Lecture 10b Flashcards
What is an exit strategy in business?
A plan for how and when a founder intends to sell their stake in a company to maximise financial gain.
Why is valuation important for exit strategies?
To negotiate a fair sale price for the founder’s shares.
How is the share price calculated during an exit?
Share price=fair valuation of the company/ number of ordinary shares
What is the formula to calculate Net Assets?
NCA+(CA−CL)−NCL
Net assets always= equity
How do you calculate the book value of a share?
shareholders funds(net assets)/ number of shares
What are 2 strengths of book value method?
- objective and based on factual data
- easy to understand and widely taught
Name 2 weaknesses of the book value method?
- Backward looking and ignores future potential
- Doesn’t value intangible assets
What does the future earnings method do?
Values a company based on its projected profits, discounted by the cost of capital
How is perpetuity calculated?
Annual earnings/ cost of capital
How do we discount future values?
Present value=future cash flow/ (1-r)^t
r=discount rate
t=time
What is one strength of this method?
Future orientated and includes the time value of money
What is one weakness of this method?
depends heavily on uncertain earnings forecast and chosen discount rate
What are financial options?
contracts giving the right to buy or sell assets in the future
What are the 2 types of option?
Put options
Call options
What are “put” options?
The right to sell a company’s shares at some point in the future at a price agreed today
What are “call” options?
Right to buy something at a set price in the future.
What is a “real option” in valuation?
Management’s flexibility to pursue future opportunities (e.g., R&D, licensing), treated like call options.
Why do real options add value?
they reflect future opportunities (e.g R&D) treated like call options
What are 2 strengths of real options valuation?
- Dynamic and realistic
- Values managerial flexibility
What are 2 weaknesses of real options method?
- Complex and not widely used
- Competitors may have similar options
