Company Valuation Flashcards
Valuing companies enables us to:
- value acquisition candidates (and assess own firm’s value when defending)
- Value for Privatisation
- Value for flotation (IPO = initial public offering)
Value for Flotation
Changing private company into a public company by issuing shares and soliciting the public to purchase them
3 basic valuation methods:
- Net Asset Value (NAV) (from balance sheet)
- Price Earning Multiples (focus on Profit + Liabilities)
- Discounted Cash Flow/ Shareholder Value analysis
How to Value Companies? Quoted/Unquoted?
Quoted Companies - what is the market value? Is the market efficient?
Unquoted Companies - Various Methods
Net Asset Value = ?
NAV = Total Assets - Total Liabilities
fixed assets and current assets) - (current liabilities and long term debt
Total Company Value = ?
Equity + Debts
When acquiring a firm you can:
a) buy whole company (buy equity and pay off its debts) this is usually more expensive
b) buy owner’s equity stake and “assume” debt
Problems with NAV:
- FUNDAMENTAL PROBLEM: ignores earning power of assets
Also: - fixed assets are usually valued at historic cost
- some debts may not be collected
- any off-balance sheet liabilities
- are accounts reliable? window dressing/creative accounting
Price : Earning Multiples (P:E ratio) =
P:E ratio = price per share/earnings per share
Alternatively
P:E ratio = value of equity/profit after tax
Earnings per share (EPS) =
EPS = profit after tax/ no. of shares
P:E ratio indicates…
- how market values each £1 of a firm’s profits
- how quickly a firm will recover its current share price via earnings
- high PER indicates good growth potential
Value of Equity =
= (profit after tax) x (P:E ratio)
