Business Valuation
Business valuation integrates the syllabus: choosing the right approach, building a defensible DCF, and applying discounts and premiums appropriate to the purpose - transaction, tax, regulatory or litigation.
Approaches
Income: FCFF discounted at WACC, FCFE at ke; terminal value = FCFF(n+1)/(WACC − g), with g no faster than long-run nominal growth. Market: listed comparables (P/E, EV/EBITDA, P/B) and precedent transactions, which embed a control premium. Cost/asset: NAV or replacement cost, a floor rather than a going-concern value. WACC = (E/V)ke + (D/V)kd(1 − t), using market weights and after-tax cost of debt.
Adjustments
Control premium, minority discount, discount for lack of marketability, key-person and size premiums; surplus and non-operating assets added separately; earnings normalised for one-offs and owner compensation.
Worked example
EBIT ₹200 crore, tax 25%, D&A ₹40 crore, capex ₹60 crore, ΔWC ₹20 crore: FCFF = 150 + 40 − 60 − 20 = ₹110 crore. With g = 5% and WACC = 12%, terminal value at the end of year 5 = 110 × 1.05/(0.12 − 0.05) = ₹1,650 crore; discounted five years at 12% = 1,650/1.7623 = ₹936.4 crore. Add the PV of explicit-period FCFFs and non-operating assets for enterprise value; subtract net debt for equity value.
Traps
Discounting FCFF at ke or FCFE at WACC; mixing nominal cash flows with a real discount rate; letting g exceed WACC; using book value of debt in WACC; double-counting terminal value inside the explicit forecast; applying both a control premium and a DLOM without justification.