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    Valuation of Business: CA Aaditya Jain

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    Sunita Yadav
    This document provides summaries of several methods for valuing a business, including: 1) Dividend yield method, which values a business based on its dividend per share and dividend yield. 2) Earnings yield method, which values a business based on its earnings per share and earnings yield. 3) Economic value added method, which calculates the net operating profit less the cost of capital. 4) Price earnings ratio method, which values a business based on its price to earnings ratio and earnings per share.

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    Valuation of Business: CA Aaditya Jain

    Uploaded by

    Sunita Yadav
    60 views3 pages
    This document provides summaries of several methods for valuing a business, including: 1) Dividend yield method, which values a business based on its dividend per share and dividend yield. 2) Earnings yield method, which values a business based on its earnings per share and earnings yield. 3) Economic value added method, which calculates the net operating profit less the cost of capital. 4) Price earnings ratio method, which values a business based on its price to earnings ratio and earnings per share.

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    VALUATION_FORMULA

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    This document provides summaries of several methods for valuing a business, including: 1) Dividend yield method, which values a business based on its dividend per share and dividend yield. 2) Earnings yield method, which values a business based on its earnings per share and earnings yield. 3) Economic value added method, which calculates the net operating profit less the cost of capital. 4) Price earnings ratio method, which values a business based on its price to earnings ratio and earnings per share.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    60 views3 pages

    Valuation of Business: CA Aaditya Jain

    Uploaded by

    Sunita Yadav
    This document provides summaries of several methods for valuing a business, including: 1) Dividend yield method, which values a business based on its dividend per share and dividend yield. 2) Earnings yield method, which values a business based on its earnings per share and earnings yield. 3) Economic value added method, which calculates the net operating profit less the cost of capital. 4) Price earnings ratio method, which values a business based on its price to earnings ratio and earnings per share.

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    Delhi : 9911442626

    SFM-For ; Kolkata
    those who want to: score
    9339238834
    90+
    Dare To Dream...Beyond 90 46 CA Aaditya Jain

    VALUATION OF BUSINESS
    DIVIDEND YIELD METHOD OR DIVIDEND CAPITALIZATION VALUATION METHOD

    Dividend Per Share (DPS) Dividend Per Share (DPS)


    Dividend Yield = Market Price Per Share (MPS)  Market Price Per Share =
    Dividend Yield

    EARNING YIELD METHOD OR INCOME OR EARNING CAPITALIZATION VALUATION METHOD

    Earning Per Share (DPS) Earning Per Share (DPS)


    Earning Yield = Market Price Per Share (MPS)  Market Price Per Share =
    Earning Yield

    ECONOMIC VALUE METHOD (EVA)

    Symbolically : EVA = Net Operating Profit After Taxes - Cost Of Capital  Average Capital Employed

     NOPAT = EBIT (1- Tax)


    Cost Of Capital = K e  We  K d  Wd  K p  WP
    Opening Capital  Closing Capital
    Average Capital Employed =
    2
    If Opening & Closing balance are not separately given,then in such case we should simply take Closing Balance without
    taking its average.
     Total Funds / Capital Employed includes : Equity Share Capital + Reserves + Debentures +Preference Share Capital
    +Long Term Loan - Profit and Loss Account ( Dr.) - Fictitious Asset

    PRICE EARNING [P/E] RATIO VALUATION METHOD

    MPS
    Price Earning Ratio [ P/E Ratio ] =
    EPS  MPS  P/E Ratio  EPS

    VALUE OF FIRM USING FUTURE MAINTAINABLE PROFITS (FMP)

    Future Maintainable Profit


    Value Of Business = Relevant Capitalization Rate
    Calculation Of Future Maintainable Profits :
    Average Past Year Profits xxxx
    Add :
    All Actual Expenses and Losses not likely to occur in future xxxx
    All Profits likely to arise in Future xxxx
    Less : All Expenses and Losses expected to arise in future (xxxx)
    Less : All Profits not likely to occur in future (xxxx)

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    MARKET VALUE ADDED (MVA)


    Symbolically :
    MVA =Current Value of the securities of the Company in the Market - Total Amount of Shareholder's Funds[Balance
    Sheet Fig. ]

    Note: Current Value of the securities of the Company in the Market = MPS x No. Of Equity Shares
    Note: Shareholder's Funds[Balance Sheet Fig.]includes Equity Share Capital + Retained Earning - Accumulated Loss -
    P/L Account ( Debit Balance )

    QUESTION Supreme Industries has an equity market capitalisation of Rs. 3,400 crore in current year. Further that its
    equity share capital is Rs. 2,000 crore and its retained earnings are Rs. 600 crore. Determine the MVA and interpret it.
    Solution : Market Value Added = (Rs. 3,400 crore - Rs. 2,600 crore) = Rs. 800 crore.

