VALUATION

CAST STUDY
FOR IBBI
ASPIRANTS

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LET’S THINK ABOUT – PRICE, COST & VALUE

 What is PRICE ?

 What is COST ?

 What is VALUE ?

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BASIC DIFFERENCE

Price Cost Value

• What you • What you • What you
PAY EXPEND GET

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IN CONTEXT OF VALUATION OF REAL ESTATE

 Price is the amount of money a seller is asking for a property.

 Cost is the amount of money that the buyer actually paid or will have to
pay for a property.

 Value is a measure of worth based on the future benefits anticipated to

accrue because of ownership of a property.

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PRICE vs VALUE

PRICE = HIGH PRICE = LOW

VALUE = LOW VALUE = HIGH
PRICE vs VALUE

PRICE = HIGH PRICE = LOW

VALUE = LOW VALUE = HIGH
PRICE vs COST

PRICE = 20 lacs
COST = 16.5 lacs
PRICE vs COST

PRICE = 20 lacs
COST = 16.5 lacs
COST vs VALUE
COST vs VALUE
COST PRICE VALUE

COST: Rs 700/- PRICE : 1000/- VALUE : …

COST PRICE VALUE

COST: Rs 700/- PRICE : 1000/- VALUE : …

COST PRICE VALUE

COST: Rs 700/- PRICE : 1000/- VALUE : …

COST PRICE VALUE

COST: Rs 700/- PRICE : 1000/- VALUE : …

 Type 1 Error Type 1I Error
False Positive False Negatives

Wrongly assumed and given a higher Super Conservative Approach and

valuation under valuing a good asset

Result : Denied Funding and Losing

Result : Higher Funding and Finally an
out on an opportunity which can
NPA
make a fortune
WHAT DO YOU THINK DO THESE NUMBERS SIGNIFY?

“7, 15, 45, 75, 150, 300, 500 & 750”

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LET US DO SOME CASE STUDIES AND
QUESTIONS

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VALUATION APPROACHES

 The following are the three main valuation approaches that are adopted commonly to
perform the business valuation in correlation with the valuation approaches and
methodologies prescribed under Indian Valuation Standard.

 (a) Market approach;

 (b) Income approach; and

 (c) Cost approach.

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MARKET APPROACH

 Market approach is a valuation approach that uses prices and other relevant information
generated by market transactions involving identical or comparable (i.e., similar) assets,
liabilities or a group of assets and liabilities, such as a business. The following are the
common methodologies for the market approach:
 (a) Market Price Method;

 (b) Comparable Companies Multiple Method; and

 (c) Comparable Transaction Multiple Method.

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INCOME APPROACH

 Income approach is the valuation approach that converts maintainable or future amounts
(e.g., cash flows or income and expenses) to a single current (i.e. discounted or capitalized)
amount. The fair value measurement is determined on the basis of the value indicated by
current market expectations about those future amounts.

 The most commonly used income approach is Discounted Cash Flow (DCF) Model.

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INCOME APPROACH

 Advantages
• Focuses on the future, not on what happened
• Takes into account the cost of equity and debt
 Disadvantages
• Quite a complicated method
• Valuation is based on financial forecasts and WACC which are very susceptible to
manipulation
• Difficulty in determining the long-term cash flow growth rate when estimating the
Terminal Value

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COST APPROACH

 Cost approach is a valuation approach that reflects the amount that would be required
currently to replace the service capacity of an asset (often referred to as current
replacement cost). The following are the commonly used valuation methods under the cost
approach:
 (a) Replacement Cost Method; and

 (b) Reproduction Cost Method.

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VALUATION OF PETROL BUNK

 Exercise 1 :
 1,200 m2 of plot abutting a Highways is proposed to be
taken on lease by a company. Fix
 the lease rent of the plot, if yield rate is 7% & land rate is
Rs. 5,000/m2

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VALUATION OF PETROL BUNK

 Solution :
 Value of land = 1,200 x 5,000
 = Rs. 60,00,000/-
 Lease rent = 60,00,000 x 7 / 100 = Rs. 4,20,000 / year

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VALUATION OF PETROL BUNK

 Exercise 2 :
 A client wants to purchase a petrol bunk outlet situated on the main road in the
center of
 town. The main road has traffic of 300 PCU. For the land, the company pays the rent
 Rs. 4,00,000/ per annum. Total annual income from sale of petrol and diesel and
other
 items is Rs. 2,00,00,000/-. Property tax Rs. 50,000/6 months. Staff salary and other
out
 goings are Rs. 60,000/ per month. Other expenses for running the business is Rs.
 1,70,00,000/-. Rate of capitalisation is 12%.
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VALUATION OF PETROL BUNK

Question :
 1. What is the total income for the owner?
 2. What is the total expense for the owner?
 3. What is the net profit?
 4. What is the method to be used?
 5. What is Y.P.?
 6. What is the amount the client can pay to purchase the bunk?
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VALUATION OF PETROL BUNK

Question :
 1. What is the total income for the owner?
Answers :
 Given data :
 Ground rent = Rs. 4,00,000 / annum
 Income from sale of petrol = Rs. 2,00,00,000 / annum
 Property tax = Rs. 50,000 / 6 months
 Staff salary & other out goings = Rs. 60,000 / month
 Other expenses = Rs. 1,70,00,000 / yearly
 Rate of capitalisation = 12%
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VALUATION OF PETROL BUNK

Question :
 2. What is the total expense for the owner?

2.0. Expenses for the owner

 Property tax (50,000 x 2) = Rs. 1,00,000
 Staff salary & other out goings = Rs. 7,20,000
 (60,000 x 12)
 Other expenses for running the = Rs. 1,70,00,000
 business
 Total expenses = Rs. 1,78,20,000 (2)
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VALUATION OF PETROL BUNK

Solution :
 1.0. Income to the owner of the bunk
 Ground rent = Rs. 4,00,000
 Income from sale of petrol & diesel= Rs. 2,00,00,000
 Total income for the owner = Rs. 2,04,00,000 (1)

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VALUATION OF PETROL BUNK

 2.0. Expenses for the owner

 Property tax (50,000 x 2) = Rs. 1,00,000
 Staff salary & other out goings = Rs. 7,20,000
 (60,000 x 12)
 Other expenses for running the = Rs. 1,70,00,000
 business
 Total expenses = Rs. 1,78,20,000 (2)

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VALUATION OF PETROL BUNK

 3.0. Net profit

 Net income / Net profit = 2,04,00,000 - 1,78,20,000
 Net profit = Rs. 25,80,000 (3)

 5.0. Method = Profit method (5)

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VALUATION OF PETROL BUNK

 5. What is Y.P.?
 4.0. Years purchase = 100
 = 8.33 (4)
 12

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VALUATION OF PETROL BUNK

 6.0. Value
 Value of the bunk by capitalising = 25,80,000 x (100 / 12)
 @ 12%
 Capitalised value = Rs. 2,15,00,000/-

 The amount that can be paid for the = Rs. 2.15 crores (6)
purchase of the bunk

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8. VALUATION OF LEASEHOLD PROPERTIES

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8. VALUATION OF LEASEHOLD PROPERTIES

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8. VALUATION OF LEASEHOLD PROPERTIES

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8. VALUATION OF LEASEHOLD PROPERTIES

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PRICE IS WHAT YOU PAY

VALUE IS WHAT YOU GET

099104-13888
[email protected] PAWAN KOTHARI
IITB, IIMA, IBBI, CE, IPMA, CFA
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