T.Y.B.F.M/T..Y.B.A.

F Business Valuation Semester V

Unit 1 Basis of Business valuation

Introduction:
Business valuation is a process used to estimate the economic value of
business. Valuation is used by the financial market. Valuation is used by
financial market participants to determine the price they are willing to pay or
receive at the time of sale of business. Business valuation requires working
knowledge of varieties of factors and professional judgement. Valuation
highly subjective calculations to determine a fair market value of a company.
There are many common situations when valuations are required like
Business recognition, employee share or stock option plan (ESOP), Mergers
and acquisition and shareholder dispute. Business valuation examination
conducted towards an estimate or opinion to the fair market value of
business interest at a given point of time.

Sometimes, when a business owner is informed about the intrinsic value of

business. Business valuation is worth the business. Like accounting,
valuation is an art rather than science. Property conducted valuation is
nothing more than opinion; it is based on facts and judgement. Valuations
are not precise due to which valuation estimates and opinion are generally
stated range of values. Business valuation is no precise science. There is no
Universal legal framework, which dictates action should be performed.
Therefore, there is no right way to estimate a company's value.

When is valuation required?

Business valuation may be required at the time of
Shareholders dispute
Purchase and sale of business
Mergers and acquisitions
Damage claims
Buy or sell agreement etc.

Importance of Conducting a Business Valuation

Numerous business owners and entrepreneurs underestimate or simply are
unaware of what the business valuation process entails and where it begins.
This is a common scenario as the valuation process is a complex multistep
process with different methods of approach. Independent of the valuation
method you choose, valuating a company is a process where current value
generating elements of the company are measured, as well as its competitive
position within its sector and its future financial expectations. The type of
valuation method used for analysis will then depend on factors such as the
industry sector where the company operates, the size of the company,
expected cash flow and the type of product or service it offers. For example,
it is generally not advised to use the valuation method of comparable
transactions if the sales volume or profits are 50% lower than that of the
target company.
The valuation process is intrinsically technical; hence, it is vitally important
that whoever is conducting the valuation acquire financial knowledge. The
valuator should also be aware of the company’s business model, its strategy,
have a thorough understanding of the market where it operates, and the
value-creating elements it acquires.
“The main objective of the business valuation is to identify the key
value-generating areas of the business.
The main objective of the valuation process is to identify the critical
value-generating areas of the business. It is essential to consider which areas
of your business may be of specific interest or value to the counterpart of the
deal, as this will mostly determine the valuation results. For example,
depending on the mind-set and objectives of the investor, their interest may
not be as much the profitability of the business, but perhaps the market
share, strategic positioning, or a specialized area of the company’s value
chain. The valuation result is then considered a significant estimation of a
value range that will be a pivotal point in the negotiation of the final price
paid for the deal. The valuation results are, therefore, important not only for
identifying the key profit drivers of the business, but for also setting a
pinpoint for upcoming deal negotiations.
Ultimately, the valuation process is a preliminary task to sell your company.
It provides insight into the critical areas of a business, allowing owners to
leverage the advantages and focus on improving vulnerabilities. Most
importantly, this valuation provides an accurate estimation of the value
range that both counterparts of the deal can use as the backbone of the deal
negotiations. As discussed earlier, there is no ultimate formula or perfect
valuation method for each situation. Still, by knowing the characteristics
of the company and its corresponding environment, the best-fit method can
be chosen from a variety. It is an essential process to be able to maximize the
price of the company backed by logical reasoning and numerical arguments.
“The business valuation is an essential process to be able to maximize the
price of the company backed by logical reasoning and numerical arguments.
Secondly, the valuation results act as a solid pivotal cornerstone of
negotiations and don’t bind to the final price of the deal. It is a rarity to see
both buyers and sellers agree on the set price immediately, so the valuation,
in a sense, brings the two sides of expectations to a middle ground.
Premises (Assumption) of Business valuation
 Going Concern – Value in continued use as an ongoing operating business
enterprise.
 Assemblage of assets – value of assets in place but not used to conduct
business operations.
 Orderly disposition – value of business assets in exchange, where the
assets are to be disposed of individually and not used for business
operations.
 Liquidation – value in exchange when business assets are to be disposed
of in a forced liquidation.

