Good morning Vijayawada..Whats up friends?

Firstly at the outset, let me begin with expressing my warm regards to the respected dignitaries on the dies, off the dies, guests, invitees and my dear FCAs. Myself Paras Ruthla come all the way from Kolkata for presenting my views and sharing my little knowledge on the Valuation of Business from practical perspective. So far as I have taken my accounts classes from the accounts guru Mr. Praveen Sharma sir, it takes almost 4 classes of minimum 3 hours each to explain the same topic. I am his student and literally friends it is quite difficult to teach you all the valuation of business within 20 minutes. But dont worry friends after my 20 minutes, I will make you all comfortable and be prepared for your

future, coz i believe that fear is in our heart not in our mind. Next First lets understand what is business valuation? In general A business valuation determines the value of a business enterprise or ownership interest. But mainly it depends upon the purpose for which the valuation is to be done. In this the value of the firm is determined based on the market criteria so the real value can be ascertained so as to safeguard the interest of the investor. Next..value to whom?? These are the various users of valuation report

Refer slide And everyone has a different type of interest in the firm so different users requires different type of report depending on their requirements. Next valuation time Lets understand when the valuation is required to be done Planning for an initial public offering of company shares so the investor can make the decision about the investment Selling the company or hiving off a division- so the buyer can know the real value of the selling firm Conducting a major strategic-planning-to ascertained the maximum amount to be invested and return on the same. Applying for loan- to understand the repayment capabilities of the applicant

Next Creating a company stock-option plan to decide exercise price and vesting period Breaking up a partnership to settle the accounts Liquidation /Filing for bankruptcyascertain the net recoverable value to

Doing estate or gift planning that involves company stock Getting a divorce these days divorce has also become like a business so here also a valuation is required Next process For better understanding of valuation I have divided it into four major categories. 1st the expert is appointed He collects the data and research is conducted

Values are analysed and estimates are calculated At the end report is given to management Next skills of expert Refer slide Next engagement of expert Refer slide Next research and data gathering Issue to be considered Refer slide Next info to be provided Refer slide Next analysis & estimate valuation process Refer slide

Next basis of valuation Valuation is based on 2 things 1. a perception that markets are inefficient and make mistakes in assessing value 2. an assumption about how and when these inefficiencies will get corrected In an efficient market, the market price is the best estimate of value. The purpose of any valuation model is then the justification of this value. Next Approaches to valuation There are some who suggest that there is a fourth way to approach valuation, which is to value the assets of a firm individually. Asset based valuation, however, requires that you use either discounted cash flow or relative valuation models to value the individual assets.

Consequently, we view it as a subset of these approaches. Next discounted cashflow Discounted cash flow valuation is geared for assets that derive their value from the cashflows that they are expected to generate - most businesses and financial assets fall into this category. The inputs needed for all discounted cash flow models - cash flows, discount rates and asset life - are the same, though the ease with which they can be estimated may vary from asset to asset. When we use discounted cash flow valuation, we are assuming that we can estimate intrinsic value and that market prices can deviate from intrinsic values. We also assume that prices will revert back to intrinsic value sooner or later this is why a long time horizon is a prerequisit.

Next DCF valuation Cash is king. A firm with negative cash flows today can be a very valuable firm but only if there is reason to believe that cash flows in the future will be large enough to compensate for the negative cash flows today. The riskier a firm and the longer you have to wait for the cash flows, the greater the cash flows eventually have to be. Next Generic DCF value model The four pillars of value: Cashflows Potential for high growth Length of the high growth period (before the firm starts growing at the same rate as the economy) Discount rate Note the variations and the need for consistency: With equity ->Cashflows to equity - > Growth rate in net income -> Discount at the cost of equity

With firm ->Cashflows to firm - > Growth rate in operating income -> Discount at the cost of capital Next valuing ABN Amro The oldest discounted cash flow model the dividend discount model - is an equity valuation model. Implicitly, we are assuming that firms will return the cash that they can afford to in the form of dividends. In a slightly modified form, you could add stock buybacks to dividends in constructing the model. While the dividend discount model is often stated in per share terms, you can use aggregate dividends and value aggregate equity in the firm as well. Next Equity Valuation In this approach, you put blinders on and consider only two questions:

 What cashflows can equity investors expect to make from this business? The cashflows can generally be defined as cashflows left over after a firm has met its reinvestment needs and made any debt payments They can therefore be negative In the strict view of equity cashflows, there are some who argue that the only cashflows to equity are dividends, which makes the dividend discount model a special case of a cashflow to equity model. What cost of equity will they attach to these cashflows? Generally should be higher for higher risk equity. Next slide: Firm valuation The another hand of relative valuation is known as firm valuation. There are mainly two approaches to value a firm. The first one is cost of capital approach. The value of the firm is obtained by discounting

expected cash flows to the firm, i.e., the residual cash flows after meeting all operating expenses and taxes, but prior to debt payments, at the weighted average cost of capital, which is the cost of the different components of financing used by the firm, weighted by their market value proportions. The second one is APV approach. Here the value of the firm can also be written as the sum of the value of the unlevered firm and the effects (good and bad) of debt but after deducting the expected bankruptcy cost. Next slide: methods... Business valuation

Price Earning multiple: Price-earnings ratio (P/E) is the price of a company's share in the public market divided by its earnings per share. Multiply this by the net income to get a value for the business Replacement value : It uses the value of the replacement value of assets. Liabilities are deducted from the

replacement value of the assets to determine the replacement value. True value or market value: It is the amount that a buyer is finally willing to pay Dividend Capitalization: Determine dividend paying capacity of a business Sales Multiple Business Valuation: Widely used method. Annual sales multiplied by industry multiplier ( Obtain from financial publications or comparable business) Profit Multiple Business Valuation: Another widely used method. Pre tax profits multiplied by industry multiplier Liquidation Value: Liquidation value uses the value of the assets at liquidation. Liabilities are deducted from the liquidation value of the assets to determine the liquidation value of the business. Liquidation value can be used to determine the bare bottom benchmark value Next slide: Contents of report

The report prepared by valuer should clearly state about the engagement of valuer. It should also state about the business being valued and a brief description about the same should also be enclosed with. The report should also state the Description of the information underlying the valuation Next slide: Valuation report. There are four major types of report, which are currently in the market that includes Next slide: Remember Refer slide.
with all my words I would like to show my gratitude to the respected members of Ludhiana branch of NIRC for blessing me with such a wonderful opportunity to stand and present in front of such a lovely audience and for that also I would like to quote that..
I would maintain that thanks are the highest form of thought; and that gratitude is happiness doubled by wonder