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CHAPTER 1

INTRODUCTION

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1.1 PREAMBLE
It was oscar wilde who described a cynic as one who knows the price of everything,
but the value of nothing. Every asset, financial as well as real, has a value. The key to
successfully investing in and managing these assets lies in understanding not only what
the value is but also the sources of the value. Any asset can be valued, but some assets are
easier to value than others and the details of valuation will vary from case to case.
Valuation plays a key role in many area of finance -- in corporate finance, mergers and
acquisitions and portfolio management.
Risk, as we define it in finance, is measured based upon deviations of actual
returns on an investment from its' expected returns. There are two types of risk. The first,
which we call equity risk, arises in investments where there are no promised cash flows,
but there are expected cash flows. The second, default risk, arises on investments with
promised cash flows.
The value of a private firm is the present value of the cash flows it is expected to
generate, discounted back at a rate that reflects both the risk in the private firm and the
mix of debt and equity it uses. Value enhancement is clearly on the minds of many
managers today. The value of a firm can be increased by changing one of the four primary
inputs into valuation: the cash flow from assets in place, the expected growth rate during
the high growth period, the length of the high growth period and the cost of capital.
The first is that no value enhancement mechanism will work at generating value
unless there is a commitment on the part of managers to making value maximization their
primary objective.

If managers put other goals first, then no value enhancement

mechanism will work. Value creation is hard work in competitive markets and almost
involves a trade-off between costs and benefits. Everyone has a role in value creation and
it certainly is not the sole domain of financial analysts.

Created by good strategic,

marketing, production or personnel divisions.


In this study contain the valuation of a private firm, private firm is entirely differentiated
from public traded firm, for doing accounting practice there is no standard and the

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historical information regarding the firm might not be available. Here it valued on
assumption that the firm going to liquidate

1.2 OBJECTIVE OF STUDY


Primary objective
This study tries to find out the value of private firm and examine the way to
enhance its value based on a book ' investment valuation ' written by aswath damodhar.
Secondary objective
Calculation of beta
Calculation of cost of capital
Calculation of cash flow
Adjusting liquidity discount
Calculation of growth rate
Find the value of firm and its enhancement

1.3 PERIOD OF STUDY


For this study used the data for the period starting from 1/4/2009 to 31/3/2014,five
years data are used for the study, and financial statement for mentioned years also availed
from the firm

1.4 IMPORTANCE OF THE STUDY


There have large difference between value and price .about a product, price only
consider its monitory value but value also considering its return or cash flow and its future
growth . If we want purchase anything first we want to know the value of that then only
we can decide about its price. Here in this study we are valuing a private firm which is
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tough task rather than valuing a publicly trading firm. If the firm is going for liquidation
or planning for IPO, it should know its value then only it can fix better price.

1.5 DATA METHODOLOGY


The researcher approaches using various formula to calculate the value of the firm
and collected information for the study. the present study calculation and analysis. here
used both primary and secondary data for the calculation and analysis. consisting of
published and unpublished data from the organization related to various aspects.
Here used statistical concept such as mean correlation as part of the study .to do
the work used Microsoft excel software.

1.6 LIMITATIONS OF THE STUDY


Here for this study used secondary data for calculation and analysis part so if there
have any bias in the data will fault the result . The chance for personal bias is there. Only few
adjustment is made in the calculation because lack of data in the firm so it may affect the
result also

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CHAPTER 2
COMPANY PROFILE

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2.1 INDUSTRY PROFILE - PLYWOOD MANUFACTURING


