Ratios

Question 1

What does the book value of a company represent?

Answer 1

• the liquidation value of the assets less the liabilities
• the replacement cost of the assets less the liabilities
• the market value of the assets less the liabilities
• the value of the business as a going concern
• the value of the business to a potential purchaser
• the sunk cost

Question 2

How to adjust Book Value?

Answer 2

• Can book value be adjusted to obtain closer estimate of economic value?
• Tangible Assets
• Intangible Assets
  
  • R&D, intellectual capital, brand names & goodwill
• Off Balance Sheet Items
  
  • leases, healthcare liabilities, pension funds, contingent legal liabilities

Question 3

Name the 6 market multiples?

Answer 3

• Market multiples can be used to compare companies listed on stock markets
• Unlisted companies can be valued by using multiples derived from comparable listed company

Market Multiples

• Dividend Yield
• Price to Book Ratio
• Tobins Q Ratio
• Price Earnings Ratio (PER)
• Price to Cash Flow Ratio
• EV/EBITDA Ratio

Question 4

How to calculate market value or market capitalisation?

Answer 4

Market value = market share price x number of shares in issue

Question 5

How to calculate EV?

Answer 5

• EV = Economic Value
• EV = market value of equity + market value of debt + minority interests

Question 6

How to calculate EBITDA?

Answer 6

EBITDA = Earnings before interest tax depreciation and amortisation

EBITDA = Operating profit + depreciation + amortisation

EBIT = Operating profit

Question 7

What is ENPV?

Answer 7

NPV calculated using different estimates of cash flow and their probability of occurrence – gives single NPV figure

Question 8

What is Sensitivity analysis?

Answer 8

what is change in NPV for change in single input variable – identifies most sensitive input variable

Question 9

What is Scenario analysis?

Answer 9

more sophisticated version of ENPV. Considers what happens under different economic scenarios but uses multiple changes of input variables to stress test each scenario separately.

Question 10

What is Monte Carlo simulation?

Answer 10

different values for each input variable are estimated. Assuming best case, worse case and most likely cases are normally distributed many simulations are generated using random numbers. Allows best case of one variable to be combined with worst case of another. Results are presented as a probability distribution.