Business valuation results can vary considerably depending upon the choice
of both the standard and premise of value. In an actual business sale, it
would be expected that the buyer and seller, each with an incentive to
achieve an optimal outcome, would determine the fair market value of a
business asset that would compete in the market for such an acquisition. If
the synergies are specific to the company being valued, they may not be
considered. Fair value also does not incorporate discounts for lack of control
or marketability.

Note, however, that it is possible to achieve the fair market value for a
business asset that is being liquidated in its secondary market. This
underscores the difference between the standard and premise of value.
These assumptions might not, and probably do not, reflect the actual
conditions of the market in which the subject business might be sold.
However, these conditions are assumed because they yield a uniform
standard of value, after applying generally accepted valuation techniques,
which allows meaningful comparison between businesses, which are
similarly situated.
 Principles of valuation
Like finance, valuation is based on some foundations, which are called
principles. The principle provides basic groundwork for the purpose of
valuation and Different techniques of valuation the following are the
principles of valuation.

1. Principle of substitution: It indicates that risk averse investors will not

pay more for business desirable substitutes to exist by creating new or by
buying. For example, if one business is worth ‘X’ amount and If a similar
business is available at a price less than ‘X’ amount then the business is
worth less than ‘X’ amount. This principle is based on understanding of the
market and forced comparison, which will lead to flawed valuation.

2. Principle of Time value of money: business valuation is done based on

time value of money. It suggests that value can be measured by calculating
present value of future cash flow discounted at appropriate discount rate.

3. Principle of Expectation: Cash flows are based on expectations about

the future performance of the company and not on the past. The difficult part
is to determine the extent and direction of growth. These exemptions have a
significant impact on the valuation.

4. Principle of Risk and Return: investor is risk averse and investor would
prefer a higher amount of wealth than lower one. The reason is higher
wealth leads to the possibility of higher consumption. Given to possible
portfolios with similar risk, the one with higher expected return will be
preferred.

5. Principle of Reasonableness and Reconciliation: Valuation requires a

large number of uncertainties and we have to go for assumptions. This
principle suggests how far the assumptions are reasonable and it reconciles
Different values of the under different approaches.
 Valuation Process.
The evaluation process comprises five steps.
1. Understanding the business: The first step towards business valuation is
to understand the business that is evaluating industry prospects, competitive
position of the industry environment, corporate strategies, its planning and
execution, technological edge etc. These help the valuator in forming
assumptions and future prospects of the business.

2. Forecasting company performance: It is achieved by doing economic

forecasting and studying companies' financial information. There are two
approaches economic forecasting are : Top down forecasting and bottom up
forecasting.

Top-down forecasting is a method of estimating a company's future

performance by starting with high-level market data and working “down” to
revenue. This approach starts with the big picture and then narrows in on a
specific company. Top-down forecasting offers a prediction of how much
market share is needed to be profitable, while bottom-up forecasting offers
an understanding of which business activities have the biggest impact on
financial performance. In top down forecasting analysts, use macroeconomic
forecasts to develop industry forecasts and then make individual company
forecasts.

Bottom-up forecasting is a method of estimating a company's future

performance by starting with low-level company data and working “up” to
revenue. This approach starts with detailed customer or product information
and then broadens up to revenue. In the bottom up forecasting analysts
aggregate individual company forecasts with industry forecasts and finally
aggregated with macroeconomic forecasts.

