Business Valuation

Question 1

Price-Earnings Ratio Formula

Answer 1

Share price / EPS

Question 2

Describe the 3 step process for using the price earnings ratio valuation

Answer 2

1) Find a P/E for a similar quoted Company
2) P/E x Earnings
3) Adjust for non-marketability

Question 3

Formulae for finding ‘value’ in the P/E Ratio valuation

Answer 3

Value = P/E (of comparable company) x Earnings (of actual)

Question 4

Acronym for Shareholder Value Analysis

Answer 4

SLOW CAT

Question 5

SLOW CAT stands for…

Answer 5

Sales Growth
Life
Op. Margin
WC Investment
CoC
Asset invmnt
Tax

Question 6

Describe the ‘Income (cash) Based approach

Answer 6

Value of business is calculated at the NPV of future cash flows

Question 7

Perpetuity formula?

Answer 7

Cashflow / Discount rate ^ n

Question 8

Describe the ‘Asset based approach’

Answer 8

Either total assets less total liabilities,
or,
NRV of assets less liabilities

Question 9

Advantages & disadvantages of the ‘Income (cash) Based Approach?

Answer 9

Technically the best method
Incorporates all relevant cash flows
Hard to estimate cash flows accurately
Suitable discount rate can be hard to find.

Question 10

When to make the marketability adjustment and what is it?

Answer 10

=2/3
When using a P/E method/EBITDA method of a quoted company to compare for an unquoted company

Question 11

Advantages & disadvantages of the ‘P/E’ Approach

Answer 11

Reflects the stock markets view of the biz
Considers the earnings creating potential
Using a proxy P/E may not be accurate
Earnings can be manipulated by accounting policies
Past earnings do not always reflect future potential

Question 12

What are the three steps for the ‘Enterprise value/EBITDA’ Method?

Answer 12

1) Enterprise value = Enterprise Multiple * EBITDA
2) Equity Value = Enterprise Value - Market Value of Debt + Cash
3) Adjust for marketability if relevant

Question 13

Advantages and disadvantages of the ‘Enterprise Value/EBITDA’ Method?

Answer 13

Unaffected by depreciation policies of a company
Takes net debt into account
Technique most commonly used by investors
It is simplistic (Negative)
Past earnings may not reflect future potential
An industry average my not properly reflect the company

Question 14

Dividend Yield Formula

Answer 14

Dividend per Share / Market price of a share x 100

Question 15

What are the three steps for the Dividend Yield method?

Answer 15

1) Find dividend yield for a similar QUOTED company
2) Divide #1 by the most recent dividend per share for original company
3) Non-marketability adjustment

Question 16

Formula for Dividend Valuation Method?

Answer 16

Value (Po) = (Do * (1+g) / (Po - g))

Question 17

What formula is the Dividend Valuation Formula similar to?

Answer 17

Ke Formula = (Do(1+g)/Po)+g

Question 18

What are the advantages and disadvantages of the Dividend Yield method?

Answer 18

Effective when investor is looking for dividend income rather than growth
Growth may not be stable
Proxy yield may not reflect the actual Company.

Question 19

Does the EPS calculation include preference shares?

Answer 19

No, exclude preference shares

Question 20

Does earnings include dividends on preference shares?

Answer 20

Yes

Question 21

Does earnings include dividends on ordinary shares?

Answer 21

No

Question 22

Earnings =

Answer 22

Profit after tax - preference dividends

Question 23

What is the formula for a growing perpetuity?

Answer 23

Cashflow * (1+g) / (Ke - g)