Business valuations

Question 1

What is the total market value of a listed company called ?

Answer 1

Market Capitilisation

Question 2

What is the equation for market cap ?

Answer 2

number of issued shares x share price

Question 3

What are some reasons you may want to value unlisted companies ?

Answer 3

• Planning on going public
• Dissolved for inheritance tax
• Shares are being used as collateral
• Shares may be getting transferred for value

Question 4

How do you calculate the total value of equity ?

Answer 4

Total tangible assets - liabilities

Question 5

How do you calculate the value of one share using net asset valuations

Answer 5

Total tangible assets - liabilities / number of shares

Question 6

What are some weaknesses of asset valuations?

Answer 6

• Investors generally focus on earnings/cash flow
• Doesn’t take into consideration intangible assets
• Service businesses usually work off goodwill

Question 7

Who would benefit from asset based valuations?

Answer 7

• Asset Strippers
• Property companies
• Minimum price identification

Question 8

What is income based valuations ?

Answer 8

Income based valuations focus on future earnings as opposed to assets

Question 9

When may income based valuations be useful ?

Answer 9

• Majority shareholders have control of the dividend so understanding income can influence their decision.

Question 10

What is P/E ratio ?

Answer 10

P/E ratio is a metric that is used to measure how much an investor is willing to pay for £1 of a companies earnings

Question 11

How do you calculate P/E ratio ?

Answer 11

P/E ratio is calculated by taking price per share / earnings per share

Question 12

How do you calculate earnings per share ?

Answer 12

Profit / ordinary shares

Question 13

What does a high P/E ratio suggest ?

Answer 13

• Optimism over a companies growth
• Stability

Question 14

What does a low P/E ratio suggest ?

Answer 14

• Lack of investor confidence

Question 15

How do you calculate the market value of the companies equity using P/E ratio ?

Answer 15

P/E ratio x Total after tax earnings

Question 16

When calculating P/E ratio for unlisted companies what should you do with the final valuation ?

Answer 16

Reduce the final valuation by 1/2

Question 17

What should you make sure is right with the earnings with a P/E ratio ?

Answer 17

• You should make sure any one off profits/losses should be excluded because this is relative to cash flow

Question 18

What are some problems with the dividend valuation model ?

Answer 18

• Other influences on share price are ignored
• results are skewed if a company does’nt pay a dividend

Question 19

What are cash flow based valuations

Answer 19

Cash flow based valuations focus on cash flow and require deductions and additions of cash flows followed by a discount at the shareholders required return

Question 20

What is the market value of convertible debt ?

Answer 20

The greater of the debt or the convertible value

Question 21

How do you value irredeemable preference shares ?

Answer 21

Take the dividend and divide it by the investors required return