Chapter 13 - Business valuations Flashcards
What are the reasons for a business valuation?
- Company is unquoted
- Stock markets do not value shares accurately
- Takeover bid
- Sale of part of business
What are the different basis for valuing a business?
- Assets basis - NAV, NBV, realisable value, replacement cost
- Income basis - P/E method, earnings yield
- Cash flow basis - dividend valuation, DCF
What is the net book value?
A valuation only including tangible asset values - historic so inaccurate
What is the realisable value?
The market value of assets
What are the disadvantages of asset based methods?
- Ignore intangible asset values and future profits
- Limited in ability to value service companies
What are the earnings of a business?
Profits after interest, tax and preference dividends
How is the P/E method of valuing a business calculated?
Earnings x P/E ratio
How is market price calculated by P/E method?
P/E x EPS
What are the disadvantages of P/E method?
- Choosing which P/E ratio to use
- Calculating earnings
- Assumes stock market efficiency
How is earnings yield calculated?
1 / P/E
How is earnings yield valuation of a business calculated?
Earnings / earnings yield
Is the DCF method suitable for minority or majority shareholders?
Majority
When valuing a company using DCF method what discount rate should be used?
WACC
When valuing debt and preference shares should the pre-tax or post-tax rate be used?
Pre-tax
What is the formula for valuing redeemable debt?
PV interest + PV redemption
What is the formula for valuing irredeemable debt?
P0 = I / Kd
What is the formula for valuing preference shares?
D0 / Kd
What are the types of market efficiency?
- Allocative - ability of market to direct funds to borrowers that can use them most profitably
- Operational - ability of market to operate with minimal transaction costs
- Information processing - price reflects all available information
What are the levels of market efficiency?
- Weak form - historic
- Semi-strong - all public info
- Strong - all private and public info
Is a rational or irrational behaviour often seen in the marketplace?
Irrational