Wood and wood based products are an important part of our day to day life. In India,
three main types of wood based panels viz., plywood including block boards and flush
doors, fiberboards and particleboards are manufactured. Wood products include: cases,
boxes, hard wood flooring, joinery, wood casks, treated rough wood, pre-fabricated
wooden buildings, wood carvings, door frames and other niche items. Most wood in India
is used for the manufacture of doors, window frames, wall panels, moldings and furniture.
Domestic manufacturing is highly fragmented and unorganized with much of the
production, particularly for doors, windows and interiors still done by individual
carpenters on site. The appreciation of the need for rational utilization of wood as a raw
material has resulted in the increased consumption of these products everywhere.
It is more than 75 years since plywood industry was started here on a very modest
scale .it was in the year 1906-07 that plywood was imported to India for the first time,
valued at 32lakh. Tea industry in Assam, west Bengal and Kerala was steadily
developing and it was thought that plywood industry should be developed so that it
would play a major role in the production of the tea chests mainly for the exports of tea.
Accordingly two plywood factories were started in Assam in 1923-24, but their
development was steady and slow and not phenomenal.
With the outbreak of second world was necessity of manufacturing tea chests
locally was very much felt, and plywood industry started on a modest scale. The
production of tea chests demanded suitable timber; hence the forest department in
different states started thinking about providing them. Experiments were made at forest
research institute; Dehradun and it was found that plywood made from Indian timbers
were as good as imported products and advised forest enterprises to set modern factories
in different places, viz, Sitapur, Bangalore, Baliapattam, Dan deli and Cooch Behar.
Some of these factories suffered setbacks in the post war years, as after cessation of war,
vested interest tried to sabotage this industry by trying to restart import of tea chests.
Slowly and steadily the Govt imposed a total ban on import and this thoughtful
action of the Govt encouraged the Indian enterprises to modernize their plants and insert
substantial capital in the industry. After 1947-48 the industry resorted to diversification
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of this product and block board, flush doors, Commercial plywood, produced in Indian
Factories came in to the market. Which were second to none in the world in quality and
diversity Industrial licensing is governed by industries (development and regulation) Act
1951 under which the wood. Based industry was covered.
There were no restrictions of putting up plywood mills up to 1970 the only criteria
was that the applicant was required to obtain an industrial license which was being
considered by the ministry of industry after consulting various ministries including
ministry of environment and forest.
During 1970 there was clear cut definition of small scale sector and units having
an investment of less than Rs 7.5 lacks in plant and equipment were covered under the
definition of small scale sectors that would be registered with the respective state director
of industries. From 1998 onwards any industry whether a small scale unit or large or
medium or new undertaking or substantial expansion would require industrial license
compulsory.
This industry has become an innocent victim of some gross misconceptions. The
unfounded impression that this industry exerting pressure on our natural forest resources
is factually incorrect. There is total disregard to its excellent role as an economic
substitute of social wood and thus preservation of natural forest and ecology. In all
fairness this industry should be regard as a timber saving industry which is helping
conservation of timber and yet meeting essential needs of the country and society.

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2.2

HARAFA RUBBER WOOD VENEERS - AN OVER VIEW

Mr c Hassan promoter and managing partner of the firm had a new idea ,in his
thinking and experienced mind about the commencement of a plywood manufacturing
concern , and was plotted a plant in chirakkal padi near to Manarkkadu , Kerala in the
name of HARAFA RUBBER WOOD VENEERS in 1998, it commence its business that
year itself . They are producing plywood sheets and it distributed across the country. It
concentrating on inter and intra state sales. their plant situating away from houses and it
have good wastage sewage system

2.2a Location
HARAFA RUBBER WOOD VENNERS

situating in chirakalpadi near to

manarkkadu ,in the border of palakkadu and malappuram , in kerala. the registerd office
and factory are situated in same spot. there is a good climatic condition the healthiest
mixture of hot and cold. there is a good transport facility and have never difficulty for
travel . adequate water ,electricity and other infrastructural facilities are available there
.it has a office with all modern facilities . the place is rich with labour force and timber .
this is one of the main raw material used to produce plywood , it prefer soft woods. the
main raw materials used for production can be easily transformed from the area of
factory plant. storing of timber in water can be easily possible as part of its smooth
production. Around

forty

workers are working there. It has one matchbox

manufacturing firm there itself.

