Valuation of Business and Assets for Corporate Restructuring: formula sheet

Key formulas

Elements of any valuation

Valuation = Subject + Date + Purpose + Standard of value + Premise + Method

State all six in an answer to show the value is defensible and not arbitrary.

Price, cost and value

Cost = past outlay; Price = agreed in a deal; Value = estimated worth under a stated standard

Price may differ from value because of negotiation, synergy or distress. Cost is historical.

Going concern vs liquidation premise

Going concern value ≥ liquidation value (usually, for a viable business)

This is a rule of thumb, not always true. If a business loses money, its assets may be worth more sold than used.

Share exchange ratio

Exchange ratio = Value per share of transferor ÷ Value per share of transferee

Shows why valuation is needed in mergers. The ratio gives the number of transferee shares issued per transferor share.

Net asset value (asset approach)

Net asset value = Fair value of assets − Liabilities

Exclude fictitious assets such as preliminary expenses. Use adjusted values where the question gives them. Divide by number of equity shares for value per share.

Value under income approach (DCF)

Enterprise value = Σ [FCFt ÷ (1 + r)^t] + Terminal value ÷ (1 + r)^n

FCF is free cash flow, r is the discount rate and n is the final forecast year. Equity value = enterprise value − debt + surplus cash.

Terminal value (constant growth)

Terminal value = FCFn × (1 + g) ÷ (r − g)

Valid only when r is greater than g. Growth g must be sustainable.

Capitalisation of earnings

Value = Maintainable earnings ÷ Capitalisation rate

Use normalised earnings, not one-off peaks or troughs.

Market approach using a multiple

Value = Comparable multiple × Subject metric

Example: equity value = P/E multiple × earnings. For EV/EBITDA, subtract net debt to reach equity value.

Weighted value

Weighted value = Σ (Value by each method × Weight), with weights adding to 100%

Weights are a matter of judgement and must be justified.

Free cash flow to firm (FCFF)

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

EBIT × (1 − t) is NOPAT. Use the tax rate on operating profit. If working capital falls, add the decrease.

Cost of equity (CAPM)

Ke = Rf + β × (Rm − Rf)

Rf is the risk-free rate, β the equity beta, (Rm − Rf) the market risk premium. If the question gives Rm, deduct Rf from it.

After-tax cost of debt

Kd (after tax) = Kd (pre-tax) × (1 − t)

Interest is tax deductible, so the tax shield lowers the cost of debt.

WACC

WACC = [E ÷ (D + E)] × Ke + [D ÷ (D + E)] × Kd × (1 − t)

Use market-value weights, or target capital structure, if given. Use book values only if the question says so.

Present value of a cash flow

PV = CF ÷ (1 + r)ⁿ

n is the year of the cash flow. Year-end flows are assumed unless the question says otherwise.

Terminal value (Gordon growth)

TV at year N = FCFF(N) × (1 + g) ÷ (WACC − g)

Valid only when g is below WACC. g should be a long-term rate, not above the long-run growth of the economy.

Terminal value (exit multiple)

TV at year N = EBITDA(N) × Exit multiple

Use when the question gives a multiple. Discount it by N years, like the Gordon TV.

Enterprise value

EV = Σ [FCFF(t) ÷ (1 + WACC)ᵗ] + TV ÷ (1 + WACC)ᴺ

Sum over the explicit forecast years t = 1 to N.

Equity value and value per share

Equity value = EV − Debt − Preference capital − Minority interest + Cash and non-operating assets; Value per share = Equity value ÷ Number of shares

Deduct only the claims that the question lists. Do not deduct operating liabilities already in working capital.

Price-Earnings (P/E) multiple

P/E = Market price per share ÷ Earnings per share (EPS)

Equity value = P/E × target's net profit. Not meaningful when earnings are negative.

Price-to-Book (P/B) multiple

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

Useful for asset-heavy businesses and financial companies. Equity value = P/B × target's net worth.

Enterprise Value

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

Use net debt (debt less cash). Include other debt-like items as per the valuer's judgement.

