Valuation Practice Flashcards
Income Statement
£’000
Revenue = 9,390
—
PBIT = 2,489
Interest (30)
–
PBT = 2,819
Tax at 17% = (479)
–
PAT = 2,340
Dividends Paid = (740)
–
Retained Profit = 1,600
Balance Sheet
Land and buildings (original cost £2.8 million) = 2,400
Equipment (original cost £4.5 million) = 3,200
—-
5,600
Working Capital = 148
–
5,748
4% debentures (redeemable in 20Y3) at nominal value = (750)
—
4,998
Ordinary Shares of £1 each = 500
Retained Earnings = 4,498
—
4,998
Calculate the value of one share in Darlo based on the Net asset basis (historic cost)
£4,998/500 = £10.00 per share
Income Statement
£’000
Revenue = 9,390
—
PBIT = 2,489
Interest (30)
–
PBT = 2,819
Tax at 17% = (479)
–
PAT = 2,340
Dividends Paid = (740)
–
Retained Profit = 1,600
Balance Sheet
Land and buildings (original cost £2.8 million) = 2,400
Equipment (original cost £4.5 million) = 3,200
—-
5,600
Working Capital = 148
–
5,748
4% debentures (redeemable in 20Y3) at nominal value = (750)
—
4,998
Ordinary Shares of £1 each = 500
Retained Earnings = 4,498
—
4,998
Darlo’s fixed assets were revalued at 31 August 20X6 as follows:
£’000
Land and buildings = 3,150
Equipment = 3,370
These revalued amounts have not been recognised in the balance sheet at 31 August 20X6
Calculate the value of one share in Darlo based on the net asset basis (revalued)
(4,998 + 3,150 + 3,370 - 2,400 - 3,200)/500 = 5,918/500 = £11.84 per share
Income Statement
£’000
Revenue = 9,390
—
PBIT = 2,489
Interest (30)
–
PBT = 2,819
Tax at 17% = (479)
–
PAT = 2,340
Dividends Paid = (740)
–
Retained Profit = 1,600
Balance Sheet
Land and buildings (original cost £2.8 million) = 2,400
Equipment (original cost £4.5 million) = 3,200
—-
5,600
Working Capital = 148
–
5,748
4% debentures (redeemable in 20Y3) at nominal value = (750)
—
4,998
Ordinary Shares of £1 each = 500
Retained Earnings = 4,498
—
4,998
Darlo’s fixed assets were revalued at 31 August 20X6 as follows:
£’000
Land and buildings = 3,150
Equipment = 3,370
These revalued amounts have not been recognised in the balance sheet at 31 August 20X6
2) The average price/earnings ratio for listed businesses in Darlo’s industrial sector is 10 and the average dividend yield is 8%
Calculate the value of one share in Darlo based on the price/earnings ratio
(2,340 x 10)/500 = 23,400/500 = £46.80
Less (say) 30% for lack of marketability of shares = £32.76
Profit after taxation x ratio/number of shares
Income Statement
£’000
Revenue = 9,390
—
PBIT = 2,489
Interest (30)
–
PBT = 2,819
Tax at 17% = (479)
–
PAT = 2,340
Dividends Paid = (740)
–
Retained Profit = 1,600
Balance Sheet
Land and buildings (original cost £2.8 million) = 2,400
Equipment (original cost £4.5 million) = 3,200
—-
5,600
Working Capital = 148
–
5,748
4% debentures (redeemable in 20Y3) at nominal value = (750)
—
4,998
Ordinary Shares of £1 each = 500
Retained Earnings = 4,498
—
4,998
Darlo’s fixed assets were revalued at 31 August 20X6 as follows:
£’000
Land and buildings = 3,150
Equipment = 3,370
These revalued amounts have not been recognised in the balance sheet at 31 August 20X6
2) The average price/earnings ratio for listed businesses in Darlo’s industrial sector is 10 and the average dividend yield is 8%
Calculate the value of one share in Darlo based on the dividend yield
(£740m/8%)/500 = 9,250/500 = £18.50 per share
(Dividend paid/Yield)/Number of shares
Less (say) 30% for lack of marketability of shares
Income Statement
£’000
Revenue = 9,390
—
PBIT = 2,489
Interest (30)
–
PBT = 2,819
Tax at 17% = (479)
–
PAT = 2,340
Dividends Paid = (740)
–
Retained Profit = 1,600
Balance Sheet
Land and buildings (original cost £2.8 million) = 2,400
Equipment (original cost £4.5 million) = 3,200
—-
5,600
Working Capital = 148
–
5,748
4% debentures (redeemable in 20Y3) at nominal value = (750)
—
4,998
Ordinary Shares of £1 each = 500
Retained Earnings = 4,498
—
4,998
Darlo’s fixed assets were revalued at 31 August 20X6 as follows:
£’000
Land and buildings = 3,150
Equipment = 3,370
These revalued amounts have not been recognised in the balance sheet at 31 August 20X6
2) The average price/earnings ratio for listed businesses in Darlo’s industrial sector is 10 and the average dividend yield is 8%
3) A discount rate of 12% pa appropriately reflects the risk of Darlo’s cash flows
4) Darlo’s pre-tax net cash inflows (after interest) for the next three years are estimated to be:
£’000
Year to 31 August X7 = 2,900
31 August X8 = 3,000
31 August X9 = 3,100
Projecting forward from 31 August 20X9 and taking a prudent view, our estimated net cash inflows (after interest, capital asset replacement and all necessary tax adjustments) will be £2 million pa.
