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