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2.2b PRESENT MANAGEMENT


MANAGING
PARTNERS
C . HASSAN

WORKING PARTNERS
KM . MUHMMED
C.ABDUL RASHEED
C.MOHAMMED
RIYASUDHEEN
ABDHUL SALEEM
K M. ABOOBACKER
V. SAKEER HUSSAIN

SLEEPING PARTNERS
C . FASSELA
C . RASEENA

2.3 ORGANAIZATION STRUCTURE

Managing Partner

Production supervisor

Manufacturing supervisor

General supervisor

Accountant

Skilled workers

Unskilled workers Skilled workers

Unskilled
workers

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2.4 PRODUCTION PROCESS


The manufacture of softwood or hardwood plywood consists of nine main processes:
log storage, log debarking and bucking, heating the logs, peeling the logs into veneers,
drying the veneers, gluing the veneers together, pressing the veneers in a hot press, plywood
cutting, and other finishing processes such as sanding.
The initial step of debarking is accomplished by feeding logs through one of several
types of debarking machines. The purpose of this operation is to remove the outer bark of the
tree without substantially damaging the wood. After the bark is removed, the logs are cut to
appropriate lengths in a step known as bucking.
The logs (now referred to as blocks) then are heated to improve the cutting action of
the veneer lathe or slicer, thereby generating a product from the lathe or slicer with better
surface finish. Blocks are heated to around 93C using a variety of methods--hot water
baths, steam heat, hot water spray, or a combination of the three.
After heating, the logs are processed to generate veneer. For most applications, a
veneer lathe is used, but some decorative, high quality veneer is generated with a veneer
slicer. The slicer and veneer lathe both work on the same principle; the wood is
compressed with a nose bar while the veneer knife cuts the blocks into veneers that are
typically 3 mm (1/8 in.) thick. Decorative hardwood veneers are usually sliced much
thinner than 3 mm (1/8 in.) thick. The veneer pieces are then clipped to a usable width,
typically 1.37 m (54 in.), to allow for shrinkage and trim.

Veneers are taken from the clipper to a veneer dryer where they are dried to
moisture contents that range from around 1 to 15 percent, dry basis. Face veneer moisture
contents can range up to 25percent, dry basis. Target moisture content depends on the type
of resin used in subsequent gluing steps. The typical drying temperature ranges from 150
to 200C (300 to 400F). The veneer dryer may be a longitudinal dryer, which circulates
air parallel to the veneer, or a jet dryer. The jet dryers direct hot, high velocity air at the
surface of the veneers in order to create a more turbulent flow of air. The increased
turbulence provides more effective use of dryer energy, thereby reducing drying time.
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Veneer dryers may be either direct-fired or indirect-heated. In direct-fired dryers,


hot combustion gases from an onsite boiler are blended with re circulated exhaust from the
dryer to lower the gas temperature. In indirect heated veneer dryers, air is warmed over
steam coils and circulated over the veneer. Veneer dryers typically have one to three
heated zones followed by a cooling zone or section. Each heated zone has a hot air source,
fans to move the warm air, and an exhaust vent or stack. The cooling section circulates
ambient air over the veneer to reduce the veneer temperature just before it exits the dryer.
The veneers must be cooled to prevent glue from curing on the veneers during the layup
and glue spreading operations before they reach the plywood press.
Veneer may also be dried in veneer kilns, which resemble lumber kilns. Kiln drying
is a batch operation, where the veneers are stacked with stickers (narrow wood strips) and
dried in the kiln.
Veneer moisture is checked against the target moisture level as the veneer exits the
veneer dryer. Veneer redryers may be used to redry the veneer that did not reach the target
moisture content. Veneer redryers are typically heated by radio frequency (RF) and are
designed to handle only a fraction of the throughput from full-scale veneer dryers.
Conventional veneer dryers may also be used for redrying veneer. When used for redrying
veneer, conventional veneer dryers are operated at faster than normal speeds .
After drying, veneers sometimes are glued together on the edges to form larger
sheets of veneer. This process is called composing. Narrow veneer slices must be
composed before they are used in plywood panels or other products requiring wider
veneer sheets. When the veneers have been dried to their specified moisture content, they
are conveyed to a
layup operation, where a thermosetting resin is spread on the veneers. The two
main types of resins are phenol-formaldehyde, which is used for softwood plywood and
exterior grades of hardwood plywood, and urea-formaldehyde, which is used to glue
interior grades of hardwood plywood. The resins are applied by glue spreaders, curtain
coaters, or spray systems. Spreaders have a series of rubber-covered grooved application
rolls that apply the resin to the sheet of veneer. Generally, resin is spread on two sides of

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one ply of veneer, which is then placed between two plies of veneer that are not coated
with resin.

Assembly of the plywood panels must be symmetrical on either side of a neutral


center in order to avoid excessive warpage. For example, a five-ply panel would be laid up
in the following manner.
Aback, with the grain direction parallel to the long axis of the panel, is placed on
the assembly table. The next veneer has a grain direction perpendicular to that of the back,
and is spread with resin on both sides. Then, the center is placed, with no resin, and with
the grain perpendicular to the previous veneer (parallel with the back). The fourth veneer
has a grain perpendicular to the previous veneer (parallel with the short axis of the panel)
and is spread with resin on both sides. The final, face, veneer with no resin is placed like
the back with the grain parallel to the long axis of the plywood panel.

