Business Valuation Flashcards
Would actual share price equal TERP
Depends how market reacts to rights issue (eg fully taken up)
Depends how market reacts to the planned investments (e.g do they have positive NPV)
Share price could be affected by general market conditions or events which afftct market confidence
What sources of finance for MBO
Management team invest in equity
Venture capital invest with interest or debt
Other finances (like bank) provide loans
What is in the financial information section of a business plan
Historical financial analysis
Key risks and contingency plan
Anticipated gearing
Amount, Purpose and Timing of any finance required
Financial forecasts
Project appraisal and sensitivity analysis
What is an appropriate dividend policy for a listed company
Constant dividend with some growth.
Don’t have dividends rising/falling with profits as it may result in a fluctuating share price for a listed company (signalling effect)
What behavioural factors lead to irrational investment decisions
Overconfidence = investors overestimates accuracies of their forecasts, the overestimate unlikely events and underestimate likely ones
Conservatism = investors tend to be naturally conservative and resistant to changing their minds
Narrow framing = investors pay attention to one particular fact more than they should because it is prominent in their minds
Extrapolative expectation = investors have a tendency to assume history will repeat itself
PE / EBITDA valuation formula
Advantages and disadvantages
PAT * PE ratio of other quoted firms
No tax, interest of Pref dividends
AND
EBITDA * EBITDA multiple - MV debt + cash
May need discount to reflect lack of marketability as it has to be estimated from similar listed companies
Useful for valuing majority interest and incorporates synergies
Erratic earnings figures may make it misleading
Earnings can be manipulated via accounting methods
Dividend yield valuation
Advantages and disadvantages
Price = dividend / yield
Price = D0 (1+g) / ke - g
Minority interest
Assumes constant predictable dividend growth
Estimated from similar listed company, discount non-marketability
Perpetuity discount factor formula
Previous year discount factor * 1 / (r - g)
How can a company pay target shareholders for their shares
1) Cash
Adv: buyer gets full control and full entitlement, shareholder get certain and unconditional amount
Disadv: buyer will have to find cash from somewhere, CGT arises
2) Bid company shares
Adv: no need to fund cash payment, CGT deferred, seller is motivated to stay to work for the success of the company
Disadv: control is diluted and future profits will be sold with the seller
3) Loan stock
Adv: advantages of cash payment without immediate finance
Disadv: buyer will have to pay interest on debt until it is redeemed
Seven value drivers of shareholder value
S = sales growth
L = length of time future plans are for
O = operating margin
W = working capital investment
C = cost of capital
A = investment in fixed assets
T = tax
Identify international trading risks other than forex
Physical risk = goods might be lost or stolen in transit
Credit risk = payment default by the customer
Trade risk = customers refusing to accept the goods on delivery or cancellation of the order in transit
Liquidity risk = inability to finance the credit given to customers
Other risks = political risk and cultural risk
Mitigate with banks, insurance companies, credit references agencies, risk transfer e.g courier contract
What is the main criterial of green loan principles (PURM)
- Use of proceeds: must be used to fund green projects
- Process for project evaluation and selection: borrower should clearly communicate to the lender its environmental sustainability objectives
- Management of proceeds = proceeds should be tracked to ensure that they are only allocated towards green projects
- Reporting = borrower keeps up to date information about the use of the proceeds
Forms of green finance
- Green loans
- Green bonds
- sustainability linked loans
Three factors that will affect time value of interest rate options
- Volatility = higher volatility of interest rates will increase the option value as increases changes of being in the money at expiry
- Time to mature: longer the time to mature the more chance the option will be in the money at expiry. Also greater interest element in the option
- Risk free rate. Higher risk free rate the higher the interest element will be in the option
Why would shareholders react negatively to lower dividend
- If the dividend is usually steady growth then cut it, sends out a worrying signal to the market
- Some shareholders would have invested in the basis of the policy paying steady dividends
- Shareholders may prefer to receive money today than promise of Div in future
- Some shareholders prefer dividends than CGT for tax purposes
- Some shareholders may not want to make this investment but they are not given a choice
- Investment may lead to negative NpV
