The Art of Intrinsic Valuation

Discounted Cash Flows Valuation

- Rattan Joneja

Chapter 1 makes a case for "Why you should value a business or a company". Exploring the fundamentals of analyzing the gap in Price and Value of a Stock, and expectations built in the current stock price, I examine what factors need to change to drive the value of a company up and identify opportunities available to the business for the creation of wealth.

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Chapter 2 introduces the readers to Intrinsic Valuation / Business Valuation. Specifically, explaining what Intrinsic Valuation is with a simple demonstration of computing intrinsic valuation.

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Chapter 3 briefly gives a bird's eye view of the "Valuation Process Chart". Depicting the essential begins with a story on how to build up Cash Flows.

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Chapter 4 explains the concept of the Time Value of Money and Discount Factor. "How many millionaires do you know who have become wealthy by investing in savings accounts ? I rest my case." - Robert G. Allen. Do have a look at Table 3 to develop a clear framework on the Time Value of Money and Valuation.

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Chapter 5 accords how Narrative and Stories are the starting points of each valuation. The launch of a new product, tapping into new market segments, developments in the industry, change in the board members etc., are changes that may come to you in the form of news/announcements but hold numerical value to turn around the Valuation of the Company. I attempt to convert stories into numbers to understand Valuation better.

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Chapter 6 provides a view on Longevity - the secret to sustaining Company Valuation. It explains why the Forecast Period is an important value driver and what factors define longevity for a company. To know whether a company will survive the test of time or fizzle out after a few interesting moves, longevity helps you uncover the tale! Incorporated in the chapter are stories of some real-world companies such as Apple, Pfizer, and Coca-Cola, etc. and demonstration of how longevity is their secret to creating Value.

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Chapter 7 briefly explains Inflation and its fundamental importance in computing Risk-Free Rate, Cost of Debt, Cost of Equity, and Sales Growth.

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Chapter 8 illustrates the computation of Sales Growth Rate. It is one of the most important steps in forecasting cash flows and a key value driver in valuation. From market size, market opportunity and industry growth rate to the company's competitiveness, investments, pricing power, product mix and product strategy - I take you through various factors that determine Sales Growth Rate.

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Chapter 9 explains the Operating Profit Margin computation and the importance of the business model on the Operating Profit Margin. How much money is the company making and how is it making money are key questions that need to be answered before weighing a company's value. This chapter explains the paramount importance of Target Operating Profit Margin in driving the value of a company.

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Chapter 10 is all about Fixed Asset Investment Rate. Some companies need lots of capital to grow while others grow by being asset light and creating wealth.

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Chapter 11 is all about Net Working Capital Investment Rate. Some companies need lots of capital to grow while others grow by being asset light and creating wealth.

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Chapter 12 provides an explanation of Income Tax Rate and computation of Net Cash Flows. The company's policies of revenue recognition, statutory income tax rates etc., significantly influence the Income Tax a company pays for a year. The Income Tax Rate has a significant impact on valuation.

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Chapter 13 is all about Capital Structure and Debt Equity Ratio. One has to make sure that the company has the right Capital Structure to be successful in Creating Value. Cost of Capital is not only governed by business risks but financial risks too.

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Chapter 15 takes you through the Computation of Cost of Equity based on the Capital Asset Pricing Model. One of the key determinants of value is the returns one expects from the stock. This chapter juggles with formulae and practical computation of Cost of Equity based on expected returns and risks.

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Chapter 16 exemplifies the computation of WACC or Cost of Capital and the discounting of the Cash Flows by WACC. Through a hypothetical example and calculations, I compute WACC and discount back the Forecasted Cash Flows to Present Value.

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Chapter 17 is about Expected Market Return (EMR), used in the computation of Cost of Equity. The EMR is the most important variable in computing Cost of Capital. The chapter provides a simple way to compute EMR based on expected returns over inflation.

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Chapter 18 explains the computation of Terminal Value. Terminal Value forms a large part in the Valuation of any business or Company.

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Chapter 20 introduces Future Value per share. While the current price and value is a determinant of present decision, the Future Value Per Share helps you evaluate how long you should hold a stock and helps you to arrive at the Target Price of a Share.

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Chapter 21 summarizes and revisits all the computation of Valuation we just learned in the previous chapter through a hypothetical case of Snap Value.

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