The laid-up assembly of veneers then is sent to a hot press in which it is


consolidated under heat and pressure. Hot pressing has two main objectives: (1) to press
the glue into a thin layer over each sheet of veneer; and (2) to activate the thermosetting
resins. Typical press temperatures range from 132 to 165C (270 to 330F) for softwood
plywood, and 107 to 135C (225 to 275F) for hardwood plywood. Press times
generally range from 2 to 7 minutes. The time and temperature vary depending on the
wood species used, the resin used, and the press design. The plywood then is taken to a
finishing process where edges are trimmed; the face and back may or may not be sanded
smooth. The type of finishing depends on the end product desired.

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Production sequence

LOG DEBARKING

LOG

AND BUCKING
STORAGE

VENEER CUTTING

VENEER DRYING

LOG HEATING

VENEER
LAYUP AND
GLUE SPREADING

PLYWOOD

PLYWOOD

CUTTING

PRESSING

PLYWOOD
FINISHING

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FINISHED
PRODUCT

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2.4 PRODUCT
Plywood is a building material consisting of veneers (thin wood layers or plies)
bonded with an adhesive. There are two types of plywood: softwood plywood and hardwood
plywood. Softwoods generally correspond to coniferous species. The most commonly used
softwoods for manufacturing plywood are firs and pines. Hardwoods generally correspond to
deciduous species. For hardwood plywood, commonly used wood species include oak,
poplar, maple, cherry, and larch.
Softwood plywood is manufactured by gluing several layers of dry softwood veneers
together with an adhesive. Softwood plywood is used for wall siding, sheathing, roof
decking, concrete form boards, floors, and containers. Softwood plywood is classified under
Standard Industrial Classification (SIC) code 2436, and North American Industrial
Classification System (NAICS) code321212 for Softwood Plywood and Veneer.
Hardwood plywood is made of hardwood veneers bonded with an adhesive. The outer
layers(face and back) surround a core which is usually lumber, veneer, particleboard, or
medium density fiberboard. Hardwood plywood may be pressed into panels or plywood
components (e.g., curved hardwood plywood, seat backs, chair arms, etc.). Hardwood
plywood is used for interior applications such as furniture, cabinets, architectural millwork,
paneling, flooring, store fixtures, and doors. Hardwood plywood is classified under SIC code
2435 and NAICS code 321211, for Hardwood Plywood and Veneer.
Softwood plywood plants typically produce softwood veneers and softwood plywood
on the same plant site. However, most hardwood plywood and veneer plants either produce
hardwood plywood or hardwood veneer. Hardwood veneer plants cut and dry hardwood
veneers. Hardwood plywood plants typically purchase hardwood veneers and press the
veneers onto a purchased core material. the firm using soft wood, glue, and water as raw
material to produce plywood and land, labor, capital, and organization are the factors of
production used by the firm. This manufacturing firm providing a good employment
opportunity towards the society ,and they are keeping all the criteria to avoid pollution to the
environment.

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2.5ACCOUNTING PRACTICE
This firm using the double entry system to do the book not the single entry system.
they are maintaining cash book ,purchase book ,sales book and, stock statement other ledgers
etc. they preparing balance sheet and profit and loss account as part of their financial
statement. they also conducting the audit work without any intervention.

2.6 VISSION AND MISSIO


Vision
The companies vision is steady growth in its productivity as well as quality and its
profitability. Quality leads customer satisfaction and shall be of top priorities and enlarge
the export related activities through better sales and marketing procedure and to make the
plywood corporation as a large scale industrial sector in Indian economy.
Mission
The mission of the firm is to assure and safeguard the interest of consumers of this
firm.

The firm produces quality products of customer satisfaction. The company is

competing towards creating quality with satisfaction.

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CHAPTER 3
REVIEW OF LITERATURE

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REVIEW OF LITERATURE
This chapter deals with reviews of the earlier works of researchers in the relevant
area. now effective valuation is the foremost objective of any firm, many researches were
held on this topic both India as well as abroad. In this chapter, various literatures relating to
valuation of firm and related with it have been reviewed to get insight into subject.

