Business Valuation Methods and Approaches: formula sheet

Key formulas

Fair market value (concept)

FMV = price between a willing buyer and a willing seller, both informed, neither under compulsion

Hypothetical market-based value. Not tied to any one buyer's synergies.

Fair value (Ind AS 113)

Fair value = price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

An exit price from the market participant's view. Not the entity's own intended use.

Investment value (concept)

Investment value = value to a specific investor based on that investor's own requirements, synergies and expected returns

Can differ from FMV. The gap often reflects the buyer's synergies.

Premise of value

Going concern value vs liquidation value (orderly or forced)

Going concern normally gives a higher value than forced liquidation for a viable business.

Valuation process

Purpose → standard and premise → information → approach → computation → reconciliation → report

Use this order as the skeleton of any descriptive answer.

Net asset value (book)

NAV = Total assets − Total outside liabilities

Use assets that are real. Exclude fictitious assets such as preliminary expenses and debit balance of P&L.

Adjusted net asset value

Adjusted NAV = Fair value of all assets (including unrecorded) − Fair value of all liabilities (including unrecorded)

Revalue each item. Add omitted items and remove overstated or fictitious ones.

Liquidation value of equity

Equity = Net realisable value of assets − Selling and liquidation costs − All liabilities

Preference capital ranks before equity. Secured and statutory dues rank as per the legal order of payment.

Value per equity share

Value per share = Value attributable to equity ÷ Number of equity shares

Deduct preference capital (with arrears if payable) before dividing.

Replacement cost of an asset

Replacement cost (net) = Current cost of equivalent new asset − Allowance for age and wear

Apply the allowance only if you are valuing an existing used asset.

FCFF

FCFF = EBIT × (1 − t) + Depreciation − Capital expenditure − Increase in net working capital

EBIT×(1−t) is NOPAT. Use only non-cash charges that you add back. Alternative: CFO + Interest × (1 − t) − Capex.

FCFE

FCFE = Net income + Depreciation − Capex − Increase in net working capital + Net borrowing

Net borrowing = new debt raised − debt repaid. Also FCFE = FCFF − Interest × (1 − t) + Net borrowing.

Cost of equity (CAPM)

Ke = Rf + β × (Rm − Rf)

(Rm − Rf) is the market risk premium. Use the beta that fits the firm's leverage.

WACC

WACC = E/(D+E) × Ke + D/(D+E) × Kd × (1 − t)

Debt cost is taken after tax. Use target or market value weights.

Present value of a cash flow

PV = CF ÷ (1 + r)^n

n is the year in which the cash flow arises.

Terminal value (Gordon growth)

TV at year n = CF(n+1) ÷ (r − g) = CF(n) × (1 + g) ÷ (r − g)

Needs r > g. TV sits at the end of year n, so discount it by (1 + r)^n.

Enterprise to equity value

Equity value = Enterprise value − Debt + Cash and surplus assets

Used with FCFF. Deduct debt at its market or book value as the question states.

Capitalisation of earnings

Value = Maintainable earnings ÷ Capitalisation rate

Capitalisation rate = discount rate − growth rate when earnings grow steadily.

Price-Earnings (P/E)

P/E = Market price per share ÷ EPS = Market capitalisation ÷ Net profit

Equity multiple. Target equity value = peer P/E × target net profit.

Enterprise Value

EV = Market capitalisation + Debt + Preference capital + Minority interest − Cash and cash equivalents

Net debt = Debt − Cash. Include items consistently with the peers.

EV/EBITDA

EV/EBITDA = EV ÷ EBITDA

Enterprise multiple. Target EV = peer multiple × target EBITDA.

Price-to-Book (P/B)

P/B = Market price per share ÷ Book value per share

Equity multiple. Common for banks and financial firms.

EV/Sales

EV/Sales = EV ÷ Revenue

Enterprise multiple. Used when earnings are negative or very low.

Equity value from EV

Equity value = EV − Net debt (− preference capital − minority interest)

Always do this step after using an enterprise multiple.

Value per share

Value per share = Equity value ÷ Number of shares

Use the shares outstanding for the target.

EVA

EVA = NOPAT − (WACC × Invested capital)

NOPAT = EBIT × (1 − tax rate). Use capital at the start of the year unless the question says otherwise.

Capital charge

Capital charge = WACC × Invested capital

Covers both debt and equity cost.

Spread form of EVA

EVA = (ROIC − WACC) × Invested capital

ROIC = NOPAT ÷ Invested capital.

