Business Valuation and Restructure

Question 1

Organic Growth

Answer 1

~ costs spread over time
~ minimum distruption
~ more risky than acquiring established business

Question 2

Non-Organic Growth (Acqusition)

Answer 2

~ faster growth
~ overcomes barriers to entry
~ bidding co S/H lose out as pay too much for co

Question 3

List Valuation Methods

Answer 3

1. Asset-based approach
2. Income-based approach
3. Price-Earnings ratio valuation
4. Enterprise value/ EBITDA multiple method
5. Dividend yield method
6. Dividend valuation method

Question 4

Asset-based valuation

Answer 4

value = assets - liabilities

Question 5

Asset-based valuation: Pros

Answer 5

~ simple
~ assets more certain than income
~ useful for asset strippers

Question 6

Asset-based valuation: Cons

Answer 6

~ book value likely to be out of date
~ ignores future earnings
~ service biz undervalued due to intabgibles value

Question 7

Income-based valuation

Answer 7

value = present value of future cash flows

Max price = MV combined Cos - MV of bidder

Question 8

Income-based valuation: Pros

Answer 8

~ technically best mehod, esp service cos

~ incorporates future cash flow and time value of money

Question 9

Income-based valuation: Cons

Answer 9

~ cash flows may be optimistic

~ calc suitable discount factor = problematic

Question 10

Price-Earnings Ratio valuation

Answer 10

value = P/E x (PAT - pref div)
P/E = share price/ EPS
~ eratic earnings: use average
~ similar earnings: use most recent

Question 11

Price-Earnings Ratio valuation: Pros

Answer 11

~ reflects stock market view

~ considers earning potential

Question 12

Price-Earnings Ratio valuation: Cons

Answer 12

~ use industry average
~ earnings can be manipulated
~ past earnings may not reflect future earnings

Question 13

Enterprise value/ EBITDA multiple valuation (2 formulas)

Answer 13

enterprise value = enterprise value multiple x EBITDA

equity value = entreprise value - MV od debt + cash
~ for UQCos, adjust downwards for unmarketability (2/3)

Question 14

Enterprise value/ EBITDA multiple valuation: Pros

Answer 14

~ unaffected by depn policies
~ most common technique used by investors
~ takes into account net debt

Question 15

Enterprise value/ EBITDA multiple valuation: Cons

Answer 15

~ too simplistic
~ ignores capex and tax
~ past earnings may not reflect future earnings

Question 16

Dividend Yield Valuation (formula)

Answer 16

value = dividend per share/ div yield (%)

~ for UQCos, adjust downwards for unmarketability (2/3)

Question 17

Dividend Valuation (formula)

Answer 17

Present value of future dividends:

value = Do (1 + g)/ (Ke - g)

Question 18

Dividend Valuation: Pros

Answer 18

most effective method if investor looking for div income rather than control

Question 19

Dividend Valuation: Cons

Answer 19

~ div payments and growth may not be stable

~ using div yeild or industry proxy may not reflect co