EV/EBITDA multiple

EV/EBITDA = Enterprise value ÷ EBITDA

Target EV = peer multiple × target EBITDA.

Equity value from enterprise value

Equity value = Enterprise value − Net debt (− preference shares − minority interest, if any)

Always do this step after applying an enterprise multiple.

Value per share

Value per share = Equity value ÷ Number of shares outstanding

Use the target's own share count.

Representative multiple

Median (or mean) of the peer multiples

Median is less affected by outliers.

Net asset value (book)

NAV = Total assets − Outside liabilities (including preference share capital)

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

Adjusted net asset value

Adjusted NAV = Fair value of assets (incl. unrecorded) − Fair value of liabilities (incl. probable contingent liabilities)

Adjust for revaluation, unrecorded items and tax effect on revaluation only if the question asks.

Value per equity share

Value per share = Net assets available to equity shareholders ÷ Number of equity shares

Net assets here are after deducting preference capital and arrears of preference dividend, if any.

Liquidation value

Liquidation value = Realisable value of assets − Liabilities − Liquidation costs

Assets are taken at forced-sale values. Secured and preferential claims rank before equity.

Replacement cost (net)

Net replacement cost = Current cost of new equivalent asset − Depreciation for age and obsolescence

Then deduct liabilities to reach equity value.

Goodwill (residual method)

Goodwill = Value of business − Fair value of net identifiable assets

Net identifiable assets include identified intangibles at fair value, less liabilities.

Goodwill (super-profit method)

Goodwill = Super-profit × Number of years' purchase

Super-profit = Average maintainable profit − Normal profit.

Normal profit

Normal profit = Capital employed × Normal rate of return

Use capital employed at fair value of net assets for the business.

Capitalisation of super-profit

Goodwill = Super-profit ÷ Normal rate of return

Treats super-profit as a perpetual stream.

Relief from royalty

Value = Σ [Revenue × Royalty rate × (1 − Tax rate)] ÷ (1 + r)^t

Add a tax amortisation benefit if the question asks for it. r is the discount rate, t the year.

Present value of a single cash flow

PV = CF ÷ (1 + r)^t

Use for each year of the asset's useful life.

Cost approach (replacement)

Value = Reproduction or replacement cost − Obsolescence

Obsolescence covers physical, functional and economic loss in value.

Terminal value (perpetuity growth)

TV = CF(n+1) ÷ (r − g)

Valid only when r > g. Use for assets with indefinite life, such as a strong brand.

Section 247 trigger

Valuation required under the Act → done by a registered valuer appointed by audit committee (or Board, if none)

The valuer must be independent and must not be connected with or interested in the company, its holding, subsidiary or associate company. Check the cooling-off period in the Rules for past connections.

Valuer's duties under Section 247

Impartial, true and fair valuation + due care + follow the Rules

Link these to your answer on liability of the valuer.

Registration chain

Qualification and experience → valuation examination → RVO membership → IBBI regulation

Registration is by asset class. A valuer values only the class for which registered.

Asset classes

Land and Building | Plant and Machinery | Securities or Financial Assets

A valuer for shares of a company must be registered for Securities or Financial Assets.

Standards hierarchy

Act and Rules > notified standards > RVO-adopted or internationally accepted standards such as IVS

Until the Central Government notifies standards, the valuer follows RVO-adopted or internationally accepted standards (Rule 18 deals with standards; Rule 8 deals with conduct). None of them overrides the Act and Rules.

Listed company scheme

Valuation report from independent registered valuer + fairness opinion from merchant banker

Applies under SEBI's framework for schemes of arrangement. Verify current circular wording.

Value per share (single method)

Value per share = Equity value ÷ Number of equity shares

Equity value = value of the business less debt and other claims ahead of equity.

Net asset value per share

NAV per share = (Total assets at fair value − Outside liabilities − Preference capital) ÷ Number of equity shares

Use fair value of assets, not book value, if the question gives it.

Earnings-based value per share

Value per share = EPS ÷ Capitalisation rate (or EPS × P/E multiple)

Use maintainable (normalised) EPS, not a one-off year.