3. Selecting appropriate valuation model: The most important step

towards evaluation is to select appropriate valuation models. The two broad
types of valuation models are intrinsic and relative valuation.
What Is a Relative Valuation Model? (For Reference)
A relative valuation model is a business valuation method that compares a
company's value to that of its competitors or industry peers to assess the
firm's financial worth. Relative valuation models are an alternative to
absolute value models, which try to determine a company's intrinsic worth
based on its estimated future free cash flows discounted to their present
value, without any reference to another company or industry average.
Intrinsic value is a measure of what an asset is worth. The intrinsic value of
a business (or any investment security) is the present value of all expected
future cash flows, discounted at the appropriate discount rate.
What Is Intrinsic Value?
Intrinsic value is a measure of what an asset is worth. This measure is
arrived at by means of an objective calculation or complex financial model,
rather than using the currently trading market price of that asset.

Intrinsic Value vs. Relative Valuation Models

While relative valuation models seek to value a business by companies to
other companies, intrinsic valuation models seek to value a business by
looking only at the company on its own. The most common intrinsic
valuation method is Discounted Cash Flow (DCF) analysis, which calculates
the Net Present Value (NPV) of a company’s future cash flow.

4. Converting forecast to valuation: Analysts play a vital role of

Collecting, Analysing, Communicating and monitoring the corporate
information, which they have used in valuation analysis.

5. Communicating the information: The final step towards business

valuation is the preparation of a research report. It is prepared on the basis of
information collected and valuation based on models reported.
 Value:
Value is the ‘worth’ it can also be defined as ‘bundle of benefits’
tangible or intangible. The value is also called desirability, utility of a
thing. It is purchasing power and worth estimated.
Value is what each person gives a company depending on his profile and
interests. It is the monetary measure of how useful the company is going to
be for a person. Value is the monetary, material, or assessed worth of an
asset, good, or service.
Who determines values?
The concept of value is like beauty just as it is said that ‘beauty lies in the
eyes of the beholder’ Value is determined by the person who perceives Value
in a thing. Value can also be estimated, determined by a professional called
‘Valuer’. The process of determining value is called ‘Valuation’. Business
valuation process of determining economic value of business. Valuation
include
1. Value of Assets and liabilities to know the value of ‘what we own’ and
‘what we owe’.
2. The asset will include both tangible and intangible assets.
3. Liabilities include both apparent and contingent.

Role of a Valuer
• Advisor
• Giving opinion to his client.
• Fair Market Value and Interest
• To take financial decision
• Advise on change in possible rental and capital value
• For investment suggestion on policy matter, sinking fund
• Land acquisition case - Date of valuation / Date of notification
• Estate management Maximum income and capital value Securing good
maintenance – Increase or decrease in capital value – To check
reasonableness of present rent and outgoings. – Provisions for reserve for
future repairs.
• Must deliver own independent, honest and conscious opinion.
• Not advice tailored to suit what the client desires.

Types of Value
There are a number of types of values.
Original value
Book value
Depreciated value
Sales value
Purchase value
Replacement value
Market value
Economic value
Residual value
Scrap value
Price and Value
1. Price can be understood as the money or amount to be paid, to get
something. And value implies the utility of worth of the commodity of
service for an individual. Price is the amount of money paid by the buyer to
the seller in exchange for any product and service. The amount charged by
the seller for a product is known as its price, which includes cost and the
profit margin. For example- If you buy a product for $250, then it is the
price of that product. Moreover, Value is the usefulness of any product to a
customer. It can never be determined in terms of money and varies from
customer to customer. For example- If you are going to a gym by spending
1000 bucks a month, the output seen is worth the expense, then it is the
value that you create for a gym, regarding the service being offered there.
Here the worth is its value.

2. Price is the amount you pay. Value is what the product or service pays
you. This value could be measured in financial terms, emotional terms,
physical conditions, or in any number of other ways.

3. The most important distinction between price and value is the fact that a
price can be quantified but value being a subjective concept and
fundamental (Cannot be quantified). For example, consider a person selling
gold bars for $5 a piece. The price of those gold bars is, in this instance, $5.
It's an arbitrary amount chosen by the seller for reasons known only to them.
Yet, in spite of the fact that those gold bars are priced at $5, their value is so
much more.

