Valuations Flashcards
What are the broad valuation methods?
1) Asset
2) Income
What are the different methods of valuations using assets?
1) Historic cost (book value)
2) Net realisable value
3) Replacement cost
What are the pros and cons of historic cost valuation?
PROS
1) Simple to calculate
2) Can use the accounts held at companies house
3) Assets are more certain than income
4) Useful for asset strippers
5) Service companies don’t have many tangible assets therefore not accurate
CONS
1) Meaningless, not the market values for the assets held
2) Could be subject to accounting manipulation
3) Useful for
What are the pros and cons of net realisable valuation?
PROS
1) Considers the MV of assets. What would we get for the sale of these assets?
2) The minimum acceptable value to owners determined to sell
3) Useful for controlling interests
4) Assets more certain than income
5) Useful for asset strippers
6) Service companies don’t have many tangible assets therefore not accurate
CONS
1) Some lines on the BS difficult to estimate MV > no active market.
2) Ignores goodwill
3) Redundancy costs ignored
What are the pros and cons of replacement valuation?
PROS
1) Considers the cost of setting the business up from scratch
2) Would be the maximum you would pay to buy the company
3) Assets are more certain than income
4) Useful for controlling interests
5) Useful for asset strippers
6) Service companies don’t have many tangible assets therefore not accurate
CONS
1) Difficulty in estimating the replacement cost
2) Ignores goodwill
What are the different income based valuations?
1) PV future cash flows
2) P/E
3) EV/EBITDA
4) Dividend valuation
5) Shareholder value analysis
What are the pros and cons of PV future cash flows?
PROS 1) Considers time value of money 2) Removes accounting policies CONS 1) Income less certain than assets 2) DF difficult to estimate 3) Estimating FCF difficult 4) Information may be private
What are the pros and cons of P/E?
PROS
1) Considers share price, more accurate than just acct. data
CONS
1) Income less certain than assets
2) Difficult to estimate P/E ratio in private company
3) Based on historical data
4) Uses accounting data
5) High ratio should indicate high confidence, but markets not always rational
6) There is a discretionary adj for marketability of private companies
What is the formula for EV?
EV = Market cap + pref shares + debt + minority int. - cash (equiv.) + depr.
What are the pros and cons of EV/EBITDA?
PROS
1) Strips out depreciation, amortisation, tax
2) Can be used to compare companies with different levels of debt
3) How long will it take to pay off an acquisition?
4) Can create benchmark using different companies in the industry
5) Considers growth > high multiple = high growth, low multiple = low growth
6) EBITDA focus on key statistics by investors
CONS
1) Stock market might not have incorporated information
2) Ignoring tax and capex could be bad in some instances > you could add value w/tax management
3) Takes a snapshot in time
4) Doesn’t consider time value of money
What are the pros and cons of dividend yield?
PROS 1) Useful for minority stake 2)Considers future CONS 1) Not useful for majority stake> you control div policy 2) Ke difficult to calc/estimate 3) Can't ensure div's continual growth 4) Adj. for marketability arbitrary
What are the pros and cons of shareholder value analysis?
PROS 1) Considers time value of money CONS 1) Constant % assumptions unrealistic 2) Input data not readily available 3) Difficult to establish the length of the competitive advantage period 4) Ambiguous value drivers 5) Large portion of value is the terminal value = estimate
Formula for PE ratio valuation?
PE = Price of share / EPS
PE ratio x earnings
Formula for EV / EBITDA?
EV = Mkt cap equity + pref shares - debt + cash equiv.
EV x EBITDA
Formula for dividend valuation method?
(D0 (1+g)) / (ke-g)
