Session - 16.11.11
Session - 16.11.11
Session - 16.11.11
Gordons Model
CAPM
DCF
What is Valuation?
What is Valuation?
Valuation is the first step toward intelligent investing. The object of investment is to find assets that are worth more than they cost Valuation is the process of estimating how much an asset is worth Valuation encompasses many considerations how the value of an asset is determined why the asset has a certain value, and not a higher or lower one how to compare asset values, as a basis for investment decision making
Efficient Marketers
Concepts of Value
Concepts of Value
Net Book Value Adjusted Book Value
Replacement Value Liquidation Value
Adjusted Book Value method. Liquidation Value method. Replacement Cost method.
Value of a asset will be represented by the book value reflected in the balance sheet.
Vo = [Total
assets at balance sheet values Total Liabilities(excluding networth) ] divided by Number of ordinary shares issued
Or, Vo = Share Capital + Reserves and Surplus Number of ordinary shares issued
ILLUSTRATION:
The balance sheet of Ahuja Ltd shows share capital of Rs 100 crores. (10 CRORE SHARES OF Rs 10 Each) and reserves and surplus of Rs 100 crores. Estimate the value of the firms equity shares.
SOLUTION:
Share Capital = Rs.100 Crs (10 crs shares of Rs.10 each). Reserves & Surpluses = Rs 100 Crs. Net Book Value = Rs. 200 Crs (100 Crs + 100 Cr) NBV per share = 200 Crs/10 Crs shares = Rs. 20 per share. One can compare NBV with the going market price while taking investment decisions.
LIMITATIONS:
It does not take into account the future earning capacity of the business. It does not take into account the present value or the change in the historical value of the asset over a period of time as the valuation is based on the historical value of the assets. Technological advances renders some of the existing assets worthless which is not accounted for in this model. These limitations of the NBV method is somewhat rectified by the Adjusted Book Value method of valuation.
It involves determining the FAIR MARKET VALUE of the assets and liabilities of the firm as a going concern. Assets are not taken at historical costs but are valued at market price.
This fair market value of an asset can be determined by either Replacement Cost method, or Liquidation Value method.
The value of business is arrived at by determining the current cost of putting up similar facilities or buying similar assets.
Debtors
Inventories
Nonoperating assets
Financial securities, excess land & buildings valued at Fair Market Value
For approximating the fair market value of the assets on the balance sheet of a firm is to find out what they would fetch if the firm were liquidated immediately
The value of the business is arrived at by totaling up the realizable value of various assets of the unit minus the liabilities.
The value realized from liquidating all the assets of the firm.
Less amount paid to all the creditors and preference share holders
LIMITATIONS:
This approach is relevant mainly for sick units that are beyond redemption. It is not suitable for going concerns as instead of valuing the company as a whole, it values it as a collection of assets to be sold individually. One of the major drawback of this model is that it does not take into account the future earning potential of the firm and just concentrates on the liquidation costs of the assets.
Enterprise value discusses the aggregate value of a company as an enterprise rather than just focus on its current market capitalization.
Enterprise value
Measure of what the market believes a company's ongoing operations are worth Market value of all capital invested in the firm
Equity, debt (short-term and long-term), preferred stock, minority interest
Assets
Liabilities
Equity
Enterprise Value
Debt
Calculating EV
To calculate enterprise value, we start with a company's market cap, add debt (on a company's balance sheet), and subtract cash and Equivalents (on the balance sheet). To get total debt, add together long-term and short-term debt. Market Cap = Current share price * Total shares Outstanding
Debt
Example
Tata Steel Ltd. Total shares Outstanding
55,34,72,856
Current share price (Rs.) = 347.70 Long-Term Debt (Rs. In 000 crores) = 24,681.80 Short-Term Debt (Rs. In000 crores) = 2,715.20 Cash & Equivalents Rs(in 000 crores) = 2,467.20 Market Cap = (55,34,72,856*347.70) In 000 crores = 19,244.25 Enterprise Value = 19,244.25 +(24,681.20 +2,715.20) 2,467.20 = Rs 44,173.45 thousand crores
EV/ Sales
Ratio measures the total company value as compared to its annual sales
A high ratio means that the company's value is much more than its sales. When valuing companies that do not have earnings, or that are going through unusually rough times
EV/ EBITDA
Higher the number, the more expensive the company is.
Best way to use EV/EBITDA is to compare it to that of other similar companies
Market Inefficiency: Markets are assumed to make mistakes in pricing assets across time, and are assumed to correct themselves over time, as new information comes out about assets.
where, n = Life of the asset CFt = Cashflow in period t r = Discount rate reflecting the riskiness of the estimated cashflows