4. Value is much more than a price. As the expectations of various buyers

are different, price and value are not necessarily equal. Hence, the price paid
by two people may be the same but value attached may not be the same.
Examples can be of luxury cars. Mr. X may not buy the car as it is
expensive. However, Mr. Y may buy the same car at a higher price, as he
may perceive more value in the car.

5. Value implies the utility of worth of the commodity of service for an

individual. Value is the usefulness of any product to a customer. It can
never be determined in terms of money and varies from customer to
customer.

Distinguish between Price And Value.

Points Price Value
Meaning Price is the amount of Value implies the utility
money paid by the or worth of the
buyer to the seller in commodity of service
exchange for any for an individual.
product and service.
Ascertainment Price is ascertained Value is ascertained
from the consumer’s from the user’s
perspective. perspectives.
Estimation Through Policy Through opinion
Impact of market Prices increase or Value remains
fluctuation Decrease unchanged
Unit of valuation Price is calculated in It is not calculated in
terms of Money terms of Money
Example If you buy a product for If you are going to a
$250, then it is the price gym by spending 1000
of that product. bucks a month, the
output seen is worth the
expense, then it is the
value that you create for
a gym, regarding the
service being offered
there.

Foundation of Business Valuation

A sound and time tested principle in business valuation is that one should
not pay more than what the asset is worth. This statement is simple to
understand however, it is not followed during business valuation which
creates many issues. Some of them are discussed below:-
1. Objectivity
The value of business is subjective and different persons may view it
differently. Hence, in the case of personal effects, emotions or personal
preferences play a role in valuation. However, such an approach should not
be followed for valuation of business. It is very crucial to follow rational and
objective methods for valuation of business.
2. Backed by evidence
The investor perceptions play a vital role in business valuation. However,
business valuation must be based on solid evidence of future cash flows and
revenue streams. The investment should have concrete evidence to back it.
Valuation models compare the value to the level of uncertainty and expected
growth in these cash flows.
3. Benchmarking the rate of return
 The rate of return expected from the business should be compared with
industry average. If the project is showing a high rate of return then it must
be analysed in relation to performance of the peers.
4. Avoiding Speculations
It is utmost important to analyse the investment on its own merits based on
profitability and sustainability. The investment should be able to recoup the
money invested. Investment in an asset at abnormally high prices with the
intention of selling it at even higher prices in future must always be avoided.
E.g. During an asset bubble investors tend to think that their assets will be
purchased by someone at higher valuation at the time of sale. This is one of
the reasons of subprime crisis which originated in U.S.A.

Purpose of Business Valuation

In real properties, valuation may be required for various purposes. It is essential
to know exactly for what purpose the valuation is being prepared. Valuation is an
art and professionals have to consider all pros and cons of the various factors
affecting valuation. Broadly speaking, valuation may be required to be done for
the following purposes.
1. Use of Valuation Reports in the Purchase/Sale of Property: If the owner of
any property wishes to offer the same for sale, it is necessary first to find out
what it would fetch him in monetary terms (at least to start the negotiation). Then
only can he make a realistic decision on whether to accept or reject an offered
price.

2. Valuation for Central Government Taxation under Direct Tax Laws:

Valuation of property is required under various direct tax laws administered by
the Central Board of Direct Taxes, Ministry of Finance. These include the Wealth
Tax Act, Capital Gains Tax, etc. These valuations are normally required to be
done under the particular act for a specific purpose as of a specific date.

3. Valuation for the Purpose of Forecasting Earnings: Any property owner

would like to receive a return on his investment that is in conformity with return
on other investments. Expected outgoings can forecast the earning capacity of the
property.