Stuart C. Gilson, Edith S. Hotchkiss and Richard S. Ruback (2000), they compares the
market value of the firm that recognize in bankruptcy's with estimates of value based on
management 's published cash flow projection. We estimate of values based on management
published cash flow projection. we estimate firm value using models that have been shown
in other context to generate relatively precise estimation

of value. WE find that these

methods generally yield unbiased estimated values ,but the dispersion of valuation errors is
very wide - the ample ratio of estimated value to the market varies from less than 20% to
greater than 25%. cross sectional analysis indicates that the variation in these errors is
related to empirical proxies for claimholders 's incentives to overstate or understate the
firm's value

Steven N. Kaplan and Richard S. Ruback (1995 ), They compares the market value of
highly leveraged transactions (HLTs) to the discounted value of their corresponding cash
flow forecasts. For our sample of 51

HLTs completed between 1983 and 1989, the

valuations of discounted cash flow forecasts are within 10 percent, on average, of the market
values of the completed transactions. Our valuations perform at least as well as valuation
methods using comparable companies and

J. P. Ryan and K. P. W. Larner (1990), They presents a theoretical framework for


the valuation of a general insurance company to actuaries, but also aims to provide reference
work for non-actuarial users of appraised values. It distinguishes between the price that may
be paid for an insurance operation from what may be called the economic or appraised e
valuations of a single line insurer are given.
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C. J. Exley and A. D. Smith(2006), they saying that Most businesses have assets
financed by capital providers. The cost of capital is a measure of the returns required by
those capital providers. Its main use is to set a target for the profits, which must be achieved
on the firm's assets in order to satisfy equity and bond holders. This paper describes the
classical theory of the cost of capital, and then applies it to the special case of banking and
insurance firms. We develop implications for product pricing, performance measurement and
capital structure optimization
Myron J. Gordon and Paul J. Halpern(1974) , They presents, tests, and illustrates the
use of a model for arriving at the cost of capital for a non-traded firm or division of a firm.
The illustration represents the application of the model to a public utility. The ideas
presented below were developed in response to a request by the United States Postal
represents the application of the model to a public utility. The ideas presented below were
developed in response to a request by the United States Postal represents the application of
the model to a public utility. The ideas presented below were developed in response to a
request by the United States Postal represents the application of the model to a public utility.
The ideas presented below were developed in response to a request by the United States
Postal
Aswath Damodaran, In this paper, he begin with a generic discounted cash flow
model, and consider the ways in which value can be created or destroyed in a firm. he then
look at two of the most widely used value enhancement measures, Economic Value Added
and Cash Flow Return on Investment, and consider where these approaches yield similar
results to those obtained from traditional valuation models, and where (and why) there
might be differences. In conclusion, he show that there is little that is new or unique in
these competing measures, and while they might be simpler than traditional discounted
cash flow valuation, the simplicity comes at a cost that is substantial for high growth firms
with shifting risk profiles.

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CHAPTER 4
THEORITICAL FRAME WORK

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VALUATION -STEPS
To calculate a value a firm we need to find out some of the variable related
with that . Find outing that variables treated as the step of the valuation. following
are the steps used for value a firm
Step 1: Estimating discount
The expected cash flows need to be discounted back at a rate that reflects the
cost of financing these assets. The cost of capital is a composite cost of financing,
that reflects the costs of both debt and equity, and their relative weights in the
financing structure. Here cost of capital treated as discount rate. To get discount
rate we want to calculate following the following variables
Beta
In the CAPM beta of an investment is the risk that the investment add to the
market portfolio here using historical data on market prices for individual
investment. The cost of equity should reflect the risk added on by an investment to
a diversified portfolio and can be measured with a beta (in the single-factor model)
or betas.

cost of equity
The cost of equity is the return that stockholders require for their investment in a
company. In financial theory, the return that stockholders require for a company.
On this basis, the most commonly accepted method for calculating cost of equity
comes from the Nobel Prize winning capital asset pricing model (CAPM): The
cost of equity is expressed formulaically below

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Where:
Re = the required rate of return on equity
rf = the risk free rate
rm rf = the market risk premium
= beta coefficient = unsystematic risk
Rf Risk-free rate - This is the amount obtained from investing in securities
considered free from credit risk, such as government bonds from developed
countries. The interest rate of U.S. Treasury Bills is frequently used as a proxy for
the risk-free rate.
(Rm Rf) = Equity Market Risk Premium (EMRP) - The equity market risk
premium (EMRP) represents the returns investors expect to compensate them for
taking extra risk by investing in the stock market over and above the risk-free rate.
In other words, it is the difference between the risk-free rate and the market rate. It
is a highly contentious figure. Many commentators argue that it has gone up due to
the notion that holding shares has become more risk
cost of debt
Here the particular firm don't have any long-term debt, so in this analysis it is
excluded
Step 2:estimating growth
In valuation, it is the expected future cash flows that determine value. While
the definition of the cash flow, still holds, it is the forecasts of earnings, net capital
expenditures and working capital that will yield these cash flows. One of the most
significant inputs into any valuation is the expected growth rate in operating
income. While one could use past growth or consider analyst forecasts to make this
estimate, the fundamentals that drive growth are simple.

