Corporate Valuation – An Overview

Organization Objectives:
- Maximisation of Profits;
- Minimisation of Costs;
- Maximisation of Cash Flows;
- Satisfying Shareholders’ Needs
- Market control - to reach specific customers
- Consolidation of activities
- Diversification of Product Line
- Transfer of Technology
- Reduced Cost of Production
- Increased Labour Productivity
- Reduction in Work Force
Others - Opportunity Costs
- Resistance from Shareholders
- Maximization of shareholders' wealth

Valuation / Usefulness -
- Shareholders Point of View
- Managers Point of View
- Efficiency, Growth, Status, displacement etc.
- Promoters Point of View
- from Public Point of View
- from Consumers' Point of View
- from Working Community's Point of View
- As a going concern
- Crucial for long term sustenance / success of any organisation;
- Valuation Approaches – Cost/Investment Based, Market valuation Based, Relative
Valuation – multiples concepts, Comparable Company and Discounted Cash Flow.
Some Concepts:
- All business require strategic financial planning so that all Components are used in an
effective manner;
o Need to focus on Existing assets, utilisation pattern, quantum of production,
investment in creating infrastructure, outsourcing etc.
o Main aim of any company is to achieve maximum benefit by investing minimum
capital and efforts
- Financial Goals & Strategies:
o Maintaining Adequate Liquidity to address unforeseen situations / events;
o Need for planning in Advance;
o Management Objectives – profits, liquidity, shareholders’ value, stakeholders
satisfaction, healthy relationship with inputs / service providers, long-tern
relationship with customers, creating back-stop plan, minimizing shortages,
dependence on service providers vs, creating owned service,
o Maintain Relationship with banks, financial institutions, credit rating agencies,
lending agencies – following banking guidelines / needs to ensure continued fund
access, credit rating agencies,
- Shareholders’ Value Creation:
o Proportionate entitlement to profits;
o Reasonable Return to Shareholders;
o Increasing share valuation;
 o Need to focus on maximizing profits, improving operational efficiency, and making
strategic investments that will increase the company's long-term growth potential.
o Shareholder value creation, also known as shareholder value maximization (SVM),
refers to the notion that the primary objective of a corporation is to maximize
the wealth of its shareholders. This concept holds that the ultimate goal of
corporate management is to increase the company's stock price, which is
seen as a direct reflection of the value being created for shareholders.
 Sometimes mistakenly Criticized that it can lead to a narrow focus on
financial performance at the expense of other important considerations,
such as employee well-being, customer satisfaction, and ethical business
practices
- Market Value Added (MVA):
o Difference in existing market value and contribution made by all the
investors i.e. the difference in the wealth accrued as a result of business and
money invested. This additional profit is divided into all the involved shareholders.
 MVA is a financial metric that measures the difference between a
company's market value and its capital employed. It is a measure of how
much value a company has generated for its shareholders beyond what
they have invested in the company. MVA is calculated as the difference
between the market capitalization of a company (i.e., the total value of all
its outstanding shares and debt) and the total amount of capital employed
by the company (i.e., the sum of equity and debt);
 MVA = Market Value of Shares – Book Value of Shareholders’ Equity
 Shares issued at Premium ??
 Alternatively: MVA = Market Value of Shares +Market Value of Debt –
Book Value of Shareholders’ Equity – Book Value of Debt
 Could include market value and book value of preference share capital
also, if it exists
- Market to Book Value (MBV):
o MBV is a financial ratio that compares a company's market capitalization to its
book value. It is used to evaluate the relationship between a company's market
value, as represented by its stock price, and its book value, as recorded in its
financial statements
o MBV thus also shows intangible value created in an organisation, Goodwill, hidden
profits – book value vs. Market Value of Assets
o An MBV of 1 indicates that a company's market value is equal to its book value,
meaning that its stock price reflects its accounting value. An MBV greater than 1
suggests that the market believes the company is worth more than its accounting
value, while MBV less than 1 indicates that the market believes the company is
worth less than its accounting value.
o Market-to-book value is often used by investors and analysts as a rough indicator
of a company's financial performance and future prospects – need to use in
conjunction with other financial metrics.
- Economic Value Added (EVA):
o EVA is a financial metric that measures the economic profitability of a company by
taking into account the cost of both equity and debt capital. It is designed to
provide a more accurate picture of a company's profitability than traditional
financial metrics such as net income, by considering the cost of capital as well as
the return on capital.
  EVA = Net Operating Profit After Taxes (NOPAT) - [(Cost of Capital) *
(Capital Employed)]
 Capital Employed = Net Worth + Debt; OR
 Capital Employed: Total Assets (excluding current liabilities) i.e. Fixed
Assets + Working Capital
o The idea behind EVA is that a company should only be considered to be adding
value if it generates a return on capital that is higher than the cost of capital.
o Widely used financial metric, particularly in the corporate finance world, and is
considered by many to be a better indicator of a company's financial performance
than traditional metrics such as net income or return on investment (ROI).
However, like any financial metric, it is important to consider EVA in the context of
a company's overall financial position and future prospects.
- Financial Strategy for Capital Structure:
o Financial strategy for capital structure refers to the approach a company takes to
determine the optimal balance between debt and equity financing, with the goal of
maximizing value for shareholders.
o Capital Structure – mix of Debt and Equity financing used to fund operations and
growth
 Debt Financing
 Equity Financing
 Hybrid Financing
 Target Capital Structure – Cost and Tax benefits vs. Risk
o Capital Structure Optimization - Capital structure optimization involves adjusting
the mix of debt and equity financing to maximize shareholder value. This can involve a
dynamic evaluation of the company's financial position and the changing economic
environment – aligning with financial goals, long term implications, impacting Risk profile,
affecting Cost of Capital and overall Corporate Valuation
o Leverage Effects and Shareholders’ Risk - leverage effect refers to the
relationship between a company's debt financing and its equity financing, and the impact
that debt financing can have on the value of the company and its shareholders
- Dividend Policy and the Value of the Firm:
o Dividend policy refers to the approach a company takes with regards to the
distribution of its profits to its shareholders in the form of dividends.
 Shareholders’ Expectation;
 Cost of Capital;
 Share Prices;
 Opportunities of Capital Investments available for Growth
 Return on Retained Earnings
 Consistency of dividends, Informational impact on valuation, specific
financial goals
- Financial Options & Firm Value – Contingent Claim Model:
o Call Option – a right to purchase or have something in future by paying an
Upfront Cost as Option Premium
o Equity investment can be treated as Call option upon the firm
o Equity holders claim to residual cash flows but limited liability, purchase price can
be treated as option premium, value of claims as the strike price and the maturity
of claims as the life of the option.

*****************