Bav Theory

Chairman Statement
Director's Report
MDA
Corporate Governance Report

Auditor's Report
An audit report is a written opinion of an auditor regarding an
entity's financial statements. A clean opinion, if the financial statements are
a fair representation of an entity's financial position.
A qualified opinion, if there were any scope limitations that were imposed
upon the auditor's work.
An adverse opinion, if the financial statements were materially misstated.
A disclaimer of opinion, which can be triggered by several situations. For
example, the auditor may not be independent, or there is a going concern
issue with the auditee.
The typical audit report contains three paragraphs, which cover the
following topics:
The responsibilities of the auditor and the management of the entity.
The scope of the audit.
The auditor's opinion of the entity's financial statements.
An audit report is issued to a user of an entity's financial statements. The
user may rely upon the report as evidence that a knowledgeable third party
has investigated and rendered an opinion on the financial statements.
Terminal Value
It represents all future cash flows in an asset valuation model. This allows
models to reflect returns that will occur so far in the future that they are nearly
impossible to forecast. It is the present value at a future point in time of all
future cash flows when we expect stable growth rate forever. It is most often
used in multi-stage discounted cash flow analysis, and allows for the limitation
of cash flow projections to a several-year period.
Stable Growth Rate
It is the maximum rate of growth that a firm can sustain without having to
expand financial leverage or look for outside financing. Small changes in the
stable growth rate can change the terminal value significantly and the effect gets
larger as the growth rate approaches the discount rate used in the
estimation. The fact that a stable growth rate is constant forever, however, puts
strong constraints on how high it can be. Since no firm can grow forever at a
rate higher than the growth rate of the economy in which it operates, the
constant growth rate cannot be greater than the overall growth rate of the
economy. A company's SGR is the product of its return on equity (ROE) and
the percentage of its profits that is plowed back into the firm. SGR is calculated
as: ROE x (1 - dividend-pay-out ratio), which is equal to the product of ROE
and the retention ratio.
EVA
Economic value added (EVA) is a measure of a company's performance based
on the residual wealth calculated by deducting its cost of capital from its
operating profit, adjusted for taxes on a cash basis. EVA can also be referred to
as economic profit, as it attempts to capture the true economic profit of a
company. This measure was devised by management consulting firm Stern
Value Management,
Risk Free Rate
The risk-free rate of return is the theoretical return of an investment with zero
risk. The risk-free rate represents the interest an investor would expect from an
absolutely risk-free investment over a specified period of time.
In theory, the risk-free rate is the minimum return an investor expects for any
investment because he will not accept additional risk unless the potential rate of
return is greater than the risk-free rate. The interest rate on zero-
coupon government securities, such as Treasury bills, notes and bonds in the
US, is generally treated as a proxy for the risk-free rate. It is assumed that
governments have zero default risk because they can print money to pay back
their debt obligation whenever they want. (Indian government 10-year
Bond rate) (No default risk, no reinvestment risk)
Intrinsic Value
Intrinsic value is the perceived or calculated value of a company, including
tangible and intangible factors, using fundamental analysis. Also called the true
value, the intrinsic value may or may not be the same as the current market
value. Intrinsic value can be calculated by value investors using fundamental
analysis to look at both the qualitative (business model, governance and target
market factors) and quantitative (ratios and financial statement analysis) aspects
of a business. This calculated value is then compared with the market value to
determine whether the business or asset is over- or undervalued.
The discounted cash flow (DCF) model is one commonly used valuation
method to determine a company's intrinsic value. The discounted cash flow
model uses a company's free cash flow and weighted average cost of
capital (WACC), which accounts for the time value of money, and then
discounts all its future cash flow back to the present day.
Difference b/w FCFE/DDM & FCFF

