CA Final · Advanced Financial Management

Business Valuation: formula sheet

Full chapter guide

Key formulas

Net asset value (adjusted book value): Net assets = Fair or realisable value of all assets − Outside liabilities (including contingent liabilities that are likely to crystallise); Exclude fictitious assets such as preliminary expenses and deferred losses. Value per share = Net assets ÷ Number of equity shares, after deducting preference capital if any.
Enterprise value: EV = Equity value + Debt − Cash and cash equivalents (+ minority interest and preference capital where relevant); Use EV-based multiples to get EV first, then bridge back to equity value.
Capitalisation of earnings: Value = Maintainable earnings ÷ Capitalisation rate; Use normalised earnings. The rate must match the earnings measure (pre-debt earnings with WACC, equity earnings with cost of equity).
DCF value (income approach): Value = Σ [CFt ÷ (1 + r)^t] + Terminal value ÷ (1 + r)^n; FCFF is discounted at WACC to get enterprise value. FCFE is discounted at cost of equity to get equity value.
Relative valuation by multiple: Value of firm = Comparable multiple × Firm's metric (e.g. P/E × EPS); Choose comparables of similar business, size, growth and risk. Adjust for one-time items.
Weighted value from multiple approaches: Final value = Σ (Weight × Value under each method), where weights add to 1; Weights reflect reliability of each method for that business and are a matter of judgement.
Net asset value (NAV) of equity: Net asset value = Value of assets − Outside liabilities − Preference share capital; Outside liabilities include debentures, loans and current liabilities. Deduct preference capital (with arrears, if given) to reach the equity amount.
Value per equity share: Value per share = Net asset value for equity ÷ Number of equity shares; Use shares outstanding. If partly paid shares exist, adjust as the question directs.
Book value of equity (alternative): Equity net worth = Equity share capital + Reserves and surplus − Fictitious assets; Fictitious assets include preliminary expenses and accumulated losses shown as assets. They have no realisable value.
Liquidation value: Liquidation value = Realisable value of assets − Liabilities − Liquidation costs; Use realisable values, not book values. Deduct winding-up expenses before the amount reaches equity.
Going concern value with goodwill: Value of business = Net asset value at fair values + Goodwill (if the question asks for it); Add goodwill only when it is given or must be computed under a stated method.
Earnings capitalisation value: Value = Maintainable earnings ÷ Capitalisation rate; Use after-tax earnings with an equity rate for equity value; use pre-interest earnings with a firm-level rate for firm value. Keep earnings and rate consistent.
P/E ratio: P/E = Market price per share ÷ EPS; Equals Market capitalisation ÷ Net profit available to equity shareholders.
Equity value by P/E: Equity value = Maintainable PAT × Peer P/E; Per share value = EPS × P/E.
Earnings yield: Earnings yield = EPS ÷ Price = 1 ÷ (P/E); Capitalisation rate in the earnings method is the earnings yield.
Enterprise value: EV = Market value of equity + Debt − Cash and cash equivalents; Add minority interest and preference capital if given.
EV/EBITDA valuation: EV = EBITDA × Peer EV/EBITDA multiple; Equity value = EV − Net debt; Net debt = Debt − Cash. Do not forget this last step.
Price-to-book: P/B = Market price per share ÷ Book value per share; Equity value = Net worth × Peer P/B.
Average multiple: Peer multiple = Σ multiples ÷ n; Use the average or median as the question directs. Adjust only if the question asks for a premium or discount.
FCFF: FCFF = EBIT × (1 − t) + Depreciation − Capex − Increase in NWC; Use the tax rate on EBIT, not on PBT. Add back all non-cash charges. If NWC falls, add the decrease.
FCFE from FCFF: FCFE = FCFF − Interest × (1 − t) + Net borrowing; Net borrowing = new debt raised − debt repaid.
FCFE from PAT: FCFE = PAT + Depreciation − Capex − Increase in NWC + Net borrowing; PAT is already after interest, so do not deduct interest again.
Cost of equity (CAPM): Ke = Rf + β × (Rm − Rf); Rm − Rf is the market risk premium. If only Rm is given, subtract Rf first.
WACC: WACC = Ke × E/(D+E) + Kd × (1 − t) × D/(D+E); Use market-value or target weights if given. Use the after-tax cost of debt.
Terminal value (growth perpetuity): TV at year n = FCF(n+1) ÷ (r − g) = FCF(n) × (1 + g) ÷ (r − g); Valid only when g < r. Use r = WACC for FCFF and r = Ke for FCFE.
Enterprise value: EV = Σ FCFF(t) ÷ (1 + WACC)^t + TV(n) ÷ (1 + WACC)^n; Discount TV by the same factor as year n.
Equity value from EV: Equity value = EV − Debt + Cash and non-operating assets; Value per share = Equity value ÷ number of shares.
Equity value from FCFE: Equity value = Σ FCFE(t) ÷ (1 + Ke)^t + TV(n) ÷ (1 + Ke)^n; Debt is already reflected in FCFE, so make no further deduction.
NOPAT: NOPAT = EBIT × (1 − tax rate); Use EBIT before interest. Adjust EBIT first if the question asks for adjustments such as adding back R&D treated as an investment.
Economic Value Added: EVA = NOPAT − (WACC × invested capital); Invested capital is usually opening capital, or as the question states. Use the capital figure given for the year.
EVA using spread: EVA = (ROCE − WACC) × invested capital, where ROCE = NOPAT ÷ invested capital; Shows that EVA is positive only when return on capital exceeds WACC.
EVA from net income: EVA = net profit after tax − (cost of equity × equity capital); Use only when the question says to treat debt interest as already charged, or gives only the equity-based data.
Market Value Added: MVA = market value of firm (equity + debt) − capital invested; For equity only: MVA = market value of equity − book value of equity capital contributed.
MVA and EVA link: MVA = Σ EVAt ÷ (1 + WACC)^t; Sum over all future years. For a constant perpetual EVA, MVA = EVA ÷ WACC.
Firm value using EVA: Firm value = invested capital + MVA; Equity value = firm value − market value of debt.
Dividend discount model (general): P0 = Σ Dt ÷ (1 + ke)^t + Pn ÷ (1 + ke)^n; Use for a finite holding period with a terminal price Pn.
Gordon growth model: P0 = D1 ÷ (ke − g) = D0 × (1 + g) ÷ (ke − g); Valid only when g is constant forever and ke > g. Use D1, the next dividend.
Implied cost of equity: ke = D1 ÷ P0 + g; Rearranged Gordon model.
Sustainable growth: g = b × ROE, where b = 1 − payout ratio; ROE is the return earned on equity, and the new investment from retained earnings is assumed to earn this return.
Value with value drivers: P0 = E1 × (1 − b) ÷ (ke − b × ROE); E1 is next year's EPS. If ROE = ke, P0 = E1 ÷ ke.
Two-stage DDM: P0 = Σ D_t ÷ (1+ke)^t (high growth years) + [D_(n+1) ÷ (ke − g_s)] ÷ (1+ke)^n; g_s is the stable growth rate after year n.
Tobin's Q: Q = Market value of firm ÷ Replacement cost of assets; Q > 1 may reflect intangibles or growth, or overpricing; Q < 1 may signal undervaluation.
Relief-from-royalty brand value: Brand value = Σ [Sales × royalty rate × (1 − tax rate)] ÷ (1 + r)^t + PV of terminal value; Discount at a rate reflecting brand risk.
Venture capital method: Post-money value today = Exit value ÷ (1 + target return)^n; Investor stake = investment ÷ post-money value.

