Investment Valuation in India

A Reserve may be defined as a sum set aside out of the business profits of a business unit. It is set aside with a view to providing for unexpected or unknown future losses or for strengthening the overall financial position of the unit. The reserves represent undistributed profit of the business so it is also classified under Retained Profits. It is an example of Appropriation of profits and appears under the Liabilities (or Application of Funds) in the Balance Sheet. Since it is created after ascertaining net profits, it effectively does not reduce the profits of the business. Objectives The main purpose of creating Reserves is to stabilise the financial position of the business. The main objectives are: To strengthen the financial position of the business To increase the amount of working capital To meet future contingencies To acquire a asset for the business at a later date To meet any unknown liability or loss Types Reserves are broadly class...

Facebook's recent announcement of the USD 19 billion acquisition of WhatsApp has stirred the social network and finance fraternity. Surprisingly, many financial analysts have been justifying the valuation calling it Facebook's (more specifically, Mark Zuckerberg's) move towards achieving the objective of "connecting the world". Here's a quick peek at how the valuation plays out. WhatsApp's model WhatsApp has been a huge success in terms of user engagement and its its average 450 million active users are usually very active on the application sending millions of text messages and photos (even videos). Recently, WhatsApp also added the voice messaging system on its application. From Revenue perspective, WhatsApp is free for 1st year of service and then charges $1 per annum. However, the system can be bypassed easily and there are millions of users who have never paid despite using the application for years. This is a major snag in WhatsApp's re...

Interim Budget 2014 Highlights Fiscal Deficit for 2013-14 at 4.6 percent of GDP Revenue Deficit for 2013-14 at 3.3 percent The current account deficit (CAD) projected to be at USD 45 billion in 2013-14 down from USD 88 billion in 2012-13. WPI inflation down to 5.05 percent and core inflation down to 3.0 percent in January 2014. Food inflation down to 6.2 percent from a high of 13.8 percent GDP growth Q3 and Q4 of FY 14 expected at 5.2 percent and that for FY 2013-14 estimated at 4.9 percent Through the Direct Benefit Transfer (DBT) Scheme, a total of Rs 628 crore (54,20,114 transactions) has been transferred directly to the beneficiaries till 31st January 2014 under 27 Schemes. Excise Duty Item Description Old Rate (Excise) New Rate (Excise) Notes Small Cars, Motorcycle, Scooters and commercial vehicles 12% 8% Applicable till 30-Jun-14 SUVs 30% 24% Applic...

Founderitis - Founder's Syndrome Imagine a parent. The parent gives birth to the child, cares for the child, feeds him and lets him grow. But when the child is old enough, the parent still wants to control the child and his ability to act autonomously. The result – a fractured parent-child relationship. In organisations, the similar case is known as Founderitis (also known as Founder’s syndrome). The founder of  the organisation starts up a business and lets it grow. It does everything from capital investment to recruitments to taking small and large decisions. However, when the organisation grows, the founder still wants to be involved in every decision. The powers are still concentrated in the hands of the founder. While this is acceptable to an extent, it may sometimes lead to the poor performance of the organisation and may even limit the further growth and success of the organisation. Symptoms of Founderitis The founder says things like “I like to give contro...

Setting off of unabsorbed losses and unabsorbed depreciation during Amalgamation The setting off of unabsorbed losses and unabsorbed depreciation of the amalgamating company by the amalgamated company is allowed only in limited cases as envisaged in Sec 72(A) of Income Tax Act in order to encourage revival of sick units. The setting off, however, is allowed only if the following conditions are fulfilled: a) the amalgamated company was not a financially viable company immediately before amalgamation b) the amalgamation was in the public interest c) such other conditions as the central government may specify by notification in the official gazette to ensure that benefits under this section is available only to facilitate rehabilitation or revival of the business of the amalgamating company Carry forward of unabsorbed depreciation is allowed only if: a) during the previous year relevant to the assessment year, the business of the amalgamating company was carrie...

One of the methods of valuing a company based on Discounted Cash Flow Method is as follows: Value of the Company = Free Cash Flow for the Firm (FCFF) for next year / (Cost of Capital - Growth Rate) where: FCFF = EBIT next year x (1 - Tax Rate) x (1 - Reinvestment Rate) Cost of Capital is the Weighted Average Cost of Capital (WACC) i.e. Weight of Debt (Wd) x Cost of Debt (Kd) + Weight of Equity (We) x Cost of Equity (Ke) Reinvestment Rate represents the amount required to be invested in the company every year to keep the company looking good and working well, even if the company does not grow in size. Reinvestment Rate is calculated as Expected Growth rate (g) / Cost of Capital (Kc) Note this is a simplistic method of calculation and is just one of the many ways of calculating value of a company. The method assumes that the company is growing at a constant growth rate which may not be a fair assumption to make, especially in case of start-ups or companies underg...

Every night has a day lying ahead. Similarly, every financial crisis leads to the huge investment opportunities. Sometimes it is done by the development of new financial instruments. Side pockets is one such form of investment that has, of late, been used by the Hedge Funds and large financial institutions. Let’s say a hedge fund had some investments that were not yielding good returns, courtesy the financial crisis. The company that were otherwise fundamentally sound, but had become victims of the financial crisis had almost become dead investments. As a risk averse investor, you were not interested in such investments and thus found no incentive to invest in the hedge fund. On the other hand, the hedge fund manager knew that the investment was good, but was only a matter of time and didn’t want to sell off the investment to book huge losses. How does the hedge fund attract investors then? Assuming it has enough cash (or liquidity) to invest in new investments it would set aside...

After miserable results of CA Final, the IPCC Results For November 2013 haven't been too good either. 8.12% students have passed both groups 19.09% students have cleared Group I 17.89% students have cleared Group II Eti Agarwal from Lucknow and Akshay Jain from New Delhi have secured joint 1st Rank with 79.7% marks. To know your result, click here  

Accountants' Adda: Employees Provident Funds Act, 1952 : Applicability:   The Act applies to (a) Every establishment which is a factory engaged in industry specified in Schedule I to the Act and ...

Imagine this, if you start investing Rs 2,000 per month at the age of 20, you could accumulate a massive Rs 1.08 crore (assuming 9.5% interest p.a.) when you retire at the age of 60. On the other hand, if you started investing the same amount at the age of 30, you would accumulate only Rs 40.66 lakhs. The investment decisions you make in the first 5-6 years of your career have the potential to transform your  financial future. The longer you stay invested, and the greater is the power of compounding. Life Insurance: Insurance is the first thing you should start investing into. The earlier you buy life insurance, the lower is the premium. If you wanted to buy a 20 year Term Policy for Rs 1 crore at the age of 35, the amount of premium you’d be required to pay is Rs 34,000, whereas if the same policy is taken at the age of 20, the amount of annual premium you’d have to pay is Rs 19,700 [the premium for 35 years term i.e. till you reach the age of 60 would still be lower at Rs 2...