    FAIR PRICE OF SHARE

    Value as per Net Asset Value  Value as per Profit Earning Capacity Method
    Fair Price of Share =
    2

    NET ASSET VALUE (NAV)

    Net Assets = [ Total Assets - Total External Liability ]


    Net Asset
    Net Asset Per Share = Number Of Equity Share Outstanding
    Note:Total Asset and Total External Liability may be taken on the basis of Market Value , Liquidation Value or Book
    Value as the case may be .If question is silent then in such case we should give preference to Market Value base.

    BOOK VALUE VALUATION METHOD

    Total Book Value of Shareholder Shareholder' s Fund


    Book Value Per Share  
    Number Of Equity Shares Number Of Equity Shares
    Where Shareholder's Fund :
    From Liability Side : Equity Share Capital + Reserve & Surplus + Retained Earnings - Accumulated loss - P/L ( Debit
    balance )
    From Asset Side : Assets less External Liabilities

    CHOP-SHOPAPPROACH/BREAK-EVEN APPROACH TO VALUATION

    The “chop-shop” approach suggests that the sum of the individual parts of a firm may be worth more than the current
    value of the whole.
    The “chop-shop” approach to valuation was first proposed by Dean Lebaron and Lawrence Speidell of Batterymarch
    Financial Management.
    The “chop-shop” approach involves three steps.
    Step 1: Identify the firm’s various business segments and calculate the average capitalization ratios for firms in those

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    Delhi : 9911442626
    SFM-For ; Kolkata
    those who want to: score
    9339238834
    90+
    Dare To Dream...Beyond 90 48 CA Aaditya Jain
    industries.
    Step 2: Calculate a “theoretical” market value based upon each of the average capitalization ratios.
    Step 3: Average the “theoretical” market values to determine the “chop-shop” value of the firm.

    QUESTION:.Using the chop-shop approach (or Break-up value approach), assign a value for Cornett GMBH. whose
    stock is currently trading at a total market price of €4 million. For Cornett, the accounting data set forth three business
    segments: consumer wholesale, specialty services, and assorted centers. Data for the firm’s three segments are as follows:
    BUSINESS SEGMENT Segment Sales Segment Assets Segment Income
    Consumer wholesale €1,500,000 € 750,000 €100,000
    Specialty services €800,000 €700,000 €150,000
    Assorted centers €2,000,000 €3,000,000 €600,000
    Industry data for “pure-play” firms have been compiled and are summarized as follows:
    BUSINESS SEGMENT Capitalization/Sales Capitalization/Assets Capitalization/OperatingIncome
    Consumer wholesale 0.75 0.60 10.00
    Specialty services 1.10 0.90 7.00
    Assorted centers 1.00 0.60 6.00
    ANSWER:
    Cornett, GMBH. – Break-up valuation
    Business Segment Capital-to- Sales Segment Sales Theoretical Values
    Consumer wholesale 0.75 €1,500,000 €1,125,000
    Specialty services 1.10 €800,000 €880,000
    Assorted centers 1.00 €2,000,000 €2,000,000
    Total value €4,005,000
    Business Segment Capital-to- Assets Segment Assets Theoretical Values
    Consumer Wholesale 0.60 €750,000 €450,000
    Specialty services 0.90 €700,000 €630,000
    Assorted centers 0.60 €3,000,000 €1,800,000
    Total value €2,880,000
    Business Segment Capital-to-Op.Income Segment Income Theoretical Values
    Consumer wholesale 10.00 €100,000 €1,000,000
    Specialty services 7.00 €150,000 €1,050,000
    Assorted centers 6.00 €600,000 €3,600,000
    Total value €5,650,000
    Average theoretical value = 4,005,000 + 2,880,000 + 5,650,000 / 3 = €4,178,000 (approx)

    FREE FLOAT MARKET CAPITALIZATION/VALUATION


    Free Float Market Capitalisation means Market Capitalisation or Market Value of the Company excluding promoter’s
    share. As the name indicate “free float”, it means shares which are freely available or freely tradeable in the market. Shares
    held by promoters are not freely tradeable in the market. There shares are subject to certain restriction as placed by SEBI.

    Example:No. Of Total Equity Share = 1,00,000;MPS = 10;Promoter's Holding = 60%.Calculate Total & Free Float
    Market Capitalization.
    Solution:Total Market Value = 1,00,000 x 10 = 10,00,000
    Free Float Market Value = 1,00,000 x 10 x 40% = 4,00,000

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