Business Valuation
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- Created by: kayleigh.aston6
- Created on: 20-05-21 12:00
What are the asset based methods of valuation?
- Historic Cost (Book Value)
- Net Realisable Value
- Net Realisable Value
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What are the advantages of asset based methods of valuation?
- Simple to calculate
- Assets are more certain than income
- Useful for asset strippers
- Assets are more certain than income
- Useful for asset strippers
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What are the limitations of asset based methods of valuation?
- Book Values are likely to be out of date
- Ignores future earnings
- Service businesses would be undervalued due to the value of intangibles
- Ignores value of digital assets, would undervalue companies with content stored electronically
- Ignores future earnings
- Service businesses would be undervalued due to the value of intangibles
- Ignores value of digital assets, would undervalue companies with content stored electronically
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What are the income based valuation methods?
- PV of future cash flows
- P/E valuation
- EV/EBITDA
- Dividend Valuation
- Shareholder Value Analysis (SVA)
- P/E valuation
- EV/EBITDA
- Dividend Valuation
- Shareholder Value Analysis (SVA)
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According to the PV of cash flows method, what is the maximum a bidder should pay for a target company?
The Market Value of combined businesses less the Market Value of the bidder before the bid is made.
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How do you calculate the PV of a perpetuity?
PV of perpetuity = cashflow x 1/r
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What are the advantages of the NPV method of valuation?
- It's technically the best method, especially for service businesses
- Incorporates all available cash flows and the time value of money
- Incorporates all available cash flows and the time value of money
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What are the limitations of the NPV method of valuation?
- Estimated value of cash flows may be optimistic, especially terminal value of perpetuity
- Calculating a suitable discount rate can be problematic, especially for listed companies
- Estimating synergistic benefits can be very difficult
- Calculating a suitable discount rate can be problematic, especially for listed companies
- Estimating synergistic benefits can be very difficult
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How do you calculate the value of a business using the P/E valuation method?
- Value = P/E x Earnings
OR
- Share Price = P/E x EPS
OR
- Share Price = P/E x EPS
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How do you value an unquoted business using the P/E method?
1. Find a P/E for a similar company (industry, size, gearing etc)
2. Adjust downwards for non-marketability (reduce by 25%)
2. Adjust downwards for non-marketability (reduce by 25%)
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What are the advantages of the P/E method of valuation?
- It reflects the stock market's view of the potential of a company
- It considers the earnings potential of the company
- It considers the earnings potential of the company
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What are the limitations of the P/E method of valuation?
- Using an industry average or proxy company's P/E ratio may not properly reflect the company
- Earnings can be manipulated by accounting policies
- Using past earnings may not reflect future potential
- Earnings can be manipulated by accounting policies
- Using past earnings may not reflect future potential
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How do you work out the Enterprise value of a company using the EV/EBITDA method?
Enterprise Value = enterprise value multiple X EBITDA
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How do you value an unquoted company using the EV/EBITDA method of valuation?
- Find or calculate an EV/EBITDA multiple using an industry average or proxy company
- Multiply most recent EBITDA for company being valued by the multiple
- Deduct the market value of debt and add cash to calculate equity value
- Adjust downwards for non
- Multiply most recent EBITDA for company being valued by the multiple
- Deduct the market value of debt and add cash to calculate equity value
- Adjust downwards for non
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What are the advantages of the EV/EBITDA method?
- It is unaffected by the capital structure or depreciation policies of a company
- It takes net debt into account
- Enables direct comparison between companies which may have different policies
- Technique most commonly used by investors (it's relevant!
- It takes net debt into account
- Enables direct comparison between companies which may have different policies
- Technique most commonly used by investors (it's relevant!
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What are the limitations of the EV/EBITDA method?
- It is simplistic, a lot of information from many value drivers is reduced to 1 number
- Ignoring capex and tax could actually be a bad thing, as some businesses could add value through skilled tax management
- Past earnings may not reflect future potent
- Ignoring capex and tax could actually be a bad thing, as some businesses could add value through skilled tax management
- Past earnings may not reflect future potent
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How do you calculate the dividend yield and therefore the share price using the dividend yield method?
