Y1 Y2 Y3 Y42008-09 2009-10 2010-11 2011-12 2012-13

Sales 3800 4560 5472 6566 7880Operating Cost 3496 4241 4925 5778 6698EBITDA 304 319 547 788 1182Interest 30 32 55 0 0EBTDA 274 287 492 788 1182Tax 55 57 98 142 213Cash Flow 219 230 394 646 969Capex 76 91 109 131 158Change in WC 55 66 79 94 113FCFE 88 73 206 420 698Discount rate 12% 12% 12% 12% 12%Terminal ValuePV of Cashflows 65 164 299 444Enterprise Value

Net DebtEnterprise Value to Equity HoldersNumber of Shares Outstanding

VALUE OF THE FIRM Fair Price of the Stock

Y52013-14

945678481607

01607

2891318

18913699312% 12%

21251563 12058

13594Net Debt 166.75Enterprise Value to Equity Holders 13427.48Number of Shares Outstanding 44,389,308 Fair Price of the Stock 3,025

Ratio Formula

P/E Ratio

Trailing P/E ratio Market price for share/Trailing EPS

Forward P/E ratio Market price for share/Forward EPSIncrease in P/EDecrease in P/E

PEG Ratio P/E / Annualised rate of expected earnings growth

EV/EBITDA (Market Value of Equity + Market Value of Debt - Cash) /EBITDA

Price/Book Market price per share/ Book Value per share

EPS PAT/No. of outstanding shares

Explanation Usage in Valuation

P/E Relative = Company P/E/(Index P/E)Expansion or re-rating Pg 159-162 of Reference Textbook.Contraction or de-rating

This measure allows for comparison across companies and time

Price that investors are ready to pay for each unit of profit earned over the previous four quarters.

Expected Market Price = Forecasted EPS * Weighted P/E

Indicates market price per EPS over last year. This is backward looking ratio.

Forecasted Market Price= CMP*( Current P/E/Future P/E)

Indicates the price per estimated EPS over next year. Example: Companies that tend to be in the news as an acquisition target will usually trade at a premium.

For a growing company in a fairly valued situation the P/E ratio ought to be equal to the rate of EPS growth. PEG of 1 indicates a fairly valued stock.

EV is the takeover price that an acquirer needs to pay incase of an acquisition.EV is not affected by capital structure as both equity and debt are included in our calculations.

Book Value is the value at which shareholder's equity is carried on balancesheet. A stock may have lower price/book ratio due to weak earnings growth prospects. In India today, the public sector banks trade at a much lower P/B ratio than the private sector banks.

There are some valuation ratios that are industry specific: Enteprise Value/Screen is used to value multiplexes; EV/reserves is used to value mining companies;Sales/Sft is used in the retail industry

PSR (Price to Sales Ratio)

Current Market Capitalisation /Historical revenues of previous 12 months

PSR= Market Capitalisation/ One year revenueMarket Capitalisation = Shares Outstanding * Current Market Price+ Current Long Term Debt

FCF

FREE CASH FLOW TO EQUITY METHOD(FCFE)EBIT

Less InterestLess TaxPlus DepreciationLess CapexLess Working Capital ChangesLess Principal repayments Plus Proceeds from new debtFCFE

Example ABC Limited cost to equity is 15% and growth rate of 20%Equity Method Year 1 Year 2Income 204800 245760Expenses 135060 162072Interest 2450 2940

23551.5 28261.8CF to Equity 43738.5 52486.2

PV of Equity 43738.5 45640.1739130435Value 186698.364222898

FCFF Method Year 1 Year 2Tax 24409 29290.8CF to Firm 45331 54397.2PV of CF 45331 47716.8421

0.140000000125742

FCF constitute the money earned from operations that a business an use without any constraints

This approach assumes that the growth is constant forever and that the cost of capital will not change over time.

