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CVR Module 1

This document discusses the basics of business valuation including the purpose, principles, techniques, concepts, and process of valuation. It also covers considerations and requirements that must be made during the valuation process.

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balaji R
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62 views

CVR Module 1

This document discusses the basics of business valuation including the purpose, principles, techniques, concepts, and process of valuation. It also covers considerations and requirements that must be made during the valuation process.

Uploaded by

balaji R
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Module 1: Basics of Business Valuation

Business valuation is a process used to


estimate the economic value of an owner's
interest in a business. Valuation is used by
financial market participants to determine the
price they are willing to pay or receive to
effect a sale of a business.
Purpose of Valuation
• Corporate valuation is done in the following situations:
Raising capital for an Emerging Venture
Initial public offering
Acquisitions
Divestitures
PSU Disinvestment
Employee Stock Option Plans
Portfolio Management
Distinction between price and value

• Price can be understood as the money or


amount to be paid, to get something.
• value implies the utility of worth of the
commodity of service for an individual.
Principles of Valuation
1. Value is determined at a specific point in time.
2. Value is prospective.
3. The market dictates the appropriate rate of return.
4. The higher the undelaying net tangible asset value base, the higher
the going concern value.
5. Value is the present value it may have 2 distinct components –
commercial or transferable value and non-commercial or value-to-
owner.
6. Value is influenced by liquidity
7. The value of a minority interest may be worth less than the value of
a controlling interest where each is viewed on ‘per share’ basis.
Techniques of Valuation
• Asset based approach – liquidation value, replacement cost
• Relative valuation
• DCF valuation
• Contingent claim valuation
• Other approaches – EVA, Performance Based Compensation
Role of Valuation
1. Valuation in portfolio Management
Fundamental analysis
Franchise buyers
Chartists
Information traders
Market timers
Efficient marketers
2. Valuation in business acquisition
3. Valuation in corporate Finance
Concepts of Value:
• Market Value
• Fair Value
• Book Value
• Intrinsic Value
• Investment Value
• Liquidation Value
• Replacement Value
Valuation Process
1. Understanding the business
2. Forecasting company performance
3. Selecting appropriate valuation model
4. Converting forecasts to a valuation
5. Applying the valuation conclusions
Considerations to be made at the time of
Business Valuation
1. Appropriateness of the valuation methods
2. Limitations of financial statements
3. Financial information commensurate with the nature of business
4. Economic environment
5. Relevant industry in which the business is valued
6. Economic, efficient and useful life of assets
Requirements during
valuation process
• Understanding actual computations of various formulas and
ratios
• Understanding GAAP and practices followed by the
companies & the relevant business financial data
• Understanding facts associated with the historical growth of
the business
• Extrapolation of the financial figures into future time periods

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