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Formulas for valuation of firms

1. Valuation of Firms : NI approach

V = S+B

where,                          V = Value of the firm

S = Market value of the equity

B = Market val

Market value of Equity (S) can be ascertained as follows :

S = NI / Ke

S = Market value of the equity

NI = Earnings available for equity shareholders

Ke = Equity  Capitalisation  Rate

K = Overall cost of capital                  Formula for K =EBIT/V


Net Income : Amount available for Equity Shareholder



Earnings before interest and Tax

Less : Interest


Less : Tax


Less : Pre-dividend (if any)

Amount available for equity shareholders









2. Valuation of firms : NO! approach

S = V – B V = EBIT/ Ke

S = Value of equity

V = Value of firm

B = Value of debt

Ke = Equity Capitalisation Rate

Ke = EBIT-I/ x 100 V-B

K = Overall cost of capital

K = kd [B/V ]=KE [S/V]

Kd = Cost of Debt

B = Total debt

V = Total value of the firm

Ke = Cost of Equity Capital

S = Market value of Equity


3. Valuation of firm : MM approach

(i) Value of unlevered firm

Vu = Profits available for equity shareholders  / Equity Capitalisation Rate


Vu = (I- t)EBT/  Ke                            t =tax rate


(ii) Value of levered firm

Vi = Vu + Bt

Vi = Vu + Bt

Vu = Value of unlevered firm

B = Amount of debt

t = Tax rate

Vi = Value of levered firm

  1. NOTE : The term levered firm means there is debt content in its capital structure. The term unlevered firm means there is no debt content in its capital structure.


4. Valuation of firm : Traditional approach

Traditional approach contains some features of NI approach and some features of NOI approach. So there is no need for a separate formula for the valuation of firms under this approach