Intellectual property is a type of intangible asset owned by a company and it is legally protected from outside use without company consent.In other words, intellectual property is an asset, which has the same protective rights just like a physical asset. It includes patents, copyrights, trademarks, trade secrets etc.Intellectual property valuation matters due to the followingTime and amount spent for intellectual property registration.It involves legal costs and other costs.Amount spent for advertising brands etc.Areas that require intellectual property valuation are as follows −Licensing.Transfer pricing.Purchase/sale of assets.Financial reporting.Corporate financing.Litigations.Methods of intellectual property valuation are as follows −Factors to be considered for ... Read More

Discounted cash flow (DCF) analysis tells about the present value of an asset/company, based on the money, which it can make in future. This analysis will estimate the intrinsic value of a company.Current and future performances of a company are taken into consideration. Both inflow and outflow cash flows are discounted to the present value and sum of all the present values of future cash flows are equal to the net present value.CategoriesThe categories of discounted cash flow (DCF) are explained below −Internal forces − Considered as solid data, because raw information (quantitative) is used. Information includes historical performances, current ... Read More

In market approach, valuation of business (intangible assets, ownership interest, etc.) are determined based on market price of similar assets/business that are sold in recent times/available in market.Sales, book value and P/E (price to earnings) are used as price indicators. After comparing with similar assets/business adjustments to qualities, quantities and size will be made.MethodsThe methods in market approach are as follows −Public company comparableThis method uses valuation metrics of publicly traded companies. Direct comparability is hard to attain in major situations. Selecting, adjusting and applying are complex processes, and need highly skilled, and experienced people to handle it. Guideline companies ... Read More

Cost approach has natural appeal. If merger/acquisition of two or more companies takes place then, new company value is the difference between asset and liabilities of its combined value.This analysis has similarities to the balance sheet. In this, the cost basis balance sheet is converted to required value. This approach in breakdown of components of value, facilitate structure deal and post-sale purchase price.Specialists identify all assets and liabilities including those which are not included in the balance sheet. After identification, they assign value for each, based on fair value.Contingent liabilities, pending litigations etc. are not included in the balance sheet.Another ... Read More

Generally, there are two ways for a valuation of a company namely, liquidation value and going concern way. Companies prefer going concern way of valuation. If a company wants to eliminate a targeted company or wants to remove it from the market, the company goes for valuation.Some of the methods of valuations are as follows −Price − Earnings Ratio (P/E Ratio)It compares a company's current share price to earnings per share. Investors prefer high P/E Ratio, because of high earnings.P/E Ratio tells about investors willing to pay per dollar of earnings. It can be easily manipulated.P/E ratio is useful in ... Read More

Consider the following table −Company 1Company 2Revenue ($)1000000500000Cost of goods sold ($)750000270000EBIR ($)250000125000Growth Rate (Expected)5%9%Cost of capital11%14%Assume the following −Cost of goods sold is reduced from 75% to 60% of revenues.Tax rate = 32%.Weighted average cost of capital = 14%.Weighted average growth rate = 6%.SolutionThe solution is as follows −Before mergerCompany 1Cash flows = (1000000 – 750000) * 0.68 >= $170000Value of firm = $ 170000 * 1.05/ (0.11-0.05)= 178500/0.06 => $ 2975000Company 2Cash flows = (500000 – 270000) * 0.6 => $156400Value of firm = $ 156400 * 1.09/ (0.14-0.09)= 170476/0.05 => $ 3409520Combined (company 1 + company 2)Combined value = $ 297500 + $3409520= $ 3707020After mergerRevenue = $1000000 + $500000 => $1500000After merger cost of goods sold revenue reduced to 60% => $1500000 * 0.60 => $900000EBIT => $1500000 − $900000 => $600000Post tax => $600000 * 0.68 => $408000Value of firm = 408000 * 1.06/ (0.14-0.06) => 432480/0.08 => 5406000Value after post-merger = $ 5406000 - $3707020 = $1698980 (increased)

Considered the following balance sheetAssetsEquity & liabilities$$Fixed assets900000Equity share capital685000Investments90000Reserves300000Receivables29500010% Debentures425000Bank12500014100001410000Company 2 is paid $ 150000 for assets for company 1Assume fair market value of fixed asset = $ 1000000SolutionThe solution is as follows −Considered fixed assets (given)Fixed assets (fair value) = $1000000Next step is to calculate net worth of assets and liabilities, these are calculated by adding fixed assets, investments, receivables and bank and subtracting from 10% debentures.Net worth of assets and liabilities = $77500 + $ 90000 + $ 295000 + 125000 − $ 425000= $587500 − $425000 => $ 162500Now in this case, the second company paid ... Read More

Let us assume company 1 is taking over company 2. In this, company 1 is acquiring company and company 2 is Target Company.ABTotal number of shares800000550000Market price/share$6$3.2510% Debentures$250000The board also decides the following −Issue 1 share of company 1 for every 10 shares held.Issue a 12% debentures for every 4 shares held.Balance is paid in cash.Pay existing debenture holders at par by issuing 20% debentures in company 1.Debenture (nominal value) = $2.SolutionThe solution is as follows −Market value of company B is calculated by multiplying total number of shares of company B with market price of company B.Market value of ... Read More

Merger of companies is a complex and giant task. Depending on companies, it takes months or years to complete the process.Sometimes the merger of two big companies may take months of time and the merger of two small companies may take years to complete due to their own reasons and regulations.In simple words, time taken to complete the process will depend on companies and their management.StepsThe steps involved in constructing merger models are explained below −Profiling − Company will do market research and search for possible targets. Companies will go for the suitable merger type and also set their objectives.Identification ... Read More

Merger model gives a detailed analysis of possible combinations of companies. Merger model acts as an intensive tool and is used by banks and merger and acquisitions professionals.It is a feasibility study carried before amalgamations. Companies hire investment and valuation professionals to estimate the value. Based on the value, companies make decisions whether to go forward or not.FactorsThe factors considered in merger model are as follows −Purchase considerationsThe main thing to keep in mind is, whether there is an increase in Earnings per share (EPS) or decrease in EPS. Companies must take care that the process does not lead to ... Read More