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ACA FM > Valuations > Flashcards

Valuations Flashcards

1
Q

Asset based valuation - Historic cost

A
  • Balance sheer value of equity (A-L) from accounts
  • Massively undervalues
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2
Q

Asset based valuation - Net realisable value

A
  • NRV of assets less liabilities
  • What could you sell for today
  • Minimum acceptable
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3
Q

Asset based valuation - Replacement cost

A
  • Cost of setting up an identical business from scratch
  • Maximum price for buyer
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4
Q

Income Based - Present value of futures cashflow

A
  • Use cashflows after interest and tax
  • Discount using KE
  • MV of combined - MV of bidder = MV target
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5
Q

Income Based - The P/E ratio

A
  • Total MV = P/E Ratio x current earnings
  • Where earnings = PAT less preference dividends
  • MV per SP = P/E ratio x EPS
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6
Q

Incomes Based - Enterprise Value

A
  • Enterprise Value = MV equity + MV debt + MV preference shares + minority interests - cash
  • EBITDA = PBIT + dep’n + amort
  • Enterprise Value = Enterprise Value / EBITDA
  • Value = Enterprise Multiple x EBITDA
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7
Q

Dividend Yield

A
  • MV of all shares = Dividends / dividend yield
  • Share Price = Dividend per share / dividend yield
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8
Q

Shareholder Value Analysis

A

7 factors drive business value:

  1. Sales growth
  2. Op profit margin
  3. CT rate
  4. Investment in NCA
  5. WC investment
  6. Cost of Capital
  7. Life of CFs

Use these to forecast CFs

Discount @ WACC = MVd + MVe
Deduct MVd to get MVe

Perpetuity (no growth) = CF/rate

Perpetuity (with growth) = (CF0*(1+g))/(rate -g)

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9
Q

Earnings per share

A

Earnings (profit after tax)/ no of ordinary shares

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10
Q

Issue price (MV) of redeemable bond

A

= PV future CFS, discounted at pre-tax cost of debt (gross redemption yield)

=PV(Rate, Nper, Pmt, Fv)
Rate = gross redemption yield
Nper = periods to redemption
Pmt = Coupon interest for 1 bond for 1 period
FV = redemption value

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11
Q

Gross Redemption Yield

A

=RATE(Nper,Pmt, PV, FV)

Nper = number of periods
Pmt = Interest
PV = MV of bond usually £100
FV = Redemption value

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12
Q

Theoretical Rights Price

A

TERP = Total value / Total Shares

Before RI- no shares x SP = Market Cap
RI - RI Shares x RI price = Proceeds

Total Shares = no shares + RI shares
Total Value = Market Cap + Proceeds - Issue Costs + NPV

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13
Q

RI Effect on Shareholder Wealth - Take up right

A

Before = no shares x SP

After = (new no shares x TERP) - (RI Price x extra price)

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14
Q

RI Effect on Shareholder Wealth - Sell rights

A

Before = no shares x SP

After = (old no shares x TERP) + ((TERP - RI price) x no rights)

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15
Q

RI Effect on Shareholder Wealth - Do nothing

A

Before = no shares x SP

After = old no shares x TERP

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16
Q

Equivalent Asset Cycle - EAC

A
  1. Calculate NPV for each option
  2. Turn NPV into EAC by - NPV/ AF for project life
  3. Pick cheapest option
17
Q

Sensitivity - Change in variable percentage

A

NPV/ PV of variable x 100%

18
Q

Sensitivity - Change in cost of capital

A

(IRR-Cost of Capital)/ Cost of capital x 100%

19
Q

Adjusted Present Value

A
  1. Calculate ungeared value of project discounting using Ke
  2. Add PV of tax shield (discount using pre-tax cost of debt)
  3. Deduct costs of issuing finance
  4. Proceed if positive
20
Q

Asset Based Valuation - Strengths

A
  • Assets are more certain than income
  • Useful for asset strippers
21
Q

Asset Based Valuation - Weeknesses

A
  • Service businesses often have very few tangible asset so would place very little value
  • Not useful as most value of some companies would reside in its goodwill
22
Q

How to do SVA

A
  1. Calculate normal NPV (competitive advantage)
  2. Calculate perpetuity and discount to T0 - 1/(1+rate) ^last CF
  3. Add investments
  4. Deduct debt
23
Q

Perpetuity with grown

A

(CF(last) x (1+g)) / (rate - g)

24
Q

Perpetuity with no growth

A

CF(last) / rate

25
Q

Asset Based Valuation - Strengths

A
  • Useful to get minimal acceptable value
  • Assets more certain than income
26
Q

Dividend Yield - Strengths

A
  • Values company based on current market valuations of similar companies
27
Q

Dividend Yield - Weaknesses

A
  • Have to find a comparable company whose dividend yield we can use
  • Based on Historic dividends
  • Will need to adjust downwards for non-marketability of unquoted companies
28
Q

Enterprise Value - Strengths

A
  • Ignores financing and accounting decisions and tax
  • Enables the comparison of two companies which may differ in these ares
29
Q

Enterprise Value - Weaknesses

A
  • It is simplistic and reflects a point in time
  • Comparing the capital spend and tax management of two companies may be important
30
Q

P/E ratio and Earnings Yield - Stengths

A
  • Values the company based on current market valuations of similar companies
31
Q
A

ACA FM (8 decks)

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