Business Valuation

Question 1

What is the purpose of Business Valuation?

Answer 1

Business Valuation is essential for determining the “fair value” for various scenarios like mergers, acquisitions, business sales and financial reporting.

Question 2

What is the formula for Net Asset Value (NAV)?

Answer 2

NAV = Total Assets - (Total liabilities + goodwill)

Question 3

Pros and Cons of NAV?

Answer 3

Pros:
- Straightforward
- Provides tangible floor value
Cons:
- Overlooks firm’s future earning potential
- Relies on book values which may not reflect current market conditions

Question 4

P/E ratio valuation formula?

Answer 4

Value = P/E Ratio X Earnings

Question 5

P/E Ratio Valuation pros and cons?

Answer 5

Pros:
- Directly related to earnings
- Easy to communicate
Cons:
- Does not account for growth potential or capital structure

Question 6

DCF Valuation formula?

Answer 6

DCF Value = Sum of: Expected cash flows/ (1+Discount Rate)^t

Question 7

Pros and Cons of DCF Valuation models?

Answer 7

Pros:
- Accounts for time value of money
- More thorough evaluation of future profitability
Cons:
- Highly sensitive to estimates for growth/ discount rates

Question 8

Constant Dividend Valuation Model Formula?

Answer 8

Price = Dividend per share/ Cost of equity

Question 9

Growing Dividend Valuation Model Formula?

Answer 9

Price = Dividend per share t+1/ Cost of equity - growth rate