Business Valuation

Question 1

Dividend valuation method

Answer 1

PV of future expected dividend payments discounted at Ke. (perpetuity)

PV = D*(1+g)/(Ke - g)

Question 2

Dividend yield method

Answer 2

Price = Dividend / Yield of similar company

Question 3

Problems with dividend based valuation

Answer 3

• Estimating future dividends
• Finding similar listed companies
• If Ke is estimated using CAPM or by looking at quoted companies, a private company valuation will need to be adjusted downwards to reflect lack of marketability.

Question 4

Problems with earnings based approach

Answer 4

• If earnings have been erratic then latest earnings figure may be misleading.
• Accounting policies can be used to manipulate earnings figure.
• Finding appropriately similar listed companies.
• Private company valuations will need to be adjusted downwards to reflect lack of marketability.

Question 5

PE multiple valuation

Answer 5

Equity value = Earnings x PE ratio

Earnings are profit after tax and preference dividends.

Question 6

EBITDA multiple valuation

Answer 6

Enterprise value = EBITDA multiple x EBITDA

Question 7

Enterprise value

Answer 7

= MV of equity + pref shares + minority interest + debt - cash

Question 8

EBITDA multiple

Answer 8

= Enterprise value / EBITDA

Question 9

Cashflow based valuation

Answer 9

Value of equity = PV cashflows to infinity discounted at WACC - Less MV debt.

Question 10

SVA valuation

Answer 10

Same as cashflow based valuation (NPV) using sales, margin, capex, working capital, discount factor and factoring in debt and investments.

Question 11

7 drivers of value

Answer 11

• Sales
• Margin
• Investment in fixed assets
• Investment in WC
• Tax
• Discount rate
• Length of time future plans are available for.