Business Valuation (2) Flashcards
What is the NBV method?
The balance sheet equation
Weaknesses of NBV (balance sheet)
Balance sheet values are often based on historical cost rather than market value
Weaknesses of NBV (non-current)
Non-current assets depends on depreciation/amortisation policies
Weaknesses of NBV (significant)
Significant assets may not be recorded in the statement of financial position (e.g. internally generated goodwill)
What is the NRV method?
Estimates the liquidation value of the business
What is the result of NRV?
What should be left for shareholders if the assets were sold off and the liabilities settled
What might NRV ignore?
Assets such as internally generated goodwill. Can be difficult to estimate NRV if there is no active market
What is net replacement cost?
It can be viewed as the cost of setting up an identical business “from scratch”
What is equity in net replacement cost?
Estimated depreciated replacement cost of net assets.
May represent the max price a buyer might be rpepared to pay
Weaknesses of net replacement cost?
Technological change means it is often difficult to determine comparable assets for the purposes of valuation
Ignores unrecorded assets (e.g. goodwill)
What does the PE ratio of a quoted company take into account?
The expected growth rate of that company
Using published PE ratios as a basis for valuing unqioted companies?
May indicate an acceptable price to the seller of the shares
Wekanesses of PE ratio>
If the unquoted company being valued is loss-making, the P/E ratio method results in a (meaningless) negative value for its equity
Share prices can sometimes vary dramatically
Earnings of the unquoted company may be intentionally inflated
Might not be able to compare to another proxy
What is the earnings yield?
Simply the reciprocal of the P/E ratio
How can a business be viewed?
As a combination of its underlying projects