4. Valuation in Connection with Mortgages: Many institutional lenders such as

banks and state financial corporations are bound by law to have pledged real
estate valued and not to lend more than a certain fixed percentage of this
valuation.

5. Valuation for Partition of Properties: The distribution of property under a

family settlement or a will or on dissolution of a partnership between various
claimants warrants valuation of the property. Such valuations form the basis of
the settlement or they may be used in any legal proceedings.

6. Valuation for Mergers/Take-overs/Acquisition by Companies: In case two

or more businesses or enterprises come together, it is necessary to place a value
on each so that stocks or shares of the new merged corporation can be
apportioned between shareholders. Also when properties are exchanged each
asset should be valued.

7. Valuation for Liquidation: Very often, it happens that a Company has

become sick or is not operating for any of several reasons. There may be
creditors of the Company who have gone to court for affecting liquidation. The
official liquidator will require an inventory of items and the value or minimum
price at which the assets are to be sold. Here also valuation will be required for
the liquidation proceedings.

8. Valuation for Dissolution of Partnership: All the stakeholders including the

partners will have their dues settled. This is not a simple task and will involve
detailed analysis of all the assets and liabilities.

9. Valuation for Accounting Purposes (Asset Valuation): Very often, large

companies or other organizations revalue their assets and bring up-to-date the
‘historical value’ in their books of accounts and balance sheet. This concept is
popular in western countries and is gaining ground all over the world whereby
the concept of ‘current cost accounting’ has been introduced.

10. Valuation for Raising Funds: When a business plans to expand it requires
financial resources, it will have to value the business. The raising of fund will be
in the form of Right issue, Fresh issue, IPO, Issue of Debentures, loans from
banks , financial institutes etc. In all these cases business valuation is required to
understand whether it is feasible to infuse extra funds in the company.

Valuation Bias

Valuation is never started with a blank slate. Valuation is shaped by your prior
views of the company in question. It refers to pre conceived notions &
assumptions of the valuators which affects the final outcome of business
valuation. .It is often observed that,before analysing the technical & financial
aspects, the valuator already has certain ideas & perceptions about the business.
The more you know about the company, the more likely it is that you will be
biased, while valuing the company. In practice, people often decide what to pay
and do the valuation afterwards. The following are different sources of Bias.

1. Closer: The more you get the closer with management/owners of the
company, the more biased your valuation of the company becomes. In principle
you should do your valuation first before you decide how much to pay for an
asset.

2. Choice: The bias starts with the matter of choice for the company as choices
are almost never random, and how we make the choice will start laying the
foundation for bias.

3. Perception: When we read something about the company in NEWS or in

public (good or bad) about the company or heard from expert valuer star making
perception or create image about the company, which leads to bias. The
information collected for valuation also added to bias.

4. Institutional Factor: Many a time bias is created due to dependency on

institutional or company support and suggestions. Information, opinion and
supportive documentation leads to bias in valuation. The use of annual reports
and other financial statements may include the best possible spin of numbers.

5. Rewards and Punishments: The reward and punishment structure associated

with finding companies to be under or overvalued is also a contributor to bias.
An analyst whose compensation depends upon whether he finds a firm under an
overvalued will be biased on his conclusion.

6. Prior Knowledge of Business:

7. Information Bias: While analysing the company a lot of information is

available. The analysts often fail to separate relevant and irrelevant information
for the purpose of analysis. Useful and relevant information should be identified
and irrelevant information must be discarded. The annual reports include
financial information but at the same time it includes financial information but at
the same time it includes management views on future performance.

What to do about bias/ Minimizing Valuation Bias

Bias cannot be regulated or legislated out of existence. An analyst or valuer are

human and brings their biases on the table. However, there are ways to mitigate
the effects of bias on valuation.

1. Self-Awareness: The first step towards reducing the bias in valuation is to

admit that the analysts have inherent bias in the process. The analysts must
understand that their individual bias may affect the overall results. Once it is
recognised that the bias of analysts greatly affects the valuation only then steps
can be taken to reduce it.

