Need for Corporate Valuation
The need for a proper assessment of an enterprise’s value can be typically for:
There are three approaches to valuing an enterprise:
Assets Based Valuation
When Net Assets are expressed in terms if each equity share, it is termed as “Book Value per share”.
When Net Assets adjusted on the basis of fair values and expressed in terms if each equity share, it is termed as “Intrinsic Value per share”.
Assets Based Valuation fails to consider the ability of the Enterprise to generate Future Revenues & Cash Flows.
Earnings Based Valuation
1. CAPM based valuation
2. Multiplier based valuation
CAPM Based Valuation
First, determine expected rate of return using CAPM. Thereafter, capitalize the EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) by using the expected rate of return as per CAPM.
EBITDA Multiplier Based Valuation
Enterprise Value = EBITDA X Multiplier
Cash Flow Based Valuation
Steps involved in Cash Flow-based Valuation:
1. Arriving at the “Free Cash Flow”
2. Forecasting “Future Cash Flow” (FCF)
3. Determining the “Terminal Value” of the enterprise (TV)
4. Determining “Discounting Rate” based on Cost of Capital
5. Determining the “Present Values” of FCF & TV