MVA

MVA = Market value of firm (equity + debt) − Capital invested

Equity-only version: market capitalisation − book equity. Use the same basis on both sides.

MVA from EVA

MVA = Σ EVAt ÷ (1 + WACC)^t

If EVA is a constant perpetuity, MVA = EVA ÷ WACC.

Residual income

RI = Profit − (Required rate × Capital)

For equity: RI = Net profit − (Ke × Book equity).

Residual income valuation

Equity value = Book equity + PV of future RI

Discount RI at the cost of equity.

Excess earnings

Excess earnings = Maintainable profit − (Normal rate × Net tangible assets)

Goodwill = Excess earnings × years' purchase, or Excess earnings ÷ capitalisation rate.

Control premium

Control premium % = (Control value ÷ Marketable minority value) − 1

Control value is the price per share for a controlling stake. The base is the marketable minority value.

Value with control premium

Controlling value = Marketable minority value × (1 + control premium)

Use only when the base value is a minority value.

Implied minority discount

Minority discount % = 1 − [1 ÷ (1 + control premium)]

Gives the discount that matches a given control premium. For a 25% premium it is 20%.

Value after discounts

Adjusted value = Base value × (1 − minority discount) × (1 − DLOM)

Discounts are applied one after another (multiplicatively), not added together, unless the question says otherwise.

Weighted final value

Final value = Σ (Value by method × Weight), where Σ weights = 100%

Weights reflect reliability of each method. Check that they add to 100%.

Quick revision

• The standard of value depends on the purpose of the valuation, so state it first.
• Going concern and liquidation premises can give very different values.
• Net asset value equals fair value of assets minus liabilities.
• DCF value equals the present value of forecast free cash flows plus the present value of terminal value.
• Free cash flows to the firm are discounted at WACC; flows to equity are discounted at cost of equity.
• Enterprise value minus net debt gives equity value, along with other claims as given in the question.
• Terminal value must use a growth rate below the discount rate.
• Use enterprise multiples for enterprise value and equity multiples for equity value.
• EVA = NOPAT − (invested capital × WACC).
• Positive EVA means returns exceed the cost of capital.
• Discounts and premiums apply after the base value, and only when the facts support them.
• Reconcile methods with reasoned weights and give one final value.

Common mistakes

• Treating fair market value and investment value as the same. Fix: Link FMV to a hypothetical informed buyer and seller, and investment value to one named investor with its own synergies.
• Saying a business has one true value. Fix: Say that value depends on purpose, standard, premise and date, and state these first.
• Deducting equity share capital and reserves as liabilities Fix: Deduct only outside liabilities and preference claims. Share capital and reserves are what you are trying to value.
• Keeping fictitious assets in the asset total Fix: Remove preliminary expenses, discount on issue of shares and the debit balance of the P&L account. They have no realisable value.
• Discounting FCFF at the cost of equity, or FCFE at WACC. Fix: FCFF is for all capital providers, so use WACC. FCFE is for shareholders only, so use cost of equity.
• Using the year-n cash flow instead of year n+1 in the terminal value. Fix: Multiply the last forecast cash flow by (1 + g) first. Then discount TV by the year-n factor, not n+1.
• Applying an EV multiple and reporting the result as equity value Fix: Whenever the multiple has EV in it, subtract net debt (and preference capital, minority interest) before stating equity value.
• Using a P/E multiple on EBITDA, or EV/EBITDA on net profit Fix: Write the multiple as a fraction first and apply it to the same denominator for the target.
• Deducting only interest instead of a full capital charge in EVA. Fix: Start from NOPAT before interest and charge WACC on total capital, debt plus equity.
• Using pre-tax cost of debt in WACC. Fix: Use Kd × (1 − t) in WACC every time.

Exam tips

• Begin every case answer with purpose, standard and premise. Examiners reward this structure.
• In MCQs, look for key phrases: willing buyer and seller points to fair market value; specific investor or synergy points to investment value; exit price at measurement date points to fair value.
• When comparing standards, use a three-point contrast and keep each point to one line.
• State the source of any definition you use, as company law, tax and accounting can differ in wording.
• For numerical differences between standards, identify the gap as buyer-specific synergy or similar item and explain it.
• Underline the premise word in the question: going concern, liquidation, forced sale or replacement. It decides which values you use.
• Show a clear schedule of adjustments. Marks are given for each correct revaluation even if the final figure is wrong.
• In case-based MCQs, ask which items are fictitious or unrecorded before you total anything.