Fundamentals of Business Valuation: formula sheet

Key formulas

Value versus price

Value = estimate of worth (analysis, stated date, stated standard); Price = amount actually agreed and paid

Price can differ from value. Never use the two words as if they mean the same.

Valuation frame

Valuation = Purpose + Valuation date + Standard of value + Premise + Approach

Write these five items first in any answer. The premise is usually going concern or liquidation.

Gain from a deal to a buyer

Value to buyer = Standalone value of target + Value of synergies; Gain to buyer = Value to buyer − Price paid

A buyer gains only if the price is below the value to that buyer.

Gain to a seller

Gain to seller = Price received − Seller's standalone value

Both sides can gain when price lies between standalone value and value to the buyer.

Fair market value test

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

Not buyer-specific. Synergies special to one buyer are generally excluded.

Fair value (Ind AS 113)

Fair value = exit price in an orderly transaction between market participants at the measurement date

Market-based, not entity-specific. Mention the measurement date.

Investment value

Investment value = value to a particular investor using that investor's own cash flows, synergies and required return

Entity or investor specific, so it can differ from FMV.

Intrinsic value comparison

If intrinsic value > market price: undervalued. If intrinsic value < market price: overvalued

Intrinsic value is an estimate, so the conclusion depends on the assumptions.

Liquidation value

Net liquidation value = Realisable value of assets − Costs of disposal − Liabilities settled

Use lower values for forced sale and higher values for orderly sale.

Going concern premise

Going concern value = present value of expected future cash flows of continuing operations

Typically higher than liquidation value for a profitable business.

Value as present value of future cash flows

Value = Σ [CFt ÷ (1 + r)^t] + Terminal value ÷ (1 + r)^n

Cash flows, discount rate r and growth (inside terminal value) are the three channels through which every factor acts.

Gordon growth terminal value

TV = CF(n+1) ÷ (r − g)

Valid only when r > g and g is a stable long-term growth rate. A small change in r or g changes value sharply.

Capitalisation of maintainable earnings

Value = Maintainable earnings ÷ Capitalisation rate

Capitalisation rate rises with risk, so higher risk means lower value for the same earnings.

Factor-to-channel rule

Factor → effect on cash flow, risk or growth → effect on value

Use this chain to explain any factor in a descriptive answer.

Normalised earnings

Normalised earnings = Reported profit ± non-recurring items ± non-market adjustments

Add back one-off losses and subtract one-off gains. Adjust owner pay and related-party items to market levels. Consider the tax effect if the question asks for post-tax figures.

Equity value from enterprise value

Equity value = Enterprise value − Debt + Surplus (non-operating) assets

Use cash and debt as at the valuation date. Add non-operating assets only if their income is excluded from the earnings you valued.

Reconciled value

Concluded value = Σ (value from each method × weight), where weights add up to 100%

Weights must be justified by purpose and data reliability.

Value after discount

Adjusted value = Base value × (1 − discount %)

Apply a marketability or minority discount only to the interest it relates to, and only once.

Net Asset Value (NAV)

NAV = Value of assets − Outside liabilities (including preference capital, if any, ranking before equity)

Use fair values for the adjusted method. Exclude fictitious assets such as preliminary expenses and accumulated losses shown as assets.

NAV per equity share

NAV per share = (Assets − Outside liabilities − Preference capital) ÷ Number of equity shares

Check whether the question wants value of the business or value per share.

Capitalisation of maintainable earnings

Value = Future maintainable profit ÷ Capitalisation rate

Use profit after adjusting for non-recurring items. The rate is the required rate of return.

Discounted Cash Flow

Value = Σ [CFt ÷ (1 + r)^t] + Terminal value ÷ (1 + r)^n

Terminal value by Gordon growth = CFn+1 ÷ (r − g), valid only when r > g.

Equity value from enterprise value

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

Needed when a multiple such as EV/EBITDA or free cash flow to firm is used.

Value using a multiple

Value = Peer multiple × Subject company's metric (e.g. P/E × EPS)

Peers must be similar in size, risk, growth and business.

Present value

PV = CF ÷ (1 + r)^n

Use PV of annuity or perpetuity formulas for repeating cash flows.

Growing perpetuity

PV = CF₁ ÷ (r − g)

Valid only when r > g. CF₁ is the cash flow one year ahead.

CAPM cost of equity

Ke = Rf + β × (Rm − Rf)

(Rm − Rf) is the market risk premium. Do not subtract Rf twice.

After-tax cost of debt

Kd (after tax) = Kd × (1 − t)

Use the tax rate that applies to the interest deduction.

WACC

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

Weights should be at market or target capital structure values.

