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Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Sample Content Project on Market Capitalization & Enterprise Value 1/2/2014 1
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Legal Policy It is illegal to reproduce, store in a retrieval system or transmit this publication in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Avancee Research Outsourcing Private Limited. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Avancee Research delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such Avancee Research can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect. © Avancee Research Outsourcing Private Limited. All Rights Reserved. About Avancee Research TM : Avancee Research TM is a privately held Business and Information Analytics Company that provides a range of data and information research and analysis services. Our services include business and financial research services (company profiles, financial analysis reports on companies, project profiles, industry profiles etc.), market research services, research based consultancy services, and other ad-hoc research services. We provide our products and services across various industry verticals such as Automotive, Pharmaceutical, Energy & Utilities, FMCG, Technology, Financial and Defence industries. Avancee Research is headquartered in Hyderabad, India. For further details, please visit 1/2/2014 2
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Market Capitalization Also known as Capitalization or Market Cap A measurement of a public listed companys worth, value or size in terms of its shares Equals to the value obtained by multiplying the total number of shares outstanding of a company with its current share price Market cap = Current share price X No. of shares outstanding Continues………….. 1/2/2014 3
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Market Capitalization Depending on the value of market cap, a company will be categorized either under small-cap or mid- cap or large-cap Normal Ranges of market caps: Mega-cap: Over $100 billion Large-cap: $10 billion–$100 billion Mid-cap: $1 billion–$10 billion Small-cap: $100 million–$1 billion Micro-cap: $10 million-$100 million Nano-cap: Below $10 million 1/2/2014 4
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Why Market Capitalization? Market capitalization will help an investor to decide whether to invest in a particular company or not It also shows the worth of a company in the current market Used to calculate free-float market capitalization 1/2/2014 5
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Free-float Market Cap In order to understand the concept of free-float market cap, we first need to know some terminology such asopen market, free-float, free-float factor etc. Shares in a company may be owned by various types of investors such as Directors, Founders, Employees, Government, or FDIs A company may have few shares in the open market, and few shares which cant be traded in the open market Continues………….. 1/2/2014 6
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Free-float Market Cap The company can only trade its shares in the open market which are not owned by any investors Open market shares which are free for trading by anyone are called free-float shares In general, companies will disclose all the data relating to ownership of its shares to respective stock exchanges where they are listed Continues………….. 1/2/2014 7
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Free-float Market Cap Stock exchanges will decide the free-float factor of a company based on the free-float shares Value obtained by multiplying free-float factor with market cap of a company will give thefree-float market cap of a company Free-float market cap = Free-float factor X market cap 1/2/2014 8
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Application of Free-float market cap Free-float market cap is used to determine the SENSEX value. In BSE, sum of top 30 companies free-float market cap will be taken to calculate the sensex value (30 companies may vary from time to time, and index committee will decide the 30 companies to be considered for calculating the sensex) Continues………….. 1/2/2014 9
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Application of Free-float market cap For Example: Assume on December 29, 2010, the sum free-float cap of 30 companies in BSE is INR1000 million and sensex is 20,000 points On December 30, 2010, if the free-float cap would be INR998.5 million, then sensex is calculated (model of relative mathematics) as SENSEX =998.5 X 20,000 = 19,970 points 1000 Note: BSE has taken Base Sensitive Index as 100 points w.e.f April 1 st /2/
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Enterprise Value (EV) Enterprise Value (EV) measure the total value of the company and is an alternative to the market capitalization. EV is the most comprehensive measurement for the market value of the company which considers the claims of all security-holders such as debt holders, preferred shareholders, minority shareholders, common equity holders, and others while calculating unlike the market capitalization which only includes common equity Continues………….. 1/2/
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Enterprise Value (EV) Enterprise Value (EV) = market cap + debt + minority interest + preferred equity – cash and cash equivalents. All the components in the calculation are taken at market value, not at book value. This is more transparent measurement which can give an acquirer the most exact market value of a company it is going to acquire including its debt. Thus EV give more accurate takeover valuation. Continues………….. 1/2/
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Enterprise Value (EV) Minority interest is added that represents claim on assets consolidated into the company Since cash is paid out as dividend or used to pay down debt, it reduces the net cost to a potential purchaser; hence cash and cash equivalents are substracted when calculating EV EV can be negative when cash in a company is more than the value other components of EV 1/2/
Avancee Research TM What matters other than Quality? ©Avancee Research Outsourcing Private Limited Applications of EV As a capital structure-neutral metric, EV is used to compare the companies with different capital structure EV/EBITDA ratio is used by stock investors to compare the return between equivalent companies EV is also used to compare the returns between the companies by buyers of controlling interests 1/2/
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