Valuation
This domain tests valuation methods, the choice of method, and the bridge from enterprise value to equity value. Questions often require a DCF, a relative multiple, or a regulatory valuation under SEBI or the Companies Act.
Methods
- DCF: forecast FCFF, discount at WACC, add terminal value, subtract net debt for equity value.
- FCFE discounted at cost of equity gives equity value directly.
- Relative valuation: P/E, EV/EBITDA, P/B and EV/Sales; choose comparables with similar growth, risk and margins.
- Asset-based: NAV and replacement cost, used for asset-heavy or distressed firms.
- Regulatory: registered valuer for preferential allotment, buy-back and merger; ICDR pricing for preferential issues.
Worked example
FCFF next year is ₹50 crore, WACC 11%, terminal growth 4%. Enterprise value = 50 / (0.11 − 0.04) = 50 / 0.07 = ₹714.29 crore. Net debt is ₹100 crore, so equity value = ₹614.29 crore. With 10 crore shares, value per share = ₹61.43. If the question gives FCFF for year 1 and growth starts after year 5, discount explicit FCFFs and add the terminal value discounted to today.
Traps
- Discounting FCFF at cost of equity; FCFF belongs to all capital providers and uses WACC.
- Using a terminal growth rate above WACC, which produces a negative or infinite value.
- Mixing nominal cash flows with a real discount rate.
- Forgetting net debt in the EV-to-equity bridge.
- Comparing P/E across firms with different leverage without adjusting.