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Step 3: calculation cash flow


The definitions of the cash flows to equity and cash flows to the firm are
identical for both private and publicly traded firms. The cash flow to equity is the
cash flow after taxes, debt payments and issues and reinvestment needs.
The cash flow to the firm that we would like to estimate should be both after
taxes and after all reinvestment needs have been met. Since a firm includes both
debt and equity investors, the cash flow to the firm should be before interest and
principal payments on debt .The cash flow to the firm can be measured in two
ways. One is to add up the cash flows to all of the different claim holders in the
firm. Thus, the cash flows to equity investors (which take the form of dividends or
stock buybacks) are added to the cash flows to debt holders (interest and net debt
payments) to arrive at the cash flow. The other approach to estimating cash flow to
the firm, which should yield equivalent results, is to estimate the cash flows to the
firm prior to debt payments but after reinvestment needs have been met.
The difference between capital expenditures and depreciation (net capital
expenditures) and the increase in non-cash working capital represent the
reinvestments made by the firm to generate future or contemporaneous growth.
EBIT
An indicator of a company's profitability, calculated as revenue minus
expenses, excluding tax and interest. EBIT is also referred to as "operating
earnings", "operating profit" and "operating income"
An indicator of a company's profitability, calculated as revenue minus
expenses, excluding tax and interest. EBIT is also referred to as "operating
earnings", "operating profit" and "operating income"
EBIT =

Revenue - COGS- Operating Expenses

Tax rate
It is the rate at which firms income are taxed. here using effective tax rate to
calculate
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Step 4: calculation of liquidity discount


It is the cost of reversing an asset trade almost instantaneously after you
make the trade. The following are the factors which affect the liquidity of the firm
Liquidity of assets owned by the firm
Financial Health and cash flows of the firm
Possibility of going public in the future
Size of the Firm

The illiquidity discount tends to be smaller for firms with higher revenues, decreases as
the block offering decreases and is lower when earnings are positive and when the investor
has a customer relationship with the firm. In particular, the discounts tend to be smaller for
large firms (at least as measured by revenues) and for healthy firms
Step 5: calculation of value of firm
by using the above variable, it is possible to determine the conventional value of the firm

VALUE ENHANCEMENT
The firm can enhance their value . the following activities which is
influence the value of the firm.
cash flows generated by assets in place currently
expected growth rate in earnings
length of the high growth period
cost of capital that is applied to discount the cash flows

In the analysis part we are examine the effect of these variable in the value of the firm

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CHAPTER 5
ANALYSIS AND INTERPRETATION

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VALUATION
Here doing a conventional valuation of the firm.

Discount rate

Cost of Capital = kequity (Equity/(Debt+Equity) + kdebt (Debt/(Debt + Equity)

Cost of equity
Here the firm don't have any debt so here we are only considering cost of equity. cost of
equity took as cost of capital.

Cost of equity = RF +Beta(risk premium)

= 4.230638 + 2.527855(2.738869)
= 0.111541

Growth

Expected Growth = Reinvestment Rate * Return on Capital

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Reinvestment rate
Capital Expenditure - Depreciation + D Non-cash WC
EBIT (1 - tax rate)

= -0.00779

Return on Capital

EBIT (1-t) / Capital Invested

= 0.026082

= -0.02%

Cash flow
Particulars

Amount

Total revenue

1017970

LESS: operating expenses

886456

Operating profit or EBIT

131514

Tax rate

7.56%

EBIT(1-tax rate)

121577.6

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Tax rate
Effective tax rate =Tax due/taxable income

32500/97942
=

7.56%

Free Cash Flow to the Firm

= EBIT (1-t) (1 Reinvestment Rate)

= 122888.2

Liquidity discount
Here it is calculated on the basis of revenue and positive or negative of cash flow it
adjusted with ratio between cash and estimated value by using a regression formula

