Valuation

70 terms · each links to a full explanation with a worked example and the exam traps

Adjusted book valueFair value of a company's assets minus the fair value of its liabilities, factoring in off-balance-sheet items — used to value non-banking financial companies (NBFCs).
Adjusted NAVThe value of an AIF measured as the cash investors would receive if every portfolio investment were realised at fair value on the valuation date, after taxes, fees, expenses, carry and other deductions.
Amortized CostA debt security's purchase cost adjusted for the purchase discount or premium over its maturity — how a Category III AIF values unlisted securities with no ascertainable market, plus accrued interest.
Book valueA company's net worth — equity capital plus reserves — divided by its outstanding shares, the accounting value each share would theoretically get if the company wound up today.
Book Value approachThe first of the three asset-based valuation methods: value the company at the historical carrying cost of its assets and liabilities, giving a book value per share treated as the floor price.
Book value per shareEquity shareholders' funds as per the balance sheet divided by the number of equity shares issued and paid up — normally treated as the floor value of a going-concern business.
Break-up Value ApproachAn asset-based valuation that measures what a company would fetch if it were shut down on the valuation date and sold in pieces — liquidation value of assets less settlement value of debt.
CAPMA model that prices the return an investor should demand from a share: the risk-free rate plus beta times the market risk premium.
Cash BurnThe rate at which a start-up spends its cash — set against the money in the bank, it says how many months of runway are left before the next round has to close.
Churn RateThe percentage of customers who discontinue using a product or service over a given period — the metric that decides whether acquired customers are an asset or a leaking bucket.
Companion variablesThe fundamental metric an analyst must read alongside a valuation multiple — such as growth with P/E, or ROIC with EV/EBITDA — to judge whether a low multiple is cheap or a warning.
Contingent claim valuationA business valuation approach that puts an option pricing model inside a cash flow based valuation, so that the real options embedded in a business are given a value instead of being ignored.
Contribution Margin After MarketingA start-up unit economics measure: revenue per order, less the variable costs of serving that order, less the direct marketing spend that won it — what one order actually leaves behind.
Cost approachValuing a business from its assets less its liabilities — by book value, by what it would cost to replace, or by what it would fetch if broken up and sold.
Cost based valuationValuing an asset by what it would cost to build it from scratch today, rather than by its cash flows or the price of comparable assets — mainly used by strategic, not financial, investors.
Customer Acquisition CostThe average cost of winning one new customer — read against customer lifetime value, it says whether a start-up is buying revenue at a profit or at a loss.
Deal CompsRelative valuation using earnings based multiples — chiefly EV/EBITDA and EV/Sales — which the workbook also calls Transaction Comparables.
Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.
Dividend Discount ModelA valuation that treats a share as worth the present value of every dividend it will ever pay, discounted at the return an equity investor demands for holding it.
Earnings yieldEarnings per share divided by the current market price — the reciprocal of the P/E ratio, expressed as a percentage so that equity can be set directly against a bond yield.
Economic Internal Rate of ReturnThe IRR of a project widened to include the direct and indirect economic benefits it creates, whether or not they reach the fund — as distinct from the financial IRR the fund actually earns.
Economic profit approachA business valuation approach in which value is the capital presently employed in the business plus the present value of the economic profit it is projected to earn in future.
Economic Value AddedA company's after-tax operating profit less a charge for the capital employed to earn it — the profit that remains after the providers of capital have been paid what they required.
Embedded valueFor a life insurer, the present value of the expected net future cash flow — adjusted for probability — from the policies currently in force, used as the base of a Price/Embedded value multiple.
Enterprise ValueWhat it would cost to buy the whole business — market capitalisation plus debt, less cash — as opposed to market capitalisation, which buys only the equity.
Equity ValueThe value of 100% of a company's shares — what belongs to equity shareholders after debt and preference capital are deducted from enterprise value. For a listed company, its market capitalisation.
EV/EBITDAEnterprise value divided by EBITDA — a whole-firm valuation multiple that compares what it would cost to buy the business against the cash profit the business generates for all its funders.
First Chicago MethodA start-up valuation technique that values a company under three scenarios — best, worst and survival — and blends them into one weighted-average valuation.
Free Cash FlowThe cash a company generates from operations after reinvesting in working capital and routine capital expenditure — the figure a DCF valuation projects for about five years and discounts at WACC.
Free Cash Flow to EquityThe cash left for shareholders after operating costs, tax, capital expenditure, working capital needs and all payments to lenders — what could be paid out as dividend without harming the business.
Free Cash Flow to FirmThe cash a business generates before any payment to any provider of capital — discounted at WACC it gives the value of the whole firm, from which debt and other claims are then subtracted.
Frequently traded sharesShares whose traded turnover over a set look-back is at least 10% of the total shares of that class — 240 trading days under the ICDR Regulations, twelve calendar months under the SAST Regulations.
Fundamental P/EThe P/E ratio implied by the dividend discount model — derived from a firm's payout ratio, required return and expected dividend growth rather than observed from the market price.
Gross Merchandise ValueThe total value of all goods sold through an e-commerce platform in a period, used as a non-financial multiple base to value loss-making e-commerce companies.
Independent ValuerThe valuer of a Category III AIF's unlisted holdings — not an associate of manager, sponsor or trustee, with 3 years' experience, and IBBI-registered with a professional membership or a CRA group entity.
Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
IPEV GuidelinesThe international best-practice guidelines for valuing unlisted private equity and venture capital investments at fair value, setting out seven widely used methods for valuing a portfolio company.
Market approachValuing a business from what the market pays for comparable businesses, using earnings and market multiples rather than the company's own projected cash flows.
Market cap to GDP ratioThe market capitalisation of all listed companies divided by the economy's GDP, times 100 — used to judge whether a whole market is cheap or expensive against its own history or its peers.
Market Value AddedThe difference between the current market value of a firm and the original capital its investors contributed — positive means the firm has added value, negative means it has destroyed it.
Milestone ValuationAn investor protection under which a venture investor pegs the company's valuation to technical or commercial targets in the business plan, so missed milestones can mean a lower valuation or delayed funding.
Net Promoter ScoreA customer-loyalty score from a single question — how likely are you to recommend this — computed as the percentage of promoters minus the percentage of detractors.
Non-financial multiplesA valuation multiple built on an operating number instead of profit — gross merchandise value in e-commerce, average revenue per user in telecom, average room revenue in hotels.
Overvalued securityUnder CAPM, a security whose estimated return plots below the Security Market Line — it is expected to earn less than its systematic risk warrants under market equilibrium.
PEG ratioThe price to earnings ratio divided by the expected earnings growth rate — Peter Lynch's way of asking whether a high P/E is justified by the growth behind it.
Post-money valuationA start-up's pre-money valuation plus the new money going in — the number that fixes what percentage of the company the incoming investor owns after the round.
Pre-money valuationThe estimated value of a start-up immediately before it receives external funding from a Category I or II AIF. Add the new investment to it and you get the post-money valuation.
Present Value Annuity FactorThe number that converts a level stream of equal payments for n periods into its present value at rate r: PVA(n, r) = (1 − (1 + r)^−n) / r. Used with the PV factor to value bonds.
Present Value (PV) factorThe multiplier that converts a single future amount into today's value: 1 ÷ (1 + r)^n. At 14% for 8 years it is 0.351, so Rs 100 due then is worth Rs 35.10 now.
Price of Previous Transaction MethodAn IPEV valuation method that marks an AIF's whole holding in a company at the price of its latest follow-on investment; a first investment is carried at cost until a follow-on reprices it.
Price to Book ValueShare price divided by book value per share — how many times the accounting net worth of a company the market is willing to pay.
Price to Earnings multipleShare price divided by earnings per share — the workbook's most widely used market multiple, and a trading comp an AIF can apply to an unlisted company only through its listed peers.
Price-to-Sales ratioShare price divided by annual net sales per share (or market capitalisation divided by annual net sales) — what investors pay for each rupee of a company's revenue.
Registered Valuer EntityThe IBBI registration a partnership or company must hold to act as a Category III AIF's independent valuer, on top of its deputed staff holding ICAI, ICSI, ICMAI or CFA credentials.
Relative valuationValuing an asset from the prices of comparable assets rather than from its own cash flows — quick, intuitive, and dependent on whoever set those comparable prices being right.
Replacement Cost ApproachAn asset-based valuation that values a business at what it would cost to replace it as it stands today, including set-up costs — suited to businesses with high entry barriers or setting-up costs.
Replacement valueThe cost of setting up an identical company from scratch today, with the same assets and infrastructure — one of several benchmarks for what an existing business is worth.
Risk neutral valuationA cash-flow valuation method that adjusts expected cash flows for the probability of actually receiving them, then discounts the result at the risk-free rate — used mainly for insurers.
Sensitivity analysisChanging one critical input of a valuation model at a time, holding the rest constant, and tabulating how far the output value moves — a test of how fragile the answer is.
Specific Company Risk PremiumAn extra slice added to the discount rate for one particular company, on top of beta and the market risk premium, to price the unsystematic risk that the CAPM does not capture.
Sum-of-the-partsValuing a conglomerate by valuing each business separately on its own appropriate multiple and adding the results, instead of applying one blended multiple to the group.
Terminal Growth RateThe constant rate at which free cash flow is assumed to grow forever after the explicit forecast period — the "g" in terminal value = FCF(T+1) / (WACC − g). In young companies it can drive most of the value.
Terminal valueThe value of everything a business earns after the end of the explicit forecast period, capitalised as a perpetuity or an exit multiple and then discounted back — usually most of a DCF answer.
Traded Debt SecurityA debt security a Category III AIF holds is "traded" on a given Valuation Day if trades in marketable lots were reported in it that day on a recognised stock exchange or the CCIL.
Trading CompsRelative valuation using multiples read off current market prices — principally the P/E ratio and the Price to Book Value ratio — as the workbook defines the term.
Unaffected share priceA target company's share price before a merger or acquisition is announced — the base over which an acquirer must pay a premium, and the price a merger arbitrageur measures the spread from.
Value stockA stock classified, typically for index and benchmarking purposes, as cheap relative to its fundamentals — low price-to-book, low price-to-earnings and high dividend yield being the workbook's own ratio criteria.
Venture Capitalist MethodA start-up valuation method: estimate the company's value at exit, discount it at the VC's target return, and set the stake needed for the investment — adjusted upward for future dilution.
Viral CoefficientHow many new paid users one existing user brings in through referrals — referrals sent per user multiplied by the conversion rate of those referrals.
WACCThe blended after-tax rate a company pays on all its capital, equity and debt weighted by how much of each it uses — and therefore the discount rate for free cash flow to the firm.