F3 - 8. Business Valuations Flashcards
What are the 4 most common reasons for valuing a business?
- Seeking a stock market flotation, so a share price assessment
- Considering buying another business
- Looking to sell part of the business
- Banks deciding on a lending decision
What are the 4 main categories of business valuation method?
- Asset based (with or without intangibles)
- Earnings based
- Cash flow based
- Share price x number of shares (if quoted)
What are the 3 options for asset based valuations, and when are theybest used?
- Historic cost/ NBV (min selling price)
- Replacement cost (cost of starting up like for like)
- Realisable value (min selling price)
What are the 2 main advantages of using asset based valuations?
- Quick and simple to estimate
- Gives minimum starting point
What are the 3 main disadvantages of using asset based valuations?
- Doesnt consider on-going earnings/profit potential
- Doesnt consider intangible asset value
- Reliant on accounting conventions
How do you value a company using it’s P/E ratio?
P/E ratio x sustainable earnings
If valuing an unquoted company, what P/E can be used?
That of a similar unquoted business, possibly adjusted downwards
What are the 3 main advantages of earnings based valuations?
- Quick
- Considers future potential
- Useful for valuing unquoted companies
What are the 3 main disadvantages of earnings based valuations?
- Adjustments needed to P/E and earnings
- Based on profits not cash flow
- Decision on which P/E to use in takeover - own or targets?
What are the 2 cash flow based valuation methods and when are they each most useful?
- PV of future cashflows (controlling interest)
- PV of future dividends received (smaller shareholding)
Which cashflows and discount rate are used to calculate the market value of a company’s equity?
Free cashflow to shareholders (after debt interest and debt), cost of equity
Which cashflows and discount rate are used to calculate the market value of a company’s equity and debt?
Free cashflow to all investors (before interest and debt), WACC
What are the 3 main advantages of cashflow based valuations?
- Considers future potential
- Can be used for any business (quoted or unquoted)
- Considers time value of money
What are the 3 main disadvantages of cashflow based valuations?
- Cash flows are estimates
- Need to estimate cost of capital
What are the 4 main types of intangible asset?
- Intellectual capital
- Digital assets
- Brands
- Customer loyalty
What are the 3 categories of intellectual capital?
- Human (knowledge, skills)
- Intellectual assets (reports, drawings etc)
- Intellectual property (patents, copyrights etc)
What 2 things does the valuation of digital assets heavily depend on?
- Usage rights
- Impact of regulation changes
What are the 3 methods of valuing intangible assets?
- Market value
- Cost to develop
- Income expected (/relief from royalites)
How is the Calculated Intangible Value calculated, to be added on to the value of tangible assets?
Find the excess pre tax return by taking the industry return on assets * year end tangible assets from the profit before tax;
Estimate the PV of this excess, post tax
What are the 4 main characteristics of an efficient market?
- Share prices are fair
- No individual dominates the market
- Transaction costs are not significant
- Share prices change quickly to reflect information
In a market with semi-strong efficiency, when does the share price change in relation to company decisions?
As soon as they are publically announced
