Valuation of Businesses, Securities and Intangible Assets
Domain overview
Valuation of Businesses, Securities and Intangible Assets tests valuation approaches, the registered valuer framework, and the use of valuation in schemes, takeovers, IBC, and tax. The examiner expects defensible assumptions, not a single number.
Core rules
- IVS 105 recognises the income, market, and cost approaches. DCF is an income approach; comparable companies and transactions are market approaches; asset-based valuation is a cost approach.
- DCF discounts expected cash flows at a rate matching the cash flow: FCFF at WACC, FCFE at cost of equity. Terminal value often uses the Gordon growth model.
- Fair value, market value, and investment value are not interchangeable. Control, minority, and marketability adjustments must be justified.
- Intangible assets are valued using relief-from-royalty, excess earnings, or cost methods. Under Ind AS 38, finite-life intangibles are amortised; indefinite-life intangibles are tested for impairment under Ind AS 36.
- Registered valuers under the Companies (Registered Valuers and Valuation) Rules, 2017 must be independent and follow applicable standards.
Worked example
FCFF next year is Rs 100 crore, growth is 5%, and WACC is 12%. Terminal value at the end of year 1 is 105/(0.12 minus 0.05) = Rs 1,500 crore. Present value is 100/1.12 + 1,500/1.12 = Rs 1,428.6 crore. The reasoning: FCFF1 is discounted one year, and the terminal value is also brought back one year because it is valued at the end of year 1.
Traps
Mixing pre-tax cash flows with post-tax WACC; using market value and fair value interchangeably; omitting control or marketability discounts; amortising an indefinite-life brand; using an unregistered valuer where the law requires one.