= Spread = 0.145 0.0022 ln (Annual Revenues) -0.015 (DERN) 0.016


(Cash/Firm Value) 0.11 ( Monthly trading volume/ Firm Value)

= 9.66%
Value of firm

= Free cash flow of firm * (1+g)/(k-g)

Valuation of a private firm and its value enhancement

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Particulars

Amount

Cost of equity

11.1541

Growth

-0.02%

Free cash flow of firm

122888.2

Liquidity discount

9.66%

VALUE HARAFA RUBBER WOOD VENEERS

Before adjusting liquidity discount is

1099727.After adjusting liquidity discount is

993450.1
Equity value

= Value + Cash - Debt

Particulars
Value after liquidity
Cash
Equity value

Valuation of a private firm and its value enhancement

Amount
993450.1
523461
1516911.1

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VALUE ENHANCEMENT
in this section just assuming that if the cash flow, growth and cost of capital change what
change that will make in value of the firm by keep in its exact value are default

If firm free cash flow increased in to 150000

Particulars

Amount

Free cash flow of


firm

150000

Growth

-0.02%

11.1541%

k-g

0.111707

Value

1315071.8

if increase in expected growth up to 3%

Particulars

Amount

Free cash flow of firm

150000

Growth

4.00%

11.15%

k-g

0.111543

Value

Valuation of a private firm and its value enhancement

1149924

Page 29

If reduce the cost of capital to 8%

Particulars

Amount

Free cash flow of firm

122888.2

Growth

-2.03%

8.00%

K-g

0.100322

Value

1200043

Interpretation
Here trough above case ,it is proving that there have a positive relation between value
and cash flow ,growth rate. But in the case of cost of capital there have a negative relation
with firm value.

Valuation of a private firm and its value enhancement

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CHAPTER 6
FINDINGS, SUGGESTION AND CONCLUSION

Valuation of a private firm and its value enhancement

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5.1 FINDINGS
Beta of the firm is 2.527855
Reinvestment of firm is -0.00779
Return of capital of the firm 2.61%
Expected growth of the firm -0.02%
Cost of equity of the firm is 11.15%
Free cash flow of the firm 122888.2
Liquidity discount of the firm 9.66%
Value of the firm before adjusting liquidity is 1099727
Value of the firm after liquidity 993450.1
Equity value of the firm 1516911.1
This study proving that there have a positive relation between value and cash
flow, growth rate. But in the case of cost of capital there have a negative relation with
firm value. The firm has a good cash flow but it reinvestment rate and rate of return
are too low ,so it is leading to a small or a negative growth rate for the firm

Valuation of a private firm and its value enhancement

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5.2 SUGGESION
The particular firm have a normal value. But they can enhance or create the value of
the firm by way of restructuring the firm ,such as include the debt in the finance mix. It will
lead to reduce the cost of capital and the firm can enhance the value .the growth rate of the
firm is not that much satisfactory. So they need to reinvest more in the firm to achieve a
satisfactory growth rate
They can increase the cash flow of the firm by way of reducing non cash working
capital, reducing net capital expenditure on existing investment, reducing the tax burden,
Improving operating efficiency, divest or liquidate poor investment. It will increase the value
of the firm

Valuation of a private firm and its value enhancement

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5.3 CONCLUSION
financial theorists have long argued that the objective in decision making should be
to maximize firm value. Managers and practitioners have often criticized them for being too
single minded about value maximization and for not considering the broader aspects of
corporate strategy or the interests of other stakeholders. In the last decade, however,
managers seem to have come around to the view that value maximization should be, if not
the only, at least the primary objective for their firms. So in the modern management value
creation is also a part of their core function
This study aimed to calculate the value of particular firm and how the firm can
enhance the value .it is challenging task to determine the value of a private firm. The firm
can enhance their value by increasing cash flow ,growth rate and reducing cost of finance
A firm can increase its value by increasing cash flows from current operations,
increasing expected growth and the period of high growth and by reducing its composite
cost of financing. In reality, however, none of these is easily accomplished and is likely to
reflect all of the qualitative factors that we are often accused of ignoring in valuation - the
quality of management, the strength of brand name, strategic decisions and good
marketing.

Valuation of a private firm and its value enhancement

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BIBILIOGRAPHY
Website:

http://people.stern.nyu.edu/adamodar/
http://www.rbi.org.in/home.aspx
http://www.moneycontrol.com/

Book referred
investment valuation by aswanth damodhar

Valuation of a private firm and its value enhancement

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