FCFF

FCFF = EBIT × (1 − t) + Depreciation − Capex − Increase in working capital

Discount at WACC to get enterprise value.

FCFE

FCFE = FCFF − Interest × (1 − t) + Net borrowing

Discount at cost of equity to get equity value directly.

Terminal value (Gordon growth)

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

Discount TV back n years at the same rate used for the flows.

Equity value from enterprise value

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

Needed when you use FCFF.

Who values under the Companies Act

Valuation event under the Act (e.g. section 62 preferential allotment by an unlisted company, section 192, sections 230-232) → registered valuer (registered for the asset class) → appointed as section 247 provides

Section 247 is not a valuation event. It governs the appointment, qualifications and duties of the valuer: where the Act requires a valuation, the audit committee, or the Board if there is none, appoints the registered valuer. The events that need a valuation sit in other provisions. For example, under section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debentures) Rules, a valuation report from a registered valuer is required for a preferential allotment of shares by a company that is not listed. A listed company prices its preferential issue under SEBI ICDR. In a scheme under sections 230-232 the Tribunal can direct a valuation. Check the provision for the event in the question.

Registered valuer route

Qualification + experience + valuation exam → enrolment with RVO → registration with the designated authority

Registration is asset-class specific. Do not state exact years of experience unless you are sure of them.

Core ethical principles

Integrity, independence, objectivity, competence, confidentiality, disclosure of interest

Use these as headings in any code-of-conduct answer.

Standards hierarchy

Notified valuation standards → (if none) standards of professional bodies such as ICMAI

Say the valuer must state the standard followed in the report.

Quick revision

• Valuation gives an estimate of worth for a stated purpose, date and standard; there is no single value for all purposes.
• Purpose decides the standard and premise of value, so state it first in any answer.
• Going concern premise assumes the business continues; liquidation premise assumes assets are sold off.
• Value depends on factors such as earnings, growth, risk, industry, economy, management and marketability.
• The valuation date matters because information and market conditions change over time.
• Asset approach values what the business owns less what it owes.
• Income approach converts expected future benefits into present value.
• Market approach uses prices of comparable businesses or transactions.
• Present value = future amount ÷ (1 + r)ⁿ, where r is the discount rate per period and n is the number of periods.
• Higher risk means a higher discount rate and, other things equal, a lower present value.
• A valuer must be independent, objective, competent and keep client information confidential.
• Where a method needs judgement, document your assumptions and reasons.

Common mistakes

• Treating value and price as the same thing. Fix: Define value as an estimate at a date and price as the amount agreed. Add one reason they differ, such as synergy or negotiation.
• Saying a business has one true value. Fix: Say value depends on purpose, standard of value, premise and assumptions. Different purposes can justify different figures.
• Treating fair market value and fair value as identical in every context. Fix: Say that fair value under Ind AS 113 is an exit price at the measurement date, while FMV is the price between a hypothetical willing buyer and seller. Note that they often give similar numbers but differ in definition and context.
• Confusing intrinsic value with market value. Fix: Market value is the price observed in trading. Intrinsic value is an analyst's estimate from fundamentals. Their gap signals under or overvaluation.
• Listing factors without saying how they change value. Fix: Add the direction and the channel for every factor: for example, rising interest rates raise the discount rate, so value falls.
• Putting external factors such as interest rates under internal factors, or the reverse. Fix: Ask whether management can decide it. Capital structure is internal. Market interest rates are external.
• Starting calculations before fixing the standard of value and valuation date. Fix: Always open by stating purpose, standard, premise and date. Use balance sheet figures as at that date.
• Adding back all expenses instead of only non-recurring ones. Fix: Adjust only items that will not recur or are not at market terms. Recurring costs stay.
• Using book values in NAV without adjusting for fair value or fictitious assets. Fix: Remove fictitious assets, revalue assets given in the question, and add omitted liabilities before computing NAV.
• Forgetting to deduct preference capital before finding value per equity share. Fix: Deduct preference capital (and arrears if stated) from net assets before dividing by equity shares.

Exam tips

• Begin every case answer with the purpose and valuation date. Examiners reward this framing.
• In MCQs, reject options that say value equals price or that one value fits every purpose.
• Link each purpose to its need in one line, such as exchange ratio for M&A or independence for litigation.
• When a deal price is given, compute value to the buyer (standalone plus synergy) and compare it with price to show who gains.
• Finish case answers with a clear recommendation, not just definitions.
• In MCQs, the keywords decide the answer: hypothetical buyer means FMV, specific buyer or synergy means investment value, exit price or Ind AS means fair value.
• When asked for differences, use a two-column style in sentences or bullets covering basis, party, synergies and typical use.
• In case answers, always state the premise as an assumption and say why the facts support it.