2. De-link valuation from reward/punishment: Any valuation process where

the reward or punishment is dependent on the outcome of the valuation will
result in biased valuations. The valuation process must be kept non-competitive
to avoid the lure of rewards.

3. No pre-commitments: Valuation bias can be minimized by avoiding

pre-commitments. The decision makers should avoid taking a strong public
position on valuation before completion of valuation.

4. Transparency about motives: All valuations should be accompanied with

disclosures as to who is paying for the valuation and how much and also should
reveal any other stakes in the outcome of the valuation. The motives behind the
analysis must be declared before the process commences. This will provide
objectivity to the analysts in arriving at the valuation.
5. Reduce in Pressure from the Employer: Valuation bias can be reduced
significantly by reduction of pressure from the employer. The demand from the
employer to bring in more business creates pressure on the employees which may
be responsible for bias.

6. Honest reporting: The reporting of valuation must be honest i.e. analysts are
required to reveal their biases before they present their results from analysis. This
will ensure truthfulness and honesty in reporting. E.g. A vegetarian person is
asked to analyse a meat producing firm then he may not be able to prepare an
honest report.

UNCERTAINTIES IN BUSINESS VALUATION

Business valuation is not an exact science, it will not provide a perfect answer.
There will always be uncertainty associated with valuations, and even the best
valuations come with a substantial margin for error. The value of business is not
based on a single factor but it is a combination of many interrelated aspects. A lot
of these aspects are dynamic and complicated, hence there is uncertainty in
business valuations. Uncertainties in Valuation Starting early in life we are taught
that if we do things right, we will get right answers. In other words, the precision
of the answer is used as measures of quality of process that yield the answer.
While this may be appropriate in maths or physics, it is a poor measure of quality
in valuation. There will always be uncertainty associated with valuation, even the
best valuation comes with a substantial margin of error.

Sources of Uncertainty
Uncertainty is a part and parcel of the valuation process both at the point in time
when we value the business and in how value evolves over time as we obtain
new information that impacts the valuation when we valuing an asset at any point
in time we make a forecast for the future. Since none of us possess a crystal ball
we have to make our best estimates every time given the information that we
have at the time of valuation. Our estimate value can be wrong for a number of
reasons likes-

• Estimate of uncertainty: - Even if our info sources are impeccable (without

fault) we have to convert raw information into input and use this input into
models. Any mistake will cause an estimation error.

• Firm specific uncertainty: - The path that we envision for a firm can prove to be
Hopelessly wrong. The firm may do much better or much worse that we
expected.

• Macro economic uncertainty:- Even if a firm evolves exactly the way we

expected it, the macro economic environment can change in unpredictable ways.

• Nature of Business
• Political Climate
• Quality of Management
• Stability of Management
• Positioning of Competitors

The contribution to each type of uncertainty to the overall uncertainty associated

with valuation can vary across companies. When valuing a mature cyclical or
commodity company it may be macroeconomic uncertainty i.e. the biggest factor
causing actual numbers to deviate from the expectation. Valuing a young tech
company can expose analysts to more estimation and firm specific uncertainty.

RESPONSES TO UNCERTAINTIES
Analysts to value the company confront uncertainty at every turn in the valuation
and they respond to it in both healthy and unhealthy ways. Among the healthy
ways, responses are:-

• Better valuation models

Building better valuation models that use more of information that is available at
the time of valuation is one way of attacking uncertainty problems. It should be
noted that even the best constructive model they reduce estimation uncertainty is
but they cannot reduce or eliminate the very real uncertainty is also with future.

• Valuation range
A few analysts recognise that value they obtain for business is an estimate and
and try to quantify a range of the estimate some uses simulation and other
devices best case and worst case of estimates of value.

