FM Business Valuation Flashcards
Pros and cons of organic growth.(2,3)
Spreads costs
No disruption
Cons
Risk
Slower
Barriers
Pros and cons of acquisition.(4,3)
Pros
Synergies
Risk reduction
Reduced competition
Vertical protection
Cons
Synergies aren’t automatic
and synergies may not be effective or just pay more in fees and price than the gains from this
Restructuring may be costly
What are the two asset based approaches to valuation?cons?
Replacement cost-cost of setting up an equivalent business from scratch (max price for a buyer)
NRV-cash that could be generated from selling assets off piecemeal (minimum price for seller)-
NRV can’t be used if being sold as going concern!
Doesn’t account for intangible assets eg staff value client relationships brand etc, digital assets!
How to value based on dividends?(4) problems?(3)
Usually for a minority interest
DVM:
Value is placed on PV of expected future dividend payments discounted at Ke
PV=(do(1+g))*(1/(ke-g))
Remember in q if asked for minority share to *this by their %shwreholding!!
Dividend yield:
Price=dividend/yiekd (estimate yield looking at similar companies to estimate the orice)
Problems:
Estimating future dividends isn’t guaranteed
Need to find similar listed companies
If Ke is estimated using CAPM then not suitable for a private company and valuation will need reduced
Problems with earnings based valuations.(4)
If earning la have been erratic then figures may be misleading
Can manipulate profit with accounting policy
A private valuation would need adjusted downward to reflect lack of marketability
Hard to find aporopriatley similar listed companies
How to calculate PE multiple valuation?(2)
Equity value=earnings*PE ratio
Earnings are taken as PAT and pref div but before ordinary div
A high PE suggests high investors confidence
How to calculate an EBITDA valuation?(3)
Enterprise value=EBITDA*EBITDA multiple
Where enterprise value=MVe+pref shares+minority interest+debt-cash-so if we need MVe need to rearrange-MOST EXAMS WILK HIVE DEBT TO DEDUCT AND MAYBE CASH THOUGH
EBITDA multiple indicates how long it would take an acquisition to pay off its cost so a high values company will have a high multiple -have to use multiple from diff company otherwise not useful
How to calc min and max based on synergies for valuation(1)
For pe valuation:
Min for company selling is whatever they can get eg current pe*earnings
Max accounting for synergies is the above + purchasing company values pe value, then calc total earnings and * combined pe then the diff between this and purchasing company value before is the max they should pay
Pros and cons of paying cash for acquisitions.(2,3)
Pro
Buyer gets control of target as well as entitlement to future profits
Seller may prefer as certain receipt
Cons
Cash must be there
Seller Expertise may be listed from the business as no motivation for seller to stick around
CGT arises immediately
Pros and cons of bid company shares on acquisition.(3,1)wb loan stock(1)
Pro
No cash. Needed
CGT deferred
Seller motivated to make work
Cons
Control is diluted and profits will be too
Loan stock
Had pro of cash payment without immediate need to finance however the buyer will have e to pay interest until redemption
Reasons for a share repurchase from shareholder/s(5)
Reduce level of equity and increase gearing
Maintain EPS following divestment
Get unused funds back to shareholders
Single shareholder may also
Want to exit the business
Take a listed company back into private
Debt for equity swap
Better than forcing bankruptcy in a company as may get nothing
Creditors get equity in exchange for their debt so still get something
How to calculate a business valuation using the cash flow based approach? Problem?
What about SVA valuation?
PV of cash flows to infinity discounted at WACC
Less MV of debt
=Value of equity
Theoretically the best approach however the future cash flows and discount rate can be difficult to estimate
SVA is still cashflow just using the seven value drivers (still less equity as with normal cash flow)
If given market risk premium how would you treat this?
This is bit in CAPM already so if given plug in to * by beta
Delayed perpetuity calc
Normal perpetuity calc*the discount factor for the year before’s
So is 1/discount rate*discount factor for year before the perpetuity starts
Think you need to do the perpetuity and then this answer will need to factor in the delay aspect hence need discounting so that it is back at t1
