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Corporate valuation
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Published on Feb 27, 2013
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8. Arriving at cost of capital Key things to remember Cost of capital for the firm should be comparable with firm with similar business and
financial risk CAPM can be utilized to calculate debt, equity asset for publicly listed firm from the historical data. Hence beta have a
historical character Return on risk free security can be estimated based on 10 year Indian Government Bond Yield Equity risk premium can
be arrived from market information for the return on broad based index for a comparable period
9. Comparable company market(CCM)multiple method CCM multiple method uses the valuation ratios of a publicly traded company and
applies that ratio to the company being valued The valuation ratio typically expresses the valuation as a function of measure of financial
performance or book value (e.g. turnover, EBIDTA, EBIT, EPS or book value) Methodology is based on current market stock price
Limitations:1. Difficulty in selecting comparable firms with similar business and financial risk (EBIDTA or Cash Flow)2. Measuring the multiple
(mean or median value can be used)
10. Comparable Transactions (M&A)Method (MTM) This methodology helps in arriving the value of the company on the basis of similar
deals matured in the market This provides and indicative value as it helps in reaching the value which market is providing to similar
companies Can be arrived through sales multiple, EBIDTA multiples or PAT multiples
11. NAV Method NAV is the net value of all the assets of the company. If you divide it by the number of outstanding shares, you get the
NAV per share. One way to calculate NAV is to divide the net worth of the company by the total number of outstanding shares. Say, a
companys share capital is Rs. 100 crores (10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs. 100 crores. Net worth
of the company would be Rs. 200 crores (equity and reserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10 crores
outstanding shares). NAV can also be calculated by adding all the assets and subtracting all the outside liabilities from them. This will again
boil down to net worth only. One can use any of the two methods to find out NAV.
12. Tobins q Tobins q was developed by James Tobin (Tobin 1969) as the ratio between the market value and replacement value of the
same physical asset. Tobins q= (Market Value of Equity+ Book Value of Debt) --------------------------------------------------- --(Book Value of Equity + Book Value of Debt)
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