FAIR VALUE, FACE VALUE, NOMINAL VALUE, MARKET VALUE, REAL VALUE, BOOK VALUE

Confused with several terms

These are some terms often used in Accounting and Finance. Many really understand the difference or simply get confused between the jargons. So, this is a little article trying to uncomplicated and give you a better understanding of the terms.

Face Value/ Nominal Value/ Par Value

Face value is the price of the security at the time of its Issue.  It doesn’t change over the time.  And guess what? Nominal Value and Par Value are just another name for it

Market Value

It is the price listed in the exchange or the price at which it is traded in Market

Book Value

It is the price calculated by the company and recorded in their books. They deduct all debt and arrive at a price or value. For shares it is calculated as: (Total Shareholders’ Equity – Preference Shares)/Number of Outstanding Shares

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In terms of Assets, Book value is what investors look at to know how much a company is worth if it ceased its operation today. All the tangible assets – Debt gives you Book Value. More the value better the position of the company.

Fair Value

It is rightly valuing or estimating the price of an asset or share or services. It is used by the investors to get a clear picture of prices which may otherwise be overpriced or under-priced by the market. A company calculates its fair value annually and in case of takeovers or mergers shares/assets are bought at the fair value. It is individually calculated based on various factors such as demand-supply, risk factors, returns, actual utility, etc

Bond fair value is formula based to calculate the present value of future cashflows.

Real Value

Real value is when the price is corrected for the inflation rate.

I hope this article helped you.

-D.V.P

Enterprise value (EV)

When you are asked to value a company for any reasons like merger, acquisition, buyout or simply a valuation, etc the Enterprise value of a company has a significant place which every analyst looks for.

More believe it that EV provides a much precise value of a company though it is more of a theoretical value. When a company buys another company, it takes over its’ Debts. This debt is lightened when the company receives the Cash of the acquired company. That is the reason why Cash and its equivalent are reduced in the Enterprise value. It shows the value to buy the company deducting the amount that would be received.

Hence the formula:

EV = Market Capitalization( total public share value) +Minority Interest+ Preference Shares +Debt – Cash and Cash equivalent

 

-D.V.P

24^th September 2012

 

Calculate your future Income on your Monthly Fixed Investment yourself

Many people have started investing and planning a good savings for their future. Monthly Investment scheme seems to be very popular among all and especially among the new age income earners as it is quite reasonable. And if you are not sure about this I will show you the calculation as to how much your monthly investment will fetch you more income after a certain period.

You need to invest a fixed monthly amount eg: Rs.1000. There are various schemes available with different amount and different rate of interest and period. If you want to choose which scheme will fetch you more returns with the given information then do the following calculation.

Example:

You invest Rs.1000 per month

You will get returns at 8% compounded MONTHLY

You are depositing for 9 years

Calculation:
A = Rs.1000 per month

Rate of interest monthly = 8/12 months = 0.667% = 0.667/100 = 0.00667

N (period)  = 9 * 12 months = 108 months

Formula:                       A*(1+r) *( (1+r)ⁿ  -1)/ r

= 1000*(1+0.00667) * ((1+0.00667)108 -1)/  0.00667

= Rs.158479

So investing Rs.1000 per month at the rate of 8% per annum compounded monthly you will get Rs. 158,479/- at the end of 9 years

D.V.P

For non-finance student who simply want to calculate without the formula download the below excel link and click Enable Editing and simply calculate entering your details
https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdG9LZnpQcjlzZWY1QnZRQWVsb3N0clE&output=xls

How to Value a Stock/Business – Brief on various methods

There are several methods which help us decide the value or price of a stock/business. All the financial and economic aspects are taken into consideration. Growth rates, rate of discount and expected returns from a stock are estimated.  It is always better to consider few methods to arrive at a conclusion about a stock rather than going for a single method. The reason being every method has its own pros and cons.

Before we get down to valuing stocks in detail you need to be clear with various terms like WACC, NPV, Cost of Capital, Beta, Cost of Equity, IRR, etc.

Here is a brief about the various methods. It would be discussed in detail separately.

Two Methods

Absolute Valuing – i.e. finding the Intrinsic Value

Relative or Comparable valuing method

Absolute Valuation Method:

·         Discounted Dividend Model  (DDM)

It is also known as Gordon Model. Dividend is an actual cash flow paid to shareholders annually.  The estimated future dividends are discounted to the present value to arrive at a stock price. This method can’t be used for all companies. To use DDM, a company must be consistent in its dividend payment and earnings which is possible in Blue chips or fundamentally highly rated companies. It uses Cost of Equity to discount the dividend cash flows.

·         Discounted Cash Flow (DCF)

It is one of the most widely used methods. In this we calculate the present value of all future cash flows of the company.  If a company is irregular in dividend payment they can opt for this method. It uses WACC to discount the cash flows.

·         Residual Income Method

This method is not much popular. Residual Income in this context means deducting the expected returns for equity shareholders from the Net Income. This shows how much of income would be left if Net Income is directly distributed to the owners. The residual income for future is calculated and then discounted at the expected rate of return to arrive at the present value of the stock/business. It uses Cost of Equity to discount the Residual Income.

·         Asset Based Valuation

This is not much preferred method. The assets are valued against the market value. If the book value shows a lower value than the market then it is considered good and not over valued as no investor likes to pay more for a company which has no market standing.  It gets difficult to value the intangible assets and at times some company inflate their Goodwill which is very difficult to value as there is no exact value. Liabilities and Shares are deducted from the Assets valued.

Relative or Comparable Valuation Method:

This method involves comparing the various ratios or parameters of different companies of the same sector involved in similar activities.  The Market capitalisation would be compared.

Various Ratios especially Price Earnings Ratio (P/E), Price to Book Value (P/BV),  Price to Cash Flow (P/CF), Liquidity Ratio, Debt Turnover Ratio, etc are compared. It is much easier to calculate than the Absolute method as most of the elements to calculate are available to us from the company. Comparing variables also help us to know how a particular company is performing compared to all its competitors.

As there is no fool proof way to estimate the value, analysts always prefer to mix various methods and arrive at n conclusion. As past data doesn’t always seems to be the exact for future but yet it goes a long way.

D.V.P