example

Calculatethe value ofa stockwith a 1-year holding

period


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Multiple-year Holding Period

Given investors can hold a common stock for over a year,

it is useful to value a stock over the investors expected

holding period.


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Example:Example:

Calculate The Value Of A StockWith A MultipleCalculate The Value Of A StockWith A Multiple--yearyear

HoldingperiodHoldingperiod

An investor plans to hold Newcos stock for 2 years. ABCco expects to pay its shareholders common equity,Rs.0.25 per share over the next two years. The investoranticipates ABC cos stock will close the end of that time

period at Rs40 per share. Given a rate of return of 10%,what is the value ofABC cos common stock at the endof the two-year time period?

Answer:

Value ofABC cos common stock

= 0.25 + 0.25 + 40 =Rs.33.49(1.10)1 (1.10)2 (1.10) 2


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INFINITE VALUE DDM

y To value a common stock using the infinite period

DDM, the calculation is simplified much like it is when

valuing a preferred stock with infinite dividends.


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Example: Calculate the value of common stock

with infinite dividends

y ABC co paid a Rs.0.25 annual dividend in 2004 and

expects to pay Rs.0.265 in 2005. Assuming a 6% growth

rate and a required rate of return of 10%, calculate the

value of ABC cos stock.

y Answer:Value of ABC cos common stock

= 0.265 = 6.63(0.10 0.06)


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Valuation Approach