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DCF Valution with Untilised Land


Rajan (NA)     15 May 2020

Rajan
NA 
 54 points

| My Other Post

Dear All,

I am in the processing of valuing a company in DCF Method. The Company is in the business of manufacturing steels and aluminium products. I have done the business project for 5 years, calculated terminal growth and Cost of Capital. Based on this, I have also arrived at the Enterprise Value of the Company based on the Business Projection.

 

However, the Company has a vacant land which is not being utilized as of now or in the future and the same was not taken into account in the DCF valuation except as BS sheet item (in the projections) whose present market value is 10x of the book value.

My question is that should we include the value of the Land as per market value/book value in the Enterprise Value? We will not be able to do a DCF Valuation of Land (Real Estate Asset) as the promoters do not have any intention to utilize or sell the asset in the near future and hence no projections can be drawn.

Thank you,

Yours sincerely,

--

Rajan

avater

Hariom Viradiya   15 May 2020

Hariom Viradiya

 15 likes  169 points

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Imagine a company is offering to takeover your entity. This entity will pay you the consideration depending on your DCF value . But for assets which do not generate cashflows, you will not be ready to sell it at less than market value and hence the buying company will have to pay you market value.

Conclusion : Take market value

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Rajan (NA)     15 May 2020

Rajan
NA 
 54 points

View Profile | My Other Post

Thank you for your response Hariom.

So you are recommending that we include the market value of the land to the Enterprise Value as arrived under DCF and take that as the final Enterprise Value of the Company.

avater

Hariom Viradiya   15 May 2020

Hariom Viradiya

 15 likes  169 points

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Yes. I have done this practically. So you can very well do it. Make sure you understand the reason 🙂

1 Like

Rajan (NA)     15 May 2020

Rajan
NA 
 54 points

View Profile | My Other Post

Thank for your comments and reasoning.


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