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Valuation Process and Steps Explained

Valuation involves 10 steps: 1) review assumptions, 2) predict sales and profits, 3) calculate working capital, 4) estimate future cash flows, 5) calculate terminal value, 6) present value terminal value, 7) present value future cash flows, 8) calculate firm value, 9) calculate enterprise value, 10) calculate intrinsic value. Valuation is necessary to obtain accurate business valuations, understand a company's resale value, determine true company value, and facilitate mergers and acquisitions by accessing more investors.

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46 views1 page

Valuation Process and Steps Explained

Valuation involves 10 steps: 1) review assumptions, 2) predict sales and profits, 3) calculate working capital, 4) estimate future cash flows, 5) calculate terminal value, 6) present value terminal value, 7) present value future cash flows, 8) calculate firm value, 9) calculate enterprise value, 10) calculate intrinsic value. Valuation is necessary to obtain accurate business valuations, understand a company's resale value, determine true company value, and facilitate mergers and acquisitions by accessing more investors.

Uploaded by

DHRUV VIJ
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Valuation Steps

1. First Read the assumptions (it should include terminal growth rate, YOY growth rate (both
pre and post current year), Risk free rate, tax, interest, WACC %, Working Capital %).

Terminal growth rate varies if you are from buyer side or target company side, 0% or max %
growth rate assume depending on your position.

COGS is calculated = Opening stock +Purchases – Closing Stock. After this compute with sales
to find the %. Take average of % from all the year and then taking average of these to find
out the estimated % for the next estimated years.

Depreciation rate will be given or Calculate depreciation from SML method or Double
Declining Balance Method. Then % with sales and the proportions to find the estimated
years.

2. Once you know the YOY growth rate – both pre and post current year, you get predict the
sales and till EAT/PAT.
3. If working capital is not given as a percentage, use the formula, Total Current Assets- Total
Current Liabilities = Net Working Capital.
4. Find these for the estimated year as well.
5. After finding out the estimated year values, compute the FCFF. The formula for FCFF is
PAT+EBIT(1-Tax) - (Capital Expenditure-Depreciation & Ammonization) +/- Change in the
Working Capital.
𝐿𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝑜𝑓 𝐹𝐶𝐹𝐹∗(1+𝑇𝐺𝑅)
6. Next Step is to find out the Terminal Value of FCFF. The formula is
(𝐶𝑂𝐸−𝑇𝐺𝑅)
𝑇𝑉
7. Next, Present Value of TV =
(1+𝐶𝑂𝐸)^5
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤
8. Present value of FCFF =
(1+𝐶𝑂𝐸)^5
9. Firm Value = step 7 +step 8
10. Enterprise value = PV of FCFF all the expected years.
11. Intrinsic value = Enterprise Value/ No. of Outstanding shares.

Why valuation is necessary?

 Better knowledge about company’s assets.


o accurate business valuation assessment.
o Estimates are not acceptable
o Specific numbers are to be gained from valuation so that business owner know how
much to obtain proper insurance coverage, know how much to reinvest in a
company and how muxh to sell a company to make profit.

 Understand of Company Resale Value


 Obtain a True Company Value
 Better During Mergers/Acquisitions
 Access to More Investors

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