Quick revision

Enterprise value belongs to all capital providers; equity value is what remains for shareholders.
Equity value = enterprise value − debt + surplus cash and non-operating assets (adjust for other claims if given).
Asset-based value = value of assets (adjusted as given) − outside liabilities.
Capitalised earnings value = maintainable earnings ÷ capitalisation rate.
Value using P/E = earnings per share × P/E multiple.
FCFF is discounted at WACC and gives enterprise value.
FCFE is discounted at cost of equity and gives equity value directly.
Terminal value with constant growth = next year's cash flow ÷ (discount rate − g), and it must be discounted back.
NOPAT = EBIT × (1 − tax rate).
EVA = NOPAT − (WACC × capital employed).
MVA = market value of the firm's capital − capital invested, as the question defines it.
Positive EVA means the firm earns above its cost of capital.

Common mistakes

Treating fair value and intrinsic value as the same thing. Fix: Say fair value is a transaction price between informed, willing parties; intrinsic value is a fundamentals-based estimate that may differ from market price.
Using book value as the asset-based value without adjustment. Fix: Revalue assets to realisable or replacement value, drop fictitious assets, and include all outside liabilities and likely contingent liabilities.
Treating preliminary expenses or accumulated losses as assets Fix: Exclude fictitious assets in every valuation. They cannot be sold for cash.
Using book values when the question gives revalued or realisable figures Fix: Underline every revaluation in the question and tick it off as you apply it.
Applying EV/EBITDA and reporting the result as equity value. Fix: Always subtract net debt after the multiplication and label EV and equity value separately.
Using reported profit without adjusting for one-off items. Fix: Scan notes for exceptional items first and build a maintainable earnings line.
Discounting FCFE at WACC, or FCFF at Ke. Fix: Write the pair at the top: FCFF with WACC gives EV; FCFE with Ke gives equity value.
Deducting debt from a value obtained using FCFE. Fix: FCFE is already after debt servicing. The sum of PVs is equity value. Deduct debt only when you started from FCFF.
Deducting interest while computing NOPAT. Fix: Start from EBIT. If you begin with PBT, add back interest first, then apply tax.
Using the pre-tax cost of debt in WACC. Fix: Always use Kd × (1 − t) for the debt component of WACC.

Exam tips

Start every case answer by stating the purpose of valuation. Marks are often given for linking purpose to approach.
Write the difference between fair value and intrinsic value in two crisp lines. It is a frequent theory question.
For 'which approach' questions, give the choice and one reason tied to the case facts, then mention a cross-check method.
Show the bridge from enterprise value to equity value and per-share value. Missing it loses easy marks.
Where an MCQ gives purpose words like 'winding up' or 'arm's length sale', map them straight to the standard of value.
Write the basis (book, fair, replacement or liquidation) in your first line. It shows the examiner your approach.
Show a clean asset and liability list. Step marks are given for each adjustment, so do not jump to the answer.
In theory questions on going concern versus liquidation value, give two or three reasons for the gap: forced sale prices, lost goodwill and winding-up costs.