8 - Business Valuation

Question 1

Reasons for mergers/acquisitions

Answer 1

Theoretical - merger will be accepted if it gives an NPV >0

Practical:

• reduction of competition
• safeguarding sources of supply
• economies of scale
• access to some aspect of the target company that is under utilised
• risk spreading through diversification
• synergy

Question 2

Asset based valuation approaches

Answer 2

NRV - minimum for a seller
Replacement cost - maximum for a buyer

Tend to undervalue as intangibles are not included

Question 3

Dividend based valuation approach

Answer 3

Price = D0(1+g)/(Ke-g)

Or

Price = D0/yield

Ke must be estimated from similar listed company and discounted for non-marketability (70%)

Question 4

Earnings based valuation approach

Answer 4

Price = PAT x PE ratio

Or

Price = EBITDA x EBITDA multiple - MV of debt

Question 5

PE multiple

Answer 5

PE multiple = Price/EPS

Estimated from a similar listed company

Question 6

EBITDA multiple

Answer 6

Multiple = Enterprise value/EBITDA

Where EV = MV debt + MV equity + minority interest + preference shares - cash

Question 7

Cash based valuation approach

Answer 7

PV of pre-interest cashflows to infinity discounted at WACC - MV of debt

Or

PV of post-interest cashflows to infinity discounted at Ke

Question 8

Reasons for divestments

Answer 8

• concentrate on core activities/lack of fit
• get rid of diseconomies of scale
• raise cash