• Probabilistic statements
Some analyst couch their evaluation in probabilistic terms to reflect the
uncertainty they that they feel thus analyst who estimate a value of $30 for a
stock which is trading at $25 will state that there is a 60-70% probability that the
stock is undervalued rather than make the categorical statement that is
undervalued. In general, healthy responses are open about its existence and
provide information on its magnitude to those using the valuation. Unfortunately
not all analysts deal with uncertainty in ways that lead to better decisions.

The unhealthy responses to uncertainty includes

• Passing the back

Some analyst try to pass on responsibility for the estimate by using other people's
numbers in valuation for example analyst will often use the growth rate estimated
buy other analyst valuing other company as there estimate of growth.

• Giving up on fundamentals
A significant number of analysts give up especially on full-fledged evaluation
models, unable to confront uncertainty and deal with it. Open the fall back on
more simple ways of valuing the companies. It is natural to feel uncomfortable
when valuing equity in a company we are after all trying to make our best
judgement about and uncertainty in future. The discomfort will increase as we
move from valuing stable companies to valuing growth companies from valuing
major companies to valuing young companies.
Role of Valuation in Acquisition
1) Sale
2) Partnership Dissolution
3) Investments
4) In Raising Funds
5) In Decision Making
6) To know the tax liability
7) Loans & Factoring
8) Taxation & Legal disputes
9) Departing Shareholders
10) Business Planning

Efficient Market Hypothesis

Efficient market hypothesis or EMH is an investment theory which suggests that

the prices of financial instruments reflect all available market information.
Hence, investors cannot have an edge over each other by analysing the stocks
and adopting different market timing strategies. According to this theory
developed by Eugene Fama, investors can only earn high returns by taking more
significant risks in the market.

Assumptions of the Efficient Market Hypothesis

Also referred to as an efficient market theory, EMH is based on the following

assumptions:

● Stocks are traded on exchanges at their fair market values.

● This theory assumes that the market value of stock represents all the
relevant information.
● It also assumes that investors are not capable of outperforming the
market since they have to make decisions based on the same available
information.

Types of Efficient Market Hypothesis

EMH has three variations which constitute different market efficiency levels.
They are discussed below :

Weak form efficient market hypothesis

This is based on the assumption that the market prices of all financial
instruments represent all public information related to the market. It does not
reflect any information that is not yet disclosed publicly. Moreover, the
efficient market hypothesis assumes that historical data like price and returns
have no relation with the future price of a financial instrument.
This variation EMH also suggests that different strategies implemented by
traders cannot fetch consistent returns. This is owing to the assumption that
historical price points cannot predict future market value. Although this
form of EMH dismisses the concept of technical analysis, it provides the
opportunity for fundamental analysis. This helps all market participants to
find out more information and earn an above-average return on investment.

Semi strong form efficient market hypothesis

This version of EMH elaborates on the assumptions of the weak form and
accepts that the market prices make quick adjustments in response to any
new public information that is disclosed. Hence, there is no scope for both
technical and fundamental analysis.

Strong form efficient market hypothesis

This form of EMH states that the market prices of securities represent both
historical and current information . This includes insider information as well
as publicly disclosed information. It also suggests that the price reflects
information available only to board members or the CEO of a company.

(For Reference)

Fundamental analysis is relevant for investments that are held for a longer
duration of time. Fundamental analysis is concerned with the previous as
well as current data. The objective of fundamental analysis is to identify an
organization’s intrinsic value to find out if a particular stock is over-priced
or under-priced. Fundamental analysis is used for investing functions only.

Technical analysis studies previous patterns, charts, and trends in order to

make predictions concerning the price movements of an organization in the
future. In other words, technical analysis can be defined as a method used to
determine the upcoming price of the securities on the basis of charts in order
to identify the trends as well as patterns.Technical analysis is relevant for
investments that are held for a shorter duration of time. Technical analysis is
only concerned with the previous data, and it is used solely for trading
functions. The objective of conducting a technical analysis is to identify the
perfect time for entering or exiting the market.