Chapter 8 Flashcards
What are 2 advantages of organic growth
Costs are spread
Less disruption
What are 3 disadvantages of organic growth
More risky
Process might be too slow
May be barriers to entry in new markets
What are the 4 reasons why two businesses may combine
Synergy
Risk reduction - reduction of specific risk for business may lead to cheaper borrowing
Reduced competition
Vertical integration
What are 5 reasons synergies may arise in business combinations
Administration savings
Economies of scale
Use of comment investment in marketing, R&D etc
Leaner management structures
Access to under utilized assets
What are the 2 downsides of an acquisition
Bidding company shareholder often lose out due to overpaying, high transaction fees and synergies being overestimated
Takeovers often in interests if directors rather than shareholders
What are the 3 asset based valuation methods
Historic cost (book value)
NRV - minimum acceptable value
Replacement cost - maximum price for the buyer
What are the 3 ways to value a company based off income
Present value of future cash flows
P/E ratio
Enterprise value/ EBITDA multiple method
What are 3 problems with the present value of future cash flows valuation method
Estimating future cash flows
Estimating discount rate
Time horizon - how far should you estimate the cash flows
What are the two ways of calculating the PE ratio
Total market value of equity / earnings (PAT less pref divs)
Share price / earnings per share
What are 4 issues with the P/E valuation method
Estimating maintainable future earnings (in particular synergies)
Accounting policies can be used to manipulate earnings figures
Selecting a suitable P/E ratio to value unquoted companies
Finding a similar quoted company (same industry, gearing, risk etc)
What is the calculation for enterprise value
MV equity + MV debt + MV preference shares + minority interests - cash
How do you calculate EBITDA
PBIT + depreciation + amortization
How do you calculate the enterprise value multiple
Which component is used as the benchmark for valuations
EVM = enterprise value / EBITDA
EVM
What are 2 advantages of EV / EBITDA method
Unaffected by financing/ capital spend/ accounting decisions and tax
EBITDA is a key measure used by many investors
What are 2 disadvantages of EV / EBITDA method
It is simplistic and reflects a point in time
Comparing the capital spend and tax management of 2 companies might be important
What are 2 advantages of the dividend valuation model
Bases valuation on future dividend stream
Useful for valuing minority shareholdings in private companies
What are the 8 disadvantages of the dividend valuation model
Assumes constant dividend growth
Ke must be estimated
Assumes constant gearing
Hard to use if company has deliberately low dividend policy in short term
Growth based on historic data
Formula breaks down if g=>ke
Estimated growth can be distorted by inflation
If using Ke of a quoted company to value private company, must adjust down for non marketability
What 2 ways can you use dividend yield to value a company
MV of all shares = dividends / dividend yield
Share price = dividend per share / dividend yield
What is the advantages of using the dividend yield valuation method
Values company based on current market valuations of similar companies
What are the 4 disadvantages of using the dividend yield valuation method
Need to find comparable listed company whose div yield you can use
Valuation is based off historic divs
Will need to adjust downwards for non marketability of unquoted companies
Will undervalue companies who are profitable, but have deliberately low dividend payout
What are 4 problems with the SVA valuation method
Constant percentage assumptions used in valuation may be unrealistic
Input data may not be easily available
May be difficult to establish length of the competitive advantage period
For many valuations, a large proportion of value is made up of the terminal value which is an unreliable estimate
How do you calculate the market value of debt
Present valuing the future cash flows at the PRE- tax cost of debt
How can you use excel to calculate the MV of debt
= PV(rate, number of periods, cash payment in each period, redeemable value)
What is the most appropriate method to value a start up or tech company
The DCF method
What are the 9 sections of a business plan
- Executive summary
- History and background
- Mission statement and objectives
- Products and services
- Markets
- Resources, management and operations
- Financials risk and return
- Action plan
- Appendices
