Valuation Techniques

 Discounted Cash Flow

 Relative/ Comparable Analysis
Transaction Valuation (Deal Valuation)

Discounted Cash Flow – Approaches -> Free Cash flow Model

-> Dividend Discount Model
-> Residual Income Model

 Free Cash Flow – Free Cash flow from Firm (FCFF)

 Calculates Enterprise Value
 Unlevered cash flow
 Discount rate is cost of capital(k0)
 Cash flow available to the firm (Debt +Equity) after investing in Working capital & Capital expenditure.
 EBIT(1-Tax) + Non cash charges – change in WC - Capital expense

 Free Cash Flow – Free Cash flow from Equity (FCFE)

 Calculates Equity Value
 Levered cash flow
 Discount rate is cost of equity(ke)
 EBIT(1-Tax) + Non cash charges – change in WC - Capital expense – Interest(1-Tax) – Debt Repayment

SOME TERMS
 Share Warrant
 Share Option – Put/Call , In Money/Out of Money
 Put Option – A right and not an obligation to sell the security at Strike/Exercise Price.
Expectation of low prices.
 Call option – A right and not an obligation to buy the security at Strike/Exercise Price.
Expectation of high prices.
 In Money Option – When exercise price is reached & share becomes valuable.
 Out of Money Option – When exercise price is not reached & share becomes non
valuable
 Exercise/Strike Price – Price at which put or call option is exercised.
 Treasury Stock Method – Options – (Options*ex price/MP) = New shares issued
New shares issued + Options = Diluted Shares
 5 STEPS IN DCF VALUATION

 Forecast free Cash Flow

 Calculate Discount Rate
 Project Terminal Value – End value of forecast
 Calculate PV of FCF and Terminal Value
 Calculate intrinsic value- Fair price/implied share price/fundamental value

Projection parameters

 Sales Growth Rate

 COGS as % of sales
 Minority interest Growth Rate
 Minority Dividend as % of minority interest
 Equity income from associates Growth Rate
 Depreciation as % of average fixed assets
 Others as 0
 Amortisation – intangible assets
 Goodwill same until any acquisition
 Intangible assets to be reduced with amortization exp
 Inventory as a % of Cost of sales
 Receivables as a % of Sales
 Payables as a % of cost of sales
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