asjusted present value method

7/30/2019 Asjusted Present Value Method

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BUSINESS VALUATION

STANDARDS IN

INDIA

Sanya Zaidi

Sana Khan

Saurav Raj Verma

Zubair Zargar

MBA-General (II Yr.

Section-C2011-2013


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Business Valuation Standard

The Business Valuation is a process to estimate

the economic worth of stakeholder's interest in a

business.

These are formally known as the"Standard of Value" and

"Premise of Value".


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Key Facts of Business Valuation:

Price is not the same as ValueThe Value of a business, by whatever business valuation

method it is obtained, is not the selling price of the business.

As Warren Buffett said, "Price is what you pay; Value is what

you get." They are not the same.

Value varies with Person, Purpose and Time

The Value is a subjective term and can have differentconnotations meaning different things to different people and

the result will not be the same, should the context or time

changes.


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Transaction concludes at Negotiated Prices

This value is still subjective, dependent on buyer and seller

expectations and subsequent negotiations and the Transaction

happens at negotiated price only.

Valuation is hybrid of Art & Science

Valuation is more of an art and not an exact science. The Art is

Professional Judgment and Science is Statistics. Mathematical

certainty is neither determined nor indeed is it possible as useof professional judgment is an essential component of

estimating value.


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Reasons for Business Valuation

For Merger and Acquisition

Dispute Resolution

Going Public

Voluntary Assessment

Succession Planning


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Accepted Methodologies of Valuation

Asset Approach

Income Approach

Market Approach


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Asset Approach (NAV)

Generally the Net Asset Value reflected in books do not usually include

intangible assets and are also impacted by accounting policies which

may be discretionary at times. NAV is not perceived as a true indicator

of the fair business value.

Book Value Method - It is based on the balance sheet review of assets

and liabilities

Replacement Cost Method - It is based on current set up cost of plantof a similar age, size and capacity

Liquidation Value Method - It is based on estimated realizable value of

various assets.


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d

Income ApproachThe Income based method of valuations are based on the premise that

the current value of any business is a function of the future value that an

investor can expect to receive from purchasing all or part of thebusiness.

Discounted Cash Flow Method (DCF)

In this method, the appraiser estimates the cash flows of any businessafter all operating expenses, taxes, and necessary investments in

working capital and capital expenditure is being met.

Capitalization of Earning Method

The idea is that the business value is defined by the business earnings

and the capitalization rate is used to relate the two.


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Market Based Approach

In this method, value is determined by comparing the subject, company

or assets with its peers or Transactions happening in the same industry

and preferably of the same size and region. This is also known as

Relative Valuation Method.

Comparable Companies Multiples Approach

Market Multiples of Comparable Listed Companies are computed andapplied to the Company being valued to arrive at a multiple based

valuation.


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Comparable Transaction Multiples Method

This technique is mostly used for valuing a company for M&A, thetransaction that have taken place in the Industry which are similar

to the transaction under consideration are taken into account.

Market Value Approach

The Market Value method is generally the most preferred method in

case of frequently traded Shares of Companies listed on StockExchanges having nationwide trading as it is perceived that the

market value takes into account the inherent potential of the

Company.


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Other Valuations Approaches

Contingent Claim Approach

Under this valuation approach, Option Pricing Model is applied to

estimate the Value. Generally ESOP Valuation for Accounting

purpose is done using the Black Scholes Method.

Price of Recent Investment Approach

Under this valuation approach, the recent investment in the business

by an Independent party may be taken as the base value for thecurrent appraisal, if no substantial changes have taken place since

the date of such last investment.


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Rule of Thumb Approach

Although technically not a valuation method, a rule of

thumb or benchmark indicator is used as a

reasonableness check against the values determined by

the use of other valuation approaches.


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Indian Perspective

For so long, Valuation has been debated in India as an

Art or Science and substantial part of the litigation in

Mergers & Acquisitions (M&A) takes place on the issue of

Valuation as it involves an element of subjectivity that often

gets challenged.

Institute of Chartered Accountants of India (ICAI) has

recently developed and recommendedBusiness Valuation

Practice Standards (BVPS) aiming to establish uniform

principles, practices and procedures for valuers performing

valuation services in India.


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The introduction of concept ofRegistered Valuer in the

Companies Bill, 2011 has also provided a framework toenable fair valuation in companies, thus standardizing the

use of valuation practices in India, leading to transparency

and better governance.

It has been observed that different regulators in India

(RBI, Income Tax, SEBI, etc) have prescribed different and

in some cases conflicting valuation methodologies creating

practical difficulties.


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Finally.

Valuation is more of an art and not an exact science, thoughthe value of a business can be objectively determined

employing valuation approaches.

This value is still subjective, dependent on buyer and seller

expectations and subsequent negotiations and use of

professional judgment is an essential component of

estimating value.


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asjusted present value method

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