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Introduction To Valuation

The goal of valuation is to estimate a company's fair market value between a willing buyer and seller. Valuation approaches include stock and debt, DCF, relative, and option valuation. Information needed includes industry, operations, finance, and projections. In practice, relative valuation, transaction multiples, and DCF are commonly used depending on the context such as IPOs, M&A, or financial buyers. Valuation aims to be unbiased but uncertainty remains due to estimation and external factors.

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53 views11 pages

Introduction To Valuation

The goal of valuation is to estimate a company's fair market value between a willing buyer and seller. Valuation approaches include stock and debt, DCF, relative, and option valuation. Information needed includes industry, operations, finance, and projections. In practice, relative valuation, transaction multiples, and DCF are commonly used depending on the context such as IPOs, M&A, or financial buyers. Valuation aims to be unbiased but uncertainty remains due to estimation and external factors.

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INTRODUCTION TO VALUATION

OVERVIEW OF CORPORATE VALUATION

• Context of valuation
• Approaches to valuation
• Features of the valuation process
• Corporate valuation in practice
• Information needed for valuation
• Refinements in valuation
• Judicial and regulatory overview of valuation
• Intrinsic value and stock market
• Importance of knowing the intrinsic value
GOAL OF VALUATION
The goal of such an appraisal is essentially to estimate a fair
market value of a company. So, at the outset, we must clarify
what is meant by “fair market value” and what is meant by “a
company”. It is defined as "the price at which the property
would change hands between a willing buyer and a willing seller
when the former is not under any compulsion to buy and the
latter is not under any compulsion to sell, both parties having
reasonable knowledge of relevant facts.” When the asset being
appraised is “a company”, the property the buyer and the seller
are trading consists of the claims of all the investors of the
company. This includes outstanding equity shares, preference
shares, debentures, and loans.
Context of Valuation

 Raising capital for a nascent venture


 Initial public offering-An initial public
offering (IPO) refers to the process
of offering shares of a private corporation to
the public in a new stock issuance. Public share
issuance allows a company to raise capital
from public investors.
 Acquisitions-An acquisition is when one
company purchases most or all of another
company's shares to gain control of that company
 Divestitures- divestiture is the process of disposing of an asset
through a sale, exchange, or closure. A divestiture is an
important means of creating value for companies in the mergers,
acquisitions, and the consolidation process
 PSU disinvestment- Disinvestment means sale or liquidation of
assets by the government, usually Central and state public sector
enterprises, projects, or other fixed assets. In some
cases, disinvestment may be done to privatize assets.
 ESOPs-An ESOP (Employee stock ownership plan) refers to an
employee benefit plan which offers employees an ownership
interest in the organization. Employee stock ownership plans are
issued as direct stock, profit-sharing plans or bonuses, and the
employer has the sole discretion in deciding who could avail of these
options
Approaches to
Valuation

Stock and Relative Option


Book Value DCF
Debt Valuation Valuation
Approach Approach
Approach Approach Approach
DCF VALUATION MODELS

• Equity DCF model


 Dividend discount model
 FCFE model
• Adjusted present value model
• Economic profit model
INFORMATION NEEDED FOR
VALUATION

A. Industry and Competition


B.Operations
C.Marketing and Sales
D.Human Resources
E.Historical Financial Information
F. Financial Projections
Corporate Valuation in Practice
 Relative Valuation
 Transaction Multiples
 DCF Valuation
 Common Practice
. IPO Relative Valuation
. M&A : . DCF Valuation
. Transaction Multiples
. Hybrid Model
. M&A .. Financial Buyer
. DCF Valuation with primary focus on IRR
 Summary :
 Valuation is often characterised by bias stemming from factors
like perception about the company being valued, the current
market value of the company, and institutional pressures.

 To mitigate the bias in valuation, avoid precommitments, delink


valuation from reward or punishment, diminish institutional
pressures, and increase self-awareness.

 In general, there is always an uncertainty associated with


valuation on account of estimation uncertainty, firm-specific
uncertainty, and macroeconomic uncertainty.

 Very broadly, the investment banking industry employs three


basic methodologies for enterprise valuation: relative valuation,
transaction multiples, and discounted cash flow valuation.
THANK YOU

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