8 - Business valuation and restructuring Flashcards
What are the asset based approaches to Valuation?
Historic cost (ordinary share cap + retained earnings)
NRV (CA + NCA - CL - NCL)
What are the advantages of asset based valuation?
Simple to calculate
Assets are more certain than income
Useful for asset strippers
What are the DISadvantages for asset based valuation?
Book values are likely to be out of date
Ignores future earnings
Service businesses would be undervalued due to the value of intangibles
What is the income based approach to valuation?
The value of the business is calculated as the present value of the future cash flows
What is the issue with the income based approach to valuation?
It requires an estimate of the future cash flows
and a discount rate can be problematic (more so for unlisted companies)
What are the advantages of the income based approach ( present value of future cash flows)
Technically the best method (more so for service businesses)
Incorporates all available relevant cash flows and time value of money
What is the Price-earnings ration valuation?
Share price divided by the earnings per share
What are the advantages of P/E Ratio valuation?
Reflects stock market’s view of the potential of the company
Considers the earnings creating potential of the company
What are the DIS-advantages of P/E Ratio valuation?
Using an industry average or proxy company’s P/E ratio may not properly reflect the company being valued
Earnings can be manipulated by accounting policies
Using past earnings may not reflect future potential
What are the advantages of EV / EBITDA?
It is unaffected by the capital structure or depreciation policies of a company
- It takes net Debt into account
- Enables direct comparison between companies which might have different policies
- It is the technique that is most commonly used by investors
What are the DIS-advantages of EV / EBITDA?
- It is simplistic
- Ignoring capex and tax could be a disadvantage in some circumstances
- Past earnings may not reflect future potential
- Industry average or proxy multiple may not properly reflect the company being valued
What is the dividend yield calculation?
Dividend paid
———————————
Market price of share
What is the Dividend Valuation method?
Ke - g
What is the advantage of dividend methods?
Most effective when the investor is looking for dividend income rather than control
What are the Disadvantages of dividend methods?
- Dividend Payments and growth may not be stable
- Using the Div Yield or a Ke of a proxy OR industry average may not reflect the company being valued
