8. Business Valuations Flashcards
net assets valuations method
value of one share = net tangible assets/the number of shares
PV of future cash flows
an acquisition would satisfy the objective of maximising shareholder wealth if PV exceeds acquisition cost.
maximum price = MV of combined business - MV of bidder
PV of future cash flows - disadvantages
- estimating future cash flows may be difficult
- difficulty estimating the discount rate
- time horizon of future cash flows may be difficult
price earnings ratio
the share price divided by the earnings per share for a company
enterprise value
a measure of a company’s total value, often used as an alternative to market capitalisation. it is the price you would pay for the entire business based on the current market price of the company’s shares and net debt.
EV Equation
EV = market capitalisation of equity + preference shares + debt + minority interest - cash and cash equivalents
initial public offerings (IPOs)
new issues to the public, an issue of new shares to new shareholders
what are the two methods of IPOs?
offer sale - issuing house - investing public
direct offer or offer for subscription for shares direct to general public
initial coin offering
- raises finance from investors. the investors receives a token, for a share or for a utility.
- payment is made in a cryptocurrency
- a ‘white paper’ is issued providing details of the venture and the tokens
- ICOs offering future income streams are likely to be judged as securities requiring greater regulation
- a key risk to the issuing company is the volatility of cryptocurrency value
advantages of asset based approaches
- simple to calculate
- assets are more certain than income
- useful for asset strippers if there are valuable tangible assets
disadvantages of asset based approaches
- book values are likely to be out of date
- ignores future earnings
- service businesses would be undervalued due to intangibles
- ignores digital assets
advantages of income based approach
- technically the best method, especially for service businesses
- incorporates all available relevant cash flows and the time value of money
disadvantages of income based approach
- estimated cash flows may be too optimistic
- a suitable discount rate may be difficult to calculate
advantages of P/E valuation
- reflects the stock market’s view
- considers the earnings potential of the company
disadvantages of P/E valuation
- using an industry average may not reflect the company being valued
- earnings can be manipulated by accounting policies
- using past earnings may not reflect future potential
advantages of EV method
- it is unaffected by the capital structure 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
disadvantages of EV method
- it is simplistic
- ignoring capex and tax could be disadvantage in some circumstances
- using past earnings may not reflect future potential
- using an industry average or proxy multiple may not properly reflect the company being valued
advantages of dividend methods
- most effective when the investor is looking for dividend income rather than control
disadvantages of dividend methods
- dividend payments and growth may not be stable
- using the dividend yield or a KE of a proxy company or industry average may not reflect the company being valued