5) On 31 August 20X6 Darlo’s equipment had a tax written down value of £920,000. Assume that we will scrap it (dispose of it for zero income) on 31 August 20X9. The equipment attracts 18% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except the final year.
In the final year the difference will either be a balancing allowance or a balancing charge
6) Corporation tax will be payable at the rate of 17%
Calculate the value of one share in Darlo based on the present value of future cash flows
Calculate the value of one share in Darlo based on the present value of future cash flows
- Set-up like an NPV with the pre-tax profits in as the estimated cash inflows
- Calculate the tax at 17%, accounting for the WDA which is a tax deduction
- Have a row for net cash flow
- Calculate the PV of these cash flows like so =NPV(0.12,B5:D5)
- In the fourth column, beginning underneath these workings, put the amount for the Post 20X9 net cash inflows = 2,000,000
- Discount to infinity = (1/12%)/16,667
- Discount to PV using the discount factor from the discount tables
- Add this PV value to the value of the other cash flows to the total PV of future cash flows
E.g. £17,951/500 = £35.90
- As above, divide by the number of shares to give the value of one share
Explain the advantages and disadvantages of the five valuation methods
- Net assets (historic and NRV)
- Price/earnings ratio
- Dividend Yield
- Present value of future cash flows
Net assets (historic cost) - tends towards low historic values, so an undervaluation. Intangibles are ignored. Earnings potential and future earnings are ignored.
Net assets (revalued) - as above, except that the asset values used are current
P/E ratio- Looks at earnings. Will it be a majority stake? if so, then control will be gained, so shares for this controlling stake should cost more. For example, it may give a much higher value than assets - are these earnings stable into the future? Future earnings - are there further projects planned? Will they be successful?
Dividend yield - this is based on dividend income and is applicable where it’s to be a minority stake. Are these dividends stable? Will there be dividend growth?
PV of future cash flows - considers cash flows not profits and estimates forwards. There are large estimates, especially the terminal value. Is it over-reliant on successful projects or products?
In an SVA, when given revenue and operating profit, what do you calculate tax on?
Just the operating profit
How do you calculate the terminal value in an SVA?
How would you find the value per share from this?
(Final year cash flow x 1 + perpetuity growth) / (Average cost of capital - perpetuity growth) x The discount factor
When added to the present value of the other year’s cash flows, this gives the enterprise value
Less debt and add any short term investments to give equity
Divide equity by number of shares x nominal value
What are the strengths and weakness of the P/E method?
The p/e basis is a market measure and has the advantage of valuing the shares by comparison to other takeovers.
However, we do not know how comparable one company is to another (depending on question)
Also, the valuation may be based on historic EPS and a more realistic measure might a prospective EPS
What are some points to consider when look at how a company could pay for the ordinary shares of another company?
- Whether the company is highly geared
- Consider both shareholders (buyer and existing company)
- The ability of the purchasing company to raise extra funds by borrowing and/or an issue of shares, maybe a rights issue
- Does the purchasing company have any cash reserves?
- Dilution of control
- The tax position of the existing company’s shareholders
- Risk
