Chapter 9 - Business Valuations Flashcards
1
Q
Market Capitalisation
A
Share Price x No. shares
2
Q
Asset Based
(Business Valuation)
A
Total assets - Total liabilities
- Book value (historic cost) - not representative of current market
- Realisable value - sell-off / asset strip
- Replacement cost - if trying to duplicate existing business
3
Q
Asset Bases Business Valuation
(Ads / Disads)
A
Advantages
- Quick / Simple
- Staring point / benchmark
Disadvantages
- Doesn’t value profit / future earnings
- Doesn’t consider off balance sheet assets