Valuations Flashcards
Asset-based
Net assets: book value or market value
Replacement cost
Net assets: book value
Book value = historic cost - look at SFP
Net assets - share capital, share premium, reserves
BUT historic cost does not equal market value
Net assets: market value
NRV = minimum acceptable value to owners determined to sell - if sell piecemeal - doesn’t take into account value all together
Can be hard to estimate NRV of redundancy costs, liquidator’s costs etc
IGNORES GOODWILL - brand, customers etc
Replacement cost
Maximum price for the buyer - it is the cost of setting up the business from scratch
Can be hard to estimate
Ignores goodwill
Minimum price for seller
NRV - for selling piecemeal - asset stripping a company
Maximum price for buyer
Replacement cost
or
A = buyer; B = seller
Max cost = B + AB - price of Co plus synergistic effects
Income-based approaches
PE ratio
PV of future cash flows
EBITDA
Dividend yield
Dividend growth model / dividend valuation model
SVA
PE ratio
use PE ratio of listed Co
share price/EPS
MVe/profits available to SHs (PAT-pref divs)
use SUSTAINABLE EARNINGS!!!!
ADJUST DOWN AS USING LISTED CO = adjust down for decreased marketability ~ 25%
(-)
estimating maintainable / sustainable future profits
(problem with all INCOME approaches) = accounting profits can be easily manipulated
selecting a suitable P/E ratio can be hard / finding a similar quoted company
what does a high PE ratio indicate?
- good growth potential
- have excellent CF generation
- carry low risk
- stable / mature
= high degree of investor confidence in the future prospects of the company
why use asset-based approach?
for / against
for - more certain than income
use for - asset stripping
against - SERVICE INDUSTRY: often have v few tangible assets so this would place v little value on the business (ignores goodwill)
PV of future CFs
PV of future CFs / discounted cash flows
THEORETICALLY THE BEST VALUATION METHOD!!!!
if use Ke = MVe
if use WACC = MVe + MVd
(+)
more relevant for service industry
(-)
forecasting problems - requires an estimate of the future
time horizon = how far should you estimate cash flows?
max price a bidder should pay:
MVcombined - MVbidder’s business
MVcombined = risk reduction therefore lower CoC, synergy, risk profile
Enterprise value
enterprise value = measure of the TOTAL VALUE of a company : MVe + MVd - cash
( net equity + net debt - therefore doesn’t include cash)
Enterprise value/EBITDA = multiple - use multiple from a similar listed Co - remember to adjust down
EBITDA - a way of looking at a Co’s performance without factoring in finance decisions (interest, divs), tax + accounting decisions (amortisation/depn)
(+)
EBITDA = key measurement used by investors
removes finance decisdions, tax environemtn, accounting decisions
(-)
too simple
comparing tax spend and tax mgmt might be important - mgmt add value through careful tax planning
Dividend valuation model
(+)
bases value on future dividend stream = good for investors looking for minority SHs are only concerned w/ dividends
(-)
assumes constant dividend growth (unlikely)
Ke must be estimated
assumes constant gearing (as Ke is constant: if gearing increases, Ke increases)
growth is based on historic data
hard to use if Co has deliberately low dividend policy
g cannot be > Ke
HAVE TO ADJUST DOWN IF USING Ke OF LISTED CO
Dividend yield
= dividend/price per share = dividends/MVe
Use dividend yield of listed company ADJUST DOWN
(+)
values the Co based on current market valuations of similar Co (market measure)
(-)
need to find a comparable listed Co
based on historic dividends
it will undervalue Co that are profitable but retain lots of the profits
SVA
Shareholder Value Analysis - analyses 7 key ACTIVITIES of a business to identify how they will result in increase shareholder wealth
7 key drivers:
1. Sales growth
2. Operating margin
3. Tax rate
4. Investment in NCA
5. Investment in capital
6. Cost of capital
7. Life of cash flows
If discount using:
WACC = MVd + MVe
KE = MVe
competitive advantage period –> terminal value (lump sum, perp)
(-)
hard to determine length of competitive advantage period
terminal value: how do you value?
input data may not be reliable
constant % growth assumptions may not be realistic
NEED TO ADD ON SHORT-TERM INVESTMENTS (MARKET VALUE)
