Valuation in Merger & Acquisitions - CA Final SFM

Analysis of Format of P&L

Particulars	Amount
Sales Less: - Operating Cost (Excluding Depreciation)	XXX (XXX)
EBITDA	XXX
Less: - Depreciation & Amortization	(XXX)
EBIT	XXX
Less: - Interest Cost (Non – Operating Expenses) Add: - Non – Operating Income	(XXX) XXX
PBT	XXX
Less: - Tax	(XXX)
PAT	XXX
Less : - Preference Dividend	(XXX)
Profit for Equity Shareholders	XXX

Abnormal item should be ignored for the purpose of valuation.

Income/Expenses: -

Operating: - Related to Business

Non – Operating: -

Normal: - Projection is Possible

Abnormal: - Projection is not possible

EBITDA is treated as proxy cash flow since it is not impacted by depreciation & amortization.

Enterprise Value  

Enterprise Value (EV) stands for theoretical takeover price of a co.

EV = Market Capitalization + Net Debt

Net Debt = Total Debt – Cash & Cash Equivalent

EV = Market Capitalization + Debt – Cash & Cash Equivalent

EBITDA Multiple = EV/EBITDA

Sales Multiple = EV/Sales

EBIT Multiple = EV/EBIT

Value of Firm/Enterprise

Based on Capitalization Method/Earning Capitalization Method

Value of Firm/Enterprise = [Future Maintainable Profit]/[Capitalization Rate]

For Calculating Future Maintainable profit only operating income and expenditure should be considered. If any new income from business operation is anticipated or any reduction in Business Income or any operating Expenses is anticipated then such anticipated items should be considered while calculating FMP.

Value of Firm Based on Dividend Discount Model

Value of Firm = D₁/(K_e – g)

Value of Firm Based on Earning Growth Model (EGM)

Value of Firm = E₁/(K_e – g)

Value of Firm Based on Chop – Shop Method

Step I: - Identify the firm’s various business segments and calculate the average capitalization ratios for firms in those industries.

Step II: - Calculate a theoretical market value based upon each average capitalization Ratios.

Theoretical Market Value = (Sales/Assets/Income) x Capitalization Rate

Step III: - Average the Theoretical Market Values to determine the “Chop –Shop” Value of the Firm.

Value of Firm Based on Free Cash flow Approach

Free Cash Flow to Firm (FCFF): - It is the free cash flow left after meeting operating and capital expenditure needs.

Free Cash Flow to Equity (FCFE): - It is the free cash flow left after meeting operating and capital expenditure needs and debt obligations (Principal and Interest).

Steps for Free Cash Flow Valuation

Step I: - Determine free cash flows

Free Cash Flows to Firm (FCFF) = No PAT + Depreciation & Amortization – (Capital Expenditure + Working Capital Investment)

Step II: - Estimate a suitable Discount Rate for Acquisition.

For FCFF Discount Rate would be WACC.

For FCFE Discount Rate would be cost of Equity.

Step III: - Calculate Present Value of Cash Flows.

Value of Company = PV of Cash Flows during the forecast period + PV of Terminal Value

Terminal Value = Sum of realisable of various Assets based on capital employed.

Terminal Value Based on Earning Multiple

Terminal Value = Last Year Profit x P/E Multiple

Terminal Value Based on Free Cash Flows (Growing Perpetuity)

Terminal Value = [(Last Year Cash Flow) x (1+ g)]/(K_e – g)

Terminal Value Based on Free Cash Flow (Stable Perpetuity)

Terminal Value = (Free Cash Flow)/Discount Rate 

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