Business Valuations Flashcards
Why Value the shares of a company?
Establish terms of takeovers and merges
To make buy and hold decisions
To value company’s wanting an IPO
To establish the value of shares held by retiring directors
Fiscal Purposes (CGT, Inheritance tax)
Divorce settlements
3 Approaches
Asset-based - based on tangible assets
Earnings - based on returns earned by the company
Cash flow-based - based on cash flows
Market Capitalisation
Current share price*no. of shares in issue
Not always accurate because:
1. Share prices on stock exchange constantly move
2. Doesn’t always reflect actual value (e.g. takeover bid often pays a premium, if helps them become dominant)
3. Only available for companies on the stock market
Real worth of a company is dependent upon:
Different methods yield different results
Investor may have preferences for valuation e.g. high or low
Final figure is a matter for negotiation - subjective and a compromise
Often requires full industry analysis
Information required for valuation
SoFP, SoPL, SoCIE - up to 5 years ago
Aged payables and receivables, non-current asset and depreciation schedule, leases, budgets and forecasts, background information on the industry
Asset-based valuation
Book values (total assets-total liabilities) - book values easy to obtain, but uses historic cost values (ok if FV)
NRV Break up basis (RV of assets-liabilities) - Minimum acceptable to owners, good for break-up/asset stripping, not good for a quick sale, ignores goodwill
Replacement cost - going concern - maximum to be paid for assets, but valuation issues - similar assets for comparison? Ignores goodwill
Asset-based valuation weaknesses
Investors don’t usually buy just for assets, but for earnings/cash flows that assets can produce
Ignores intangible assets: skilled workforce, good management team, good product positioning
Asset-based valuation usage and How to:
Asset stripping (break up), minimum price, property investment companies
Note using breakup value - MV of debt is done pretax
How to:
NCA+CA (add any extra MV over BV)
Less debt payable (note if premium and pre-tax)
less current liabilities too!!!
PE Ratio Earnings-based valuation usage and How to:
Company has a majority shareholding:
Ownership bestows additional benefits of control not included in the DVM
Majority shareholding = can influence dividend policy so interested in earnings:
How to:
EarningsPE Ratio (Take PE ratio from proxy)
Value per share = EPSPE Ratio
Adjust down or up
Weight by shares given e.g. div by 400k * by 200k
If given two companies. Do the value of existing company MINUS EAT of both companies and any additions*new PE ratio
Add growth if given to the Earnings, however note if it is next year then dont for the Earnings, but minus of earnings yield still
REMEMEBER: based on future earnings potential so can use forecast earnings
Reasons for adjusting the PE Ratio
Difficult to estimate the maintainable ongoing level of earnings for a company to be valued. Therefore you may adjust 10% either way for example:
Change to a director’s emoluments
Strip out a one-off debt write off
is a private company as its shares less liqiuid
more riskier company e.g. fewer controls, management knowledge
High projected growth
DVM Method How to and Usage:
For a minority shareholding - based on dividends which minorities can’t influence
P0 = D(1+g)/(re-g)
If the D is given in per share. This will give MP per share, multiply by amount of shares. Or if given in full Dividend, divide by total shared to get DPS
Will likely have to use gordon’s growth model for growth
Multiply share price by shares in issue (ignore nominal value)
With growth, remember it’s future growth, so can use forecast dividend
DCF Basis How To and Usage:
For a majority shareholding
Calculate free cashflows e.g.
Revenue-CoS-Expenses-Tax+TAD-Capital investment
Find the real cost of capital and divide it by that and minus off debt
Valuation post-takeover
If sufficient cash:
Shares* value of shares for both
Add together and add the synergy
Calculate the total value of the premium +1 e.g. 1.20 is 20%
Minus this.
Divide by existing shares of parent if no shares issued
Share for share exchange
Calculate the gain via synergy and minus consideration only value e.g. 20%
Add to existing value and calculate new price per share.
Divide original consideration by the new price per share to calculate required new shares to issue
Valuation of debt and preference shares
Preference shares P0 = D/Kp
Irredeemable debt = MV = I/r (REMEMBER, if interest about to be paid add 1x Int)
Redeemable debt = PV of future interest and redemption, discounted at investors required return (Keep interest as a whole number)
Value of Convertible debt shares
Check convertible option total by:
No. of shares*share price (INCLUDE growth if there and COMPOUND)
Compare to Interest and Redemption value and see which is higher in terms of whether you’d redeem
MV = if conversion higher, incorporate as per usual. Therefore, floor value can only exist if conversion is higher