Tax@35%

FCF= Operational Cash Flow- Capital Expenditure

Value = C /(1+d)^n where n is life of company or asset

23551.543738.5

245760Year 3 Year 4

294912 353894.4194486.4 233383.68

3528 4233.633914.16 40696.99262983.44 75580.128

47624.5293005671 49695.161009287

Year 3 Year 435148.96 42178.75265276.64 78331.968

50228.2548 52871.84

Cash flow per share = Discounted CF/Number of outstanding shares

Terminal Value in year n = Cash flow in year (n+1)/ d-g where d= discount rate of cash flows and g is the stable growth rate of cash flows

Book Value= Total Assets - Long term debt / Number of outstanding sharesPrice to book value ratio

Value of Equity= Average P/BV ratio over the years* Present Book Value per share

1. Book Value Method2. Replacement Cost Method3. Liquidation Method

CONSTANT GROWTH MODEL

Dividend Per Share

Payout ratioRetention Rate

Dividend Yield

DIVIDEND GROWTH MODELBonus Share in 1994 in 1:2 ratio

Dividend Growth Of Ambuja Cements Bonus Share in 1999 1:2 ratioBonus Share in 2006 1:1.5 ratio

Year End Dividend(%)

199106 40

199206 50

199306 50

199406 60

199506 40

199606 50

199706 50

199806 60

199906 70

200006 40

200106 50

200206 60

200306 70

200406 80

200506 90

200612 96

200712 102

200812 110

200912 120

201012 130

High Dividend Yield implies that the share has been underpriced in the market. Whenever company ploughs back profits to settle loans or for expansion programs the yield will be low.

201112 160

Dividend Growth (historical)Cost of EquityAverage Retention RatioDividend Growth (Sustainable)

Retention Rate = 1- Payout ratio

Beta is 0.82

V= D1/k where V is current value of security, D1 denotes the estimated dividend to be paid for the share one year ahead and k is the discount rate

V= D1/ r-g where g = retention rate * cost of equity

DPS= Total dividend payment/ Number of shares outstanding

Payout Ratio = Dividend per share/ EPS*100

DPS/Market price(cum dividend) per share *100

Cost of Equity= Rf current + Beta(Rm - Rf historical avg.)

18 17.2215%63%

RELATIVE VALUATION

Price/earnings ratio (P/E)

Price/cash flow ratio (P/CF)Price/Book value ratio (P/BV)Price/sales ratio (P/S)

Enterprise Value/ EBITDA

Commonly used for a shorter period of time valuation exercise and relative ease.

1. Identify the right peer set2. Identify the right multiple ratio3. Premiums and Discounts to multiple

However homegeneous an industry appears each company always has certain competencies which differentiate it from the rest of the pack.Example : Two companies in the same industry could have different features:Co.A- twice the debt level than its peersCo.B- Highest market share

Stronger trades at a higher premiumWeaker trades at a discountComparing it to the average or median value of the multiple for its peers.

Indicates the price per rupee of share earnings. Helps investors compare the prices of stocks having different eps.

Price/ Replacement Cost of assets

This is typically used in large infrastructure projects where operating income can be largely reduced by depreciation.It also allows for comparison of firms that are reporting operating losses and diverge widely.

However homegeneous an industry appears each company always has certain competencies which differentiate it from the rest of the pack.

WACC

Cost of Debt

Cost of Equity

Effective tax rate

Average cost of equity and after tax cost of debt weighted by market values of equity and debt.Cost of capital should be based on current market conditions so we must use market value of equity and debt as weights. Based on market conditions the WACC can change.

Effective rate of interest of existing long term debt of the company.This is used on an after tax basis since tax is deductible on interest on debt.

Rate of return that stockholders in the company are expecting to make when they buy its stock.

Measures the average tax paid across all the income generated by a firm. It is usually lower than the tax rate.

kd= rate of interest(1-Tax Rate)

ke=Rf+ Beta(Rm-Rf)

Exercise 1[(1+r1)(1+r2)…(1+rn)]^1/n-1 Exercise 2 Geometric Mean

r= P(t+1) - P(t)+D/ P(t) or r = Price Change + Cash Dividend/ Purchase Price *100