Business Valuations (3) Flashcards
What do cash flow basis establish?
The present value of a company either in $m or per share
How is dividend valuation method calculated?
The present value of future dividends being generated by curernt management team
When is DVM calculated?
Suitable for valuing a minority interest in shares of a company
When is DV suitable?
Valuing a minority in shares of a company, as it ingores forecast synergies arising from a takeover
What is a disadvantage of simple dividend growth model?
Difficult to estimate future dividend growth
Inaccurate to assume growth is constant
Creates zero values for zero dividend companies
Creates negative values for high growth companies
What is DCF method value?
Calculated as present value of future cash flows that are generated by new management team
When is DCF useful?
For valuing a controlling interest in the shares of a company, where owners can act to change profitability of a company
What is DCF also used for?
Irredeemable debt
Redeemable debt
Convertible debt
Preference shares
When we are valuing securities from viewpoints of investors?
Any tax relief due on interest payments is ignored so cash flows and required yield should both be pre-tax
What happens for convertible debt and redeemable debt?
DCF should include interest received during term of debt + amounts received at redemption
What happens for irredeemable debt and preference shares?
The cash flows can be treated as being received into perpetuity
What is the efficient market hypothesis?
A rationale for explaining how share prices react to new information about a company, and when any such change in share price occurs
What is allocative efficiency
The ability of a financial market to direct funds to borrowers which can use them profitability
What is operational efficiency
Describes the ability of a financial market to operate with minimal transaction costs
What is informational efficiency?
Market price for securities reflects all relevant and available info relating to securities and company which issued them
What is zero efficency?
Share prices fail to reflect factors that should impact share price
What is weak form?
Share prices reflect historical info
What is semi-strong firm?
Historical info and all publicly available info quickly and accurately
What is strong form?
Share prices reflect all info, publicly available or not
Implication of zero efficiency?
Regularly mispriced
Investors can make excess profits by analysing past share price movements
Implication of weak form?
Investors can’t make excessive profits over long-term by studying past share price movements
Random walk theory
Investors can make excess profits by reacting quicker tha stock market does
What is random walk theory?
Share prices movements are unpredictable
Implications of semi-strong form?
Investors can’t beat market in long-term by analysing past price patterns or by analysing past information
Implications of strong form?
Share prices respond to new developments and events before they become public knowledge
What is the central paradox of efficient markets?
People believe market is inefficient, so they trade securities in an attempt to outperform the market
Long-term investors and semi-strong form?
Long-term investors aren’t able to make above average profits by identifying shares that have fundamental value that is materially different from their market value
