Business Valuation (4) Flashcards
What are the market value of any share?
Should equal the present value of the future dividend stream discounted at the investors’ required return
What are preference dividends?
A fixed percentage of the share’s nominal value
Issue of a fixed percentage of share’s nominal value?
There will be zero growth of the future cash flow and the share price becomes the present value of a perpetuity
What should the market value of any debt equal?
The present value of the future payments to the investor discounted at the required return
What happens with irredeemable loan notes?
There will be a fixed annual payment of “coupon” interest into perpetuity, with no repayment of principal
What should the market value of a reedemable loan note equal?
The present value of the coupon interest (paid each year until maturity) and the redemption price (paid at maturity), discounted at the investors’ required rate of return.
How is the required return on a reedeemable loan note referred to as?
Pre-tax cost of reedeemable loan note
Yield to maturity
Gross redemption yield
What is a convertible loan note?
Allow the investor to choose between redeeming the loan notes at some future date or converting them into a predetermined number of ordinary shares
How to estimate market value of convertible loan note?
Predict whether the investor will choose redemption or conversio
What is known with certainty and what can only be predicted in covertible loan note?
Redemption value (certainty)
Future share price (predicted)
What is the floor value?
The value assuming redemption
What is the conversion premium?
Market value − current conversion value
What has an inverse relationship?
Market interest rates and market value of fixed income securities
What does the market value of a loan note equal?
The present value of the fixed future payments it will make to the investor
What happens if market interest rates fall?
The present value of a loan note’s future cash flows will rise and with it the loan note’s market price