Weighted average value per share

Weighted value = Σ (Value by method × Weight) ÷ Σ Weights

Apply the same weights to both companies.

Share exchange ratio

Ratio = Weighted value per share of transferor ÷ Weighted value per share of transferee

Shares of transferee issued = Transferor shares held × Ratio.

Number of new shares to issue

New shares = Transferor shares outstanding × Ratio

Check the result against the transferee's authorised capital.

Synergy

Synergy = Value of combined firm − (Value of A + Value of B)

Gain to the acquirer = Synergy − Premium paid over stand-alone value.

Purchase consideration (share-based)

Consideration = New shares issued × Value (or face value, as the question directs) per transferee share

Follow the accounting standard the question names.

Quick revision

• Value depends on purpose; the same business can have different values for a sale, a merger and a liquidation.
• The three approaches are asset, income and market.
• NAV = fair value of assets − outside liabilities; divide by the number of shares for value per share.
• DCF value = present value of forecast free cash flows + present value of terminal value.
• Discount rate must match the cash flow: use WACC for cash flows to the firm and cost of equity for cash flows to equity.
• Terminal value is often a large share of DCF value, so check the growth rate assumption carefully.
• A multiple must be applied to the same kind of figure it was derived from, such as earnings of the comparable and of the target.
• Comparable companies should be similar in business, size, growth and risk; explain any adjustment you make.
• Intangibles are commonly valued by cost, market or income methods, with income methods often used for brands and patents.
• A valuation in the regulated settings must be done by a registered valuer where the law requires it.
• Share exchange ratio = value per share of the transferor ÷ value per share of the transferee.
• State your assumptions clearly; marks are given for reasoning as well as the final number.

Common mistakes

• Treating price, cost and value as the same word. Fix: Write one definition each: cost is past outlay, price is the deal figure, value is the estimated worth. Add a one-line example.
• Giving a single 'true value' for the business. Fix: Say valuation is an opinion that depends on purpose, date, standard and assumptions. Different purposes give different values.
• Using the asset approach for a profitable service or technology business. Fix: Say that the asset approach misses earning power and goodwill. Prefer income or market approach for asset-light going concerns.
• Calling price-to-earnings or EV/EBITDA multiples part of the income approach. Fix: If the multiple comes from comparable companies or deals, it is the market approach. The income approach discounts or capitalises the business's own future benefits.
• Discounting FCFF at the cost of equity, or discounting FCFE at WACC. Fix: FCFF goes with WACC and gives enterprise value. FCFE goes with Ke and gives equity value directly. Write the pairing beside your table.
• Using the pre-tax cost of debt in WACC. Fix: Always multiply by (1 − t) in the WACC formula. Underline the tax rate when you read the question.
• Applying EV/EBITDA and stopping at enterprise value. Fix: Subtract net debt (and other claims) to get equity value, then divide by shares.
• Mixing equity and enterprise items, such as applying P/E to EBITDA. Fix: Match the metric to the multiple: equity price with earnings or book value, enterprise value with EBITDA or sales.
• Treating reserves and surplus as liabilities Fix: Reserves belong to equity holders. Deduct only outside liabilities and preference capital.
• Including preliminary expenses or the P&L debit balance as assets Fix: Exclude all fictitious assets before computing net assets.

Exam tips

• Open every answer with a one-line definition and the purpose. Examiners look for purpose-linked answers.
• If the question mentions a price, cost or book figure, contrast it with value explicitly. This is a frequent scoring point.
• Name the standard of value and the premise in case answers. Do not leave the word 'value' undefined.
• For insolvency facts, always compare going concern and liquidation value.
• Use short bullets for needs, then one paragraph applying them to the facts, and end with a conclusion.
• In case questions, tie your choice of approach to a stated fact such as asset-heavy, loss-making or listed peers. Marks go to the reasoning.
• Always mention the limitation of each approach you name. Examiners look for balanced answers.
• For numerical questions, show the bridge from enterprise value to equity value and the per-share step.