3 Calculate or estimate the engagement of funds on that brand 4 Estimate a cost

3 calculate or estimate the engagement of funds on

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3. Calculate or estimate the engagement of funds on that brand. 4. Estimate a cost of capital, year to year, and calculate the component amount attributable to capital in the profits. The logic here is that capital has also contributed to the profit. 5. Adjust for inflation over the years. 6. Assign a weight age to the annual profits, weights being more in years closer to the year of valuation. 160
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BRAND VALUATION 7. Adjust for tax. 8. Ascertain the Price earning Ratio or P/E multiple either of the company whose brand is being evaluated or in case it is not a listed company, take an average P/E ratio for similar companies or companies with similar product portfolios. The rationale for applying P/E multiple is that if a particular share script is being traded in the market at a price which is several times its earnings then obviously it is a reflection of the investing communities trust and confidence in the profit capability of the firm. Thus applying this multiple will capture the essence of that underlying principle. Now let us take an example to prove the above: We take a hypothetical company and one of its brands that we wish to value: We are carrying out the exercise in the year 2009. Table no: 11.2 (all figures in Rs. lacs) 2004 2005 2006 2007 2008 Sales of the Brand 120 130 135 140 146 Gross Margin 36 (30 percent) 39 (30 percent) 43 (32 percent) 43 (31 percent) 47 (32 percent) Less: Selling/ Distribution/ Marketing/ Administrative expenses 18 19 20 21 23 Net Margin 18 20 23 22 24 Capital Employed 80 85 90 88 90 161
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BRAND VALUATION Weight adjusted net profit = (13.1 +28.3 + 44.46 + 64.2 + 90 = 240.6) ÷ (1 + 2 + 3 + 4 + 5=15) = 16 lacs Let us presume the company’s script in the market is trading at average Rs. 400 per share and the company’s earnings per share has been Rs. 16 then the P/E ratio is 400 ÷ 16= 25. Now the valuation of the brand will be: 1. Weight adjusted, inflation corrected cost of capital Rs. 16 lacs excluded net profit 2. Corporate tax @ let us say 33percent Rs. 5.33 lacs Tax adjusted Rs. 10.67 lacs 3. P/E multiple = 25 So brand value is 10.67 lacs * 25= Rs. 267 lacs You will discover the high P/E ratio has increased the brand value substantially. Cost of Capital 8 (10 percent) 8.5 (10 percent) 10 (11 percent) 7 (8 percent) 6 (7 percent) Net profit after adjusting for cost of capital 10 11.5 13 15 18 Adjustment for inflation at a flat range rate of 7 per centpa 1.31 1.23 1.14 1.07 1 Inflation adjusted net profit 13.1 14.15 14.82 16.05 18 Weights applied (highest 2008) 1 2 3 4 5 Weighted net profit 13.1 28.3 44.46 64.2 90 162
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BRAND VALUATION If on the other hand the P/E multiple was let us say 6 the brand value would have been 6 * 10.67 = Rs. 64 lacs only. The future earning multiple will be an altered version where the past 5 years will be replaced by future 5 years estimated profits and calculating the discounted net present value. 11.3 SUMMARY Brand is a name, a term, a sign, a symbol, a design or a combination of any or all of them that marketers use to convey the identity of its goods/ services to customers and differentiate its own products/ services from those marketed by others.
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