All three types of cash flow – FCFF vs FCFE vs Dividends – can be used to
determine the intrinsic value of equity,
Free cash flow to the firm (FCFF): is the cash flow available to all the firm’s
suppliers of capital once the firm pays all operating and investing expenditures
needed to sustain the firm’s existence. The remaining cash flows are those that
are available to the firm’s suppliers of capital, namely its stockholders and
bondholders.
Free cash flow to equity (FCFE): is the cash flow available to the firm’s
stockholders only. These cash flows are inclusive of all of the expenses above,
as well as the net cash outflows to its bondholders. Using the dividend discount
model is similar to the FCFE approach, as both forms of cash flows represent
the cash flows available to stockholders.
Forecasting Method (Free Cash Flows)
Free cash flow is a measure of a company’s financial performance. It represents
how much cash a company has left from its operations – cash that could be used
to pursue opportunities that improve shareholder value
Direct Cash Forecasting: Direct cash forecasting is a method of forecasting
cash flows and balances used for short term liquidity management
purposes. Direct cash forecasting, sometimes called the receipts and
disbursements method of forecasting, aims to show cash movements and
positions at specific future points in time.
The inputs into a direct cash forecasting process are typically upcoming
payments and receipts organised into units of time such as a day, week or
month. These units of time are then aggregated to the length of time that
the forecast is set to cover. The time frame for when a direct method of
cash forecasting is useful is generally less than 90 days, however it may
stretch to one year.
Indirect Cash Forecasting: An indirect cash forecast is one that is derived
from a various projected income statements and balance sheets, generally
done as part of the planning and budgeting processes. There are three
methods of deriving an indirect cash forecast:
Adjusted Net Income (ANI): This is in effect a projected cash flow statement, it
is derived from operating income, either EBIT or EBITA, changes on the
balance sheet are then applied, such as Accounts Payable (AP), Accounts
Receivable (AR) and inventories to forecast cash flow.
Proforma Balance Sheet (PBS): The PBS method looks at the projected balance
sheet cash account at a future point in time. If all other balance sheet accounts
have been projected correctly, cash will be too.
Accrual Reversal Method (ARM): The ARM is hybrid of the ANI and direct
methods and uses statistical analysis to reverse large accruals and calculate the
cash movements for individual periods.
WACC
Weighted average cost of capital (WACC) is a calculation of a firm's cost of

capital in which each category of capital is proportionately weighted.
All sources of capital, including common stock, preferred stock, bonds and any
other long-term debt, are included in a WACC calculation. A firm’s WACC
increases as the beta and rate of return on equity increase, because an increase in
WACC denotes a decrease in valuation and an increase in risk.
To calculate WACC, multiply the cost of each capital component by its

proportional weight and take the sum of the results.
Other Topics
Contingent Liability: A contingent liability is a potential liability that may
occur depending on the outcome of an uncertain future event. A contingent
liability is recorded in the accounting records if the contingency is probable and
the amount of the liability can be reasonably estimated.
Replacement Cost: A replacement cost is the cost to replace an asset of a
company at the same or equal value, where the asset to be replaced could be a
building, investment securities, accounts receivable or liens. The replacement
cost can change, depending on changes in market value of the asset and any
other costs required to prepare the asset for use. Accountants use depreciation to
expense the cost of the asset over its useful life.
Replacing an asset can be an expensive decision, and companies analyse the net
present value (NPV) of the future cash inflows and outflows to make purchasing
decisions. Once an asset is purchased, the company determines a useful life for
the asset and depreciates the asset's cost over the useful life.
Liquidation Value: Liquidation value is the total worth of a company's physical

assets when it goes out of business or if it were to go out of business.
Liquidation value is determined by assets such as real estate, fixtures,
equipment and inventory. Intangible assets are not included in a company's
liquidation value.
APV: The adjusted present value is the net present value (NPV) of a project or
company if financed solely by equity plus the present value (PV) of any
financing benefits, which are the additional effects of debt. By taking into
account financing benefits, APV includes tax shields such as those provided by
deductible interest.
Bermuda Triangle: Three problems that can sink the valuation process:
I. Bias – The biases analyst brings into the valuation process. The more you
learn about a company, the more this bias grows. It becomes worse, if you are
paid to value as an appraiser.
ii. Uncertainty: Start-ups me hoti hai, analysts are paralyzed in its presence,
come up with shortcuts (using pricing multiples). Don’t run away,
iii. Complexity: Globalization se increase hoti hai, accounting standards are
getting complex, easy access to data and modelling tools, they become black
boxes where analysts suspend common sense and stop taking responsibility for
their own valuations.
Levered Beta: takes debt and equity in its capital structure, and then compares
the risk of a firm to that of the market. (tax benefit by including debt, more
default risk, and thus higher cost of equity)
Unlevered Beta: Takes only equity in capital structure, and compares risk of
firm to that of market. (Useful while comparing companies with different
capital structures, it focuses only on equity risk, removes tax benefit, UL is
generally lower than levered beta)
Relative Valuation: Far Less assumption, quickly calculated, Simpler to
understand, reflects mood of market, yields value close to market price (but)
inconsistent estimates, can blindly follow market, lack transparency of
assumptions
Synergy Valuation (Operating, Financial) – refer pdf

Cash & Tax Benefits
Common Errors

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Chairman Statement

Corporate Governance Report

Difference b/w FCFE/DDM & FCFF

Weighted average cost of capital (WACC) is a calculation of a firm's cost of

To calculate WACC, multiply the cost of each capital component by its

Liquidation Value: Liquidation value is the total worth of a company's physical

Synergy Valuation (Operating, Financial) – refer pdf

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