Div yield= Div per share/Market price of share x 100
AND,
Share Price = Div per share/ Dividend Yield
AND,
Share Price = Div per share/ Dividend Yield
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How do you value an unquoted company using the dividend yield method?
1. Find a dividend yield from an industry average or proxy company
2. Divide the most recent dividend per share for the company being valued by the dividend yield
3. Adjust downwards for non-marketability
2. Divide the most recent dividend per share for the company being valued by the dividend yield
3. Adjust downwards for non-marketability
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How do you calculate the value of a company using the Dividend Valuation Method?
Value = D0(1+g)/(Ke-g)
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What are the advantages of the Dividend Valuation Method?
- It is useful if the investor is looking for dividend income rather than control
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What are the limitations of the Dividend Valuation Method?
- Dividend payments and growth may not be stable
- Using the dividend yield or Ke of a proxy co. or industry average may not reflect the company being valued.
- Using the dividend yield or Ke of a proxy co. or industry average may not reflect the company being valued.
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What are the limitations of SVA?
- A large proportion of the value is made up from the terminal value which is an unreliable estimate at best
- It may be difficult to establish the length of the competitive advantage period
- It may be difficult to establish the length of the competitive advantage period
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What are the advantages and disadvantages to the seller and buyer of paying for a company with CASH?
BUYER:
Advantage: More attractive to seller
Disadvantage: Could cause liquidity issues
SELLER:
Advantage: Certain amount is received
Disadvantage: Possible immediate tax issues
Advantage: More attractive to seller
Disadvantage: Could cause liquidity issues
SELLER:
Advantage: Certain amount is received
Disadvantage: Possible immediate tax issues
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What are the DISADVANTAGES to the seller and the buyer for buying a company with a share-for-share exchange?
BUYER:
- Increased dilution
SELLER:
- Uncertain value received
- Dealing costs to sell shares
- Increased dilution
SELLER:
- Uncertain value received
- Dealing costs to sell shares
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What are the ADVANTAGES to the seller and the buyer for buying a company with a share-for-share exchange?
BUYER:
- Preserves liquidity
- Sellers can undertake to not sell the shares for a period of time to preserve continued cooperation with the buyer
SELLER:
- No immediate tax issues
- Preserves liquidity
- Sellers can undertake to not sell the shares for a period of time to preserve continued cooperation with the buyer
SELLER:
- No immediate tax issues
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What are the advantages and disadvantages to the seller and buyer of paying for a company with LOAN STOCK- FOR - SHARE EXCHANGE?
BUYER:
Advantage: Avoid dilution
Disadvantage: Gearing problems
SELLER:
Advantage: More assured return than on shares
Disadvantage: May prefer equity
Advantage: Avoid dilution
Disadvantage: Gearing problems
SELLER:
Advantage: More assured return than on shares
Disadvantage: May prefer equity
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What are the potential reasons for divestment?
- Lack of fit, with existing co's.
- The sub is too small and doesn't warrant the time to manage it
- The sub is trading poorly, and selling as a going concern is more profitable than liquidating
- Parent may need to improve it's liquidity
- The sub is too small and doesn't warrant the time to manage it
- The sub is trading poorly, and selling as a going concern is more profitable than liquidating
- Parent may need to improve it's liquidity
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What are the possible methods of funding a management buy out (MBO)?
- Private Equity Funding
- Debt Capital
-Management buy-in
- Sell-offs
- Debt Capital
-Management buy-in
- Sell-offs
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Other cards in this set
Card 2
Front
What are the advantages of asset based methods of valuation?
Back
- Simple to calculate
- Assets are more certain than income
- Useful for asset strippers
- Assets are more certain than income
- Useful for asset strippers
Card 3
Front
What are the limitations of asset based methods of valuation?
Back
Card 4
Front
What are the income based valuation methods?
Back
Card 5
Front
According to the PV of cash flows method, what is the maximum a bidder should pay for a target company?
Back
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