Business valuation

Question 1

what are the advantages and disadvantages of Net asset based valuation

Answer 1

Advantages
simplicity
Tangible asset
clear starting point

Disadvantages
ignores earning power
not suitable for all business
ignores intangible
market value discrepancies

Question 2

what are basic features of Price earning model, its formula and types/modes?

Answer 2

1.Common method of valuing “Controlling Interest”.
2. Dividend decision is taken by controller so here entire earnings are focused for valuation

Function is:
a. PE Multiple = (Earnings per share / Market Value per share)
b. Market Value per share = Earnings per share X PE Multiple

Market Value derivation from PE can take a number of forms:

types
MV using current earnings
lagging returns
stable lagging PE
Leading PE

Question 3

how to calculate the PE for Private companies?

Answer 3

PE is not readily available for private companies. Valuation of their shares need the following 2 approaches:

a. Stand-alone valuation (using similar listed company’s PE) Here we take PE of a listed company operating in the same industry and reduce it to 2/3 or 3/4 due to liquidity risk since the private company shares are not traded in the
market

b. Boot Strapping (using the PE Of acquirer)
Here the earnings of company is multiplied by the PE of acquirer. Acquirer PE is used
since after the acquisition, the market will treat the target company as a part of
acquirer.

Question 4

what are advantages and disadvantages of Price earning method of valuation.

Answer 4

Advantages
Simplicity: Easy to calculate and understand.
Liquidity Factor: The method considers the market price, and thus, implicitly
takes into account the liquidity of the shares.
Industry Comparison: Allows for easy comparison with peers or the market
as a whole. (Comparison of PE between competitors)
Quick Assessment: Useful for making quick, albeit approximate, valuations.
Flexible: Can be used across different sectors and industries, although the
multiple can vary significantly.

Disadvantages

Earnings Volatility: Fluctuations in make the valuation
misleading.
Not Suitable for All Companies: For companies with negative or very Iow
earnings, the P/E ratio can be irrelevant or skewed.
Over-Simplification: Ignores many aspects like growth prospects, debt, cash
reserves, and so on.
Short-Term: Often focuses on current or may not
reflect long-term value.
Sensitivity to Market Conditions: The stock price is affected by market
conditions, which may not be related to the company’s fundamentals.
Comparative Limitations: Differences in accounting methods, business
cycles, and other variables can make cross-company comparisons challenging.

Question 5

after cashflow calculation in free cashflows how the equity cashflows are calculated and how the FV of equity is calculated?

Answer 5

total cashflows = 10000
less: interest - tax = (4000)
add new finance 30000
equity cashflows 9000

divide equity cashflow/Ke

total cashflows/wacc = total MV
less: MV of debt (MV of debt)
equals to MV of equity