Published on July 5, 2010
IMPLICATIONS OF VARIOUS ADJUSTMENTS ON THE FUNDAMENTAL VALUATION FOR BOOK VALUE OF A COMPANY : IMPLICATIONS OF VARIOUS ADJUSTMENTS ON THE FUNDAMENTAL VALUATION FOR BOOK VALUE OF A COMPANY Slide 2: Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets, it focuses on the overall state of the economy, interest rates, production, earnings, and management. Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm’s length who are fully informed and are not under any compulsion to transact. Slide 3: The book value of an asset is the asset’s cost minus the asset’s accumulated depreciation. The book value per share of stock is a corporation’s total amount of stockholders’ equity divided by the number of common shares of stock outstanding on that date. Slide 4: The amount of owner's equity or stockholders' equity reported on a company's balance sheet. This is not an indication of the company's fair market value. A corporation's book value is used in fundamental financial analysis to help determine whether the market value of corporate shares is above or below the book value of corporate shares. Slide 5: Asset Based Approach Income Approach Market Approach Slide 6: It comprises four major steps: Forecasting the company’s cash flow for a specified number of years. Estimating the cost of capital to be included in the valuation analysis. Determining the continuing value of a business beyond the valuation date. Analyzing and interpreting the results of calculations and assumptions. Slide 7: Capital Asset Pricing Method Systematic risk is measured by a statistical factor called beta, which is a function of the relationship between the return on an individual security and the return on the market as a whole Slide 8: This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present This concept of discounting future monies is commonly known as the time value of money Slide 9: Strengths This method focuses solely on the future . It takes into account fluctuations in annual cash flows. It offers the highest level of precision. Weaknesses This method is generally not well understood and is more difficult to apply than other methods. Slide 10: Discount rate is required to calculate the risk adjusted present value of expected future cash flows of any company. The discount rate is composed of the following: risk free rate of return; risk associated with equity investments; risk associated with the industry in particular & risk associated with the company in particular. Slide 11: Continuing value can be defined as the stream of benefits beyond the cash flow forecast period derived from a business investment on a going-concern basis. It is also a popular method for determining the selling price of micro businesses and certain professional practices. This method is fraught with error, however, so it pays to stay alert to its major pitfalls. Slide 12: Normal capitalization method: Normal capital required to get actual return less actual capital employed Super profit method Excess of actual profit over normal profit multiplied by number of years super profits are expected to continue Annuity method Discounted super profit at a suitable rate Slide 13: Net Assets / No. of Shares = Asset value *net assets include goodwill as well as contingent assets. Asset Backing Method is applied in case of: Amalgamation Takeover Liquidation Slide 14: Normalization adjustments often deal with items the owner or manager expends that are discretionary. These adjustments may also relate to unusual or infrequent transactions that are not typical to the business. Normalization Adjustments In Business Valuation: Slide 15: ADJUSTMENTS TO PREPARE FINANCIAL STATEMENTS DEPRECIATION: It is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors. PREPAID: A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. ACCRUED : Accrued expense refers to an expense that has been incurred but not yet paid.