VARIOUS METHOD FOR VALUATION OF ENTERPRISE
1. Book Value Method
This method is mathematically the simplest and arguably the oldest method prevalent for valuing the shares. In this method the net worth of the company is arrived at by deducting the net liabilities from net assets. The Net Worth as further reduced by Preference Share Capital, if any, is divided by the number of Equity Shares arrive at the Book Value of the Equity Share.
2. Intrinsic Value Method
This method is the logically refined version of earlier method in as much as the Net Worth under this method is derived incorporating the current values of assets and liabilities as against the historical values used in the previous method.
This method has its genesis in the logic that the value of a property to its owner is identical in amount with the adverse loss, direct and indirect that the owner must be expected to suffer if he were to be deprived of the property. In the case of amalgamation this method is relevant in so far as it takes into account the market value of assets and rights being relinquished by the amalgamating company into the pool of common interests. While calculating the realistic value of assets necessary adjustments have been made for bad debts or immovable stocks apart from incorporating valuation as done by expert valuers for certain assets. Intercompany holdings have been retained as is, since their liquidation will result in proportionate increase / decrease in cash or cash equivalents.
3. Value Based on Past Earnings
Under this method the Earnings per share (EPS) is calculated on the basis of average of past working results of the company after applying suitable weights to make them more representative of the main stay of the operations of the company. A suitable capitalization factor is applied to the EPS to arrive at the value of the share.
4. Dividend Yield Method
This method is appropriate particularly for the minority shareholders, in as much as the value of any investment is a function of the return it gives. Under this method a capitalization rate is applied to the dividend per share to estimate its value under this method.
5. Market Price
The Market Price of any Equity share as quoted on a stock exchange is considered as the fair value of the equity shares of that company.
6. Discounted Cash Flow method (DCF method)
6.
6.The DCF method is considered theoretically the most sound approach and scientific and acceptable method for determination of the value of a business undertaking. Under this technique, the projected free cash flows from business operations are discounted at the weighted average cost of capital to the business. The sum of the discounted value of such free cash flow is the value of the business.
6.
6.Free cash flows are the cash flows expected to be generated by the company that are available to all providers of the Company’s capital both debt and equity. The free cash flows are determined by adding to profit before tax (i) depreciation and amortization, (ii) interest on loans, (iii) any non operating item. The above is adjusted for (i) change in working capital requirements, (ii) investments in capital expenditure and (iii) estimated tax liability.
6.
6.The discount rate, which is applied to the free cash flows, should reflect the opportunity cost to all capital providers (namely shareholders and creditors), weighted by their relative contribution to the capital of the company. This is commonly referred to as the Weighted Average cost of capital.
6.
6.The company’s debt outstanding is deducted from the value of the business to arrive at the value to the equity share holders.
6.
7. Comparable Companies Method – Revenue/ EBITDA multiple
This is a more direct approach often used in practice which relies on valuation multiples such as enterprise value to revenues and enterprises value to EBITDA. These multiples are calculated as the ratio of value to some normalizing metric such as revenues or EBITDA. For example, EBITDA multiple is obtained dividing the value of the enterprise by EBITDA and it expresses enterprise value per rupee of EBITDA.
Multiples are estimated from the prices of other companies with characteristics comparable to the company being valued. Usually, these comparables are companies in the same industry. Since the ultimate purpose of a valuation multiple is to provide value of the expected cash flow of the company, a comparable must have similar expected growth and risk.
Revenue multiples are calculated dividing enterprise value by revenues. They are used to value companies for which no earnings are expected in near term, such as turnaround situation or fast growing companies that sacrifice profit in near term in order to capture market share. They can also be used to gauge the value of a company with no reliable cost information.
EBIDTA multiples are obtained dividing the enterprise value of comparable companies by their EBITDA. When applied to the target companies EBITDA, this multiple yields an estimate of its enterprise value.
1. Book Value Method
This method is mathematically the simplest and arguably the oldest method prevalent for valuing the shares. In this method the net worth of the company is arrived at by deducting the net liabilities from net assets. The Net Worth as further reduced by Preference Share Capital, if any, is divided by the number of Equity Shares arrive at the Book Value of the Equity Share.
2. Intrinsic Value Method
This method is the logically refined version of earlier method in as much as the Net Worth under this method is derived incorporating the current values of assets and liabilities as against the historical values used in the previous method.
This method has its genesis in the logic that the value of a property to its owner is identical in amount with the adverse loss, direct and indirect that the owner must be expected to suffer if he were to be deprived of the property. In the case of amalgamation this method is relevant in so far as it takes into account the market value of assets and rights being relinquished by the amalgamating company into the pool of common interests. While calculating the realistic value of assets necessary adjustments have been made for bad debts or immovable stocks apart from incorporating valuation as done by expert valuers for certain assets. Intercompany holdings have been retained as is, since their liquidation will result in proportionate increase / decrease in cash or cash equivalents.
3. Value Based on Past Earnings
Under this method the Earnings per share (EPS) is calculated on the basis of average of past working results of the company after applying suitable weights to make them more representative of the main stay of the operations of the company. A suitable capitalization factor is applied to the EPS to arrive at the value of the share.
4. Dividend Yield Method
This method is appropriate particularly for the minority shareholders, in as much as the value of any investment is a function of the return it gives. Under this method a capitalization rate is applied to the dividend per share to estimate its value under this method.
5. Market Price
The Market Price of any Equity share as quoted on a stock exchange is considered as the fair value of the equity shares of that company.
6. Discounted Cash Flow method (DCF method)
6.
6.The DCF method is considered theoretically the most sound approach and scientific and acceptable method for determination of the value of a business undertaking. Under this technique, the projected free cash flows from business operations are discounted at the weighted average cost of capital to the business. The sum of the discounted value of such free cash flow is the value of the business.
6.
6.Free cash flows are the cash flows expected to be generated by the company that are available to all providers of the Company’s capital both debt and equity. The free cash flows are determined by adding to profit before tax (i) depreciation and amortization, (ii) interest on loans, (iii) any non operating item. The above is adjusted for (i) change in working capital requirements, (ii) investments in capital expenditure and (iii) estimated tax liability.
6.
6.The discount rate, which is applied to the free cash flows, should reflect the opportunity cost to all capital providers (namely shareholders and creditors), weighted by their relative contribution to the capital of the company. This is commonly referred to as the Weighted Average cost of capital.
6.
6.The company’s debt outstanding is deducted from the value of the business to arrive at the value to the equity share holders.
6.
7. Comparable Companies Method – Revenue/ EBITDA multiple
This is a more direct approach often used in practice which relies on valuation multiples such as enterprise value to revenues and enterprises value to EBITDA. These multiples are calculated as the ratio of value to some normalizing metric such as revenues or EBITDA. For example, EBITDA multiple is obtained dividing the value of the enterprise by EBITDA and it expresses enterprise value per rupee of EBITDA.
Multiples are estimated from the prices of other companies with characteristics comparable to the company being valued. Usually, these comparables are companies in the same industry. Since the ultimate purpose of a valuation multiple is to provide value of the expected cash flow of the company, a comparable must have similar expected growth and risk.
Revenue multiples are calculated dividing enterprise value by revenues. They are used to value companies for which no earnings are expected in near term, such as turnaround situation or fast growing companies that sacrifice profit in near term in order to capture market share. They can also be used to gauge the value of a company with no reliable cost information.
EBIDTA multiples are obtained dividing the enterprise value of comparable companies by their EBITDA. When applied to the target companies EBITDA, this multiple yields an estimate of its enterprise value.
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