Chapter 8

Question 1

Business valuation, using PE ratio and earnings yield 

Answer 1

Multiply earnings by the PE ratio

Divide earnings by earnings yield

Question 2

Impact of proposed investments, and share price

Answer 2

Increase by the net present value of the cash flows divided by the number of shares

Question 3

Calculating free, cash flow equity

Answer 3

A measure of how much cash is available to the equity share hold of the company. After all expenses, reinvestment, and debts, are paid. Do not deduct dividends.

Deduct tax and interest, cost of capital expenditure, increase in working capital, debt repaid

Add back depreciation, proceeds from capital, disposals, new debt, raised, decrease in working capital

Question 4

Calculating, intangible value

CIV

Answer 4

Average profit minus industry average on tangible assets times tangible asset value

Multiplied by one minus tax rate

Multiplied by one divided by WACC

Question 5

Calculating a business value based on future cash flows

Answer 5

Discount back using whack and calculating cash flows to perpetuity using whack.

Adjust answer, based on gearing ratio 

Question 6

Share price from earnings per share, dividend, cover, and dividend yield

Answer 6

Earnings as a percentage of share price equals dividend yield times dividend cover

Share price equals earnings per share divided by percentage above

Question 7

Dividend valuation model

Answer 7

Calculate the growth rate

G = B x R
R equals cost of equity
B equals dividend pay percentage

P0 = d0 (1+G) / ke - e

Question 8

Business valuation based on PE evaluation

Answer 8

P ratio multiplied by earnings 

Question 9

Market price per share

Answer 9

Dividend per share

Divided by

Dividend yield

Question 10

Cost of equity for annual growth rate

Answer 10

Ke = d0 (1+g) / P0 + g

Question 11

Impact of a change in the cost of equity on a share price

Answer 11

Share price equals profit divided by cost of capital

divided by number of shares

Therefore, a change in the cost of capital will change the share price using the free cash flow method

Question 12

Business Asset valuation

Which cost is used?

Answer 12

Replacement cost, not realisable value

Question 13

Impact on business valuations of positive NPV projects

Answer 13

In a strong market, it will have already anticipated the project plans and built it into the share price