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FM > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What are 2 advantages of organic growth

A

Costs are spread

Less disruption

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2
Q

What are 3 disadvantages of organic growth

A

More risky

Process might be too slow

May be barriers to entry in new markets

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3
Q

What are the 4 reasons why two businesses may combine

A

Synergy

Risk reduction - reduction of specific risk for business may lead to cheaper borrowing

Reduced competition

Vertical integration

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4
Q

What are 5 reasons synergies may arise in business combinations

A

Administration savings

Economies of scale

Use of comment investment in marketing, R&D etc

Leaner management structures

Access to under utilized assets

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5
Q

What are the 2 downsides of an acquisition

A

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

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6
Q

What are the 3 asset based valuation methods

A

Historic cost (book value)

NRV - minimum acceptable value

Replacement cost - maximum price for the buyer

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7
Q

What are the 3 ways to value a company based off income

A

Present value of future cash flows

P/E ratio

Enterprise value/ EBITDA multiple method

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8
Q

What are 3 problems with the present value of future cash flows valuation method

A

Estimating future cash flows

Estimating discount rate

Time horizon - how far should you estimate the cash flows

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9
Q

What are the two ways of calculating the PE ratio

A

Total market value of equity / earnings (PAT less pref divs)

Share price / earnings per share

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10
Q

What are 4 issues with the P/E valuation method

A

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)

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11
Q

What is the calculation for enterprise value

A

MV equity + MV debt + MV preference shares + minority interests - cash

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12
Q

How do you calculate EBITDA

A

PBIT + depreciation + amortization

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13
Q

How do you calculate the enterprise value multiple

Which component is used as the benchmark for valuations

A

EVM = enterprise value / EBITDA

EVM

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14
Q

What are 2 advantages of EV / EBITDA method

A

Unaffected by financing/ capital spend/ accounting decisions and tax

EBITDA is a key measure used by many investors

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15
Q

What are 2 disadvantages of EV / EBITDA method

A

It is simplistic and reflects a point in time

Comparing the capital spend and tax management of 2 companies might be important

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16
Q

What are 2 advantages of the dividend valuation model

A

Bases valuation on future dividend stream

Useful for valuing minority shareholdings in private companies

17
Q

What are the 8 disadvantages of the dividend valuation model

A

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

18
Q

What 2 ways can you use dividend yield to value a company

A

MV of all shares = dividends / dividend yield

Share price = dividend per share / dividend yield

19
Q

What is the advantages of using the dividend yield valuation method

A

Values company based on current market valuations of similar companies

20
Q

What are the 4 disadvantages of using the dividend yield valuation method

A

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

21
Q

What are 4 problems with the SVA valuation method

A

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

22
Q

How do you calculate the market value of debt

A

Present valuing the future cash flows at the PRE- tax cost of debt

23
Q

How can you use excel to calculate the MV of debt

A

= PV(rate, number of periods, cash payment in each period, redeemable value)

24
Q

What is the most appropriate method to value a start up or tech company

A

The DCF method

25
Q

What are the 9 sections of a business plan

A
  1. Executive summary
  2. History and background
  3. Mission statement and objectives
  4. Products and services
  5. Markets
  6. Resources, management and operations
  7. Financials risk and return
  8. Action plan
  9. Appendices

FM (7 decks)

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