Module 10 Flashcards
approaches to business/equity valuation?
- market/relative valuation (P/E ratio)
- income/discounted CF valuation (DDM, FCFTF)
- cost/asset-based valuation (book value and adjusted book value)
general issues with equity/firm valuation?
- valuation is more challenging than bonds
- market prices can be affected by factors unrelated to the firm
- valuation is subjective
- business value changes over time
what is investment value?
business value to a specific investor
fair market value?
value to a typical investor
why firm valuation is more challenging than bonds?
- future CF not known in advance
- ordinary shares have no maturity date
- no easy way to observe market RRR
what are price multiples/relative valuations used for?
to value unlisted shares and determine over/undervaluation of listed shares
what is the P/E ratio formula?
market price per share / EPS
value per ordinary share using P/E ratio?
(comparable P/E ratio) x (sustainable future EPS)
what adjustments are made to sustainable future EPS?
excludes:
- abnormal items
- P/L on discontinued ops
- non-operating inc/exp
what adjustments are made to comparable P/E ratio?
- for differences in risk and growth factors
- reduce if target comp is more risky
- inc if more growth
advantages of P/E ratio method?
- quick and easy to use
- info required is readily available
disadvantages of P/E ratio method?
- adjustments are subjective
- does not rely on CF = ignores TVM
- may not take future into account
value of a comparable listed company?
Vdebt + Vequity = firm value
value of firm being valued?
(EV / EBITDA)(comparable) x (EBITDA)(firm being valued)
to calculate the value per ordinary share?
minus debt and divide by no. of outstanding shares
when is the FCFTF method good?
- firms with no div history, start-ups
- an unlisted company
- a min/majority shareholding
how FCFTF similar to the DDM?
values a firm based on the future CF to the firm
what are free cash flows?
operating CF left over after deducting investments in NWC and net CAPEX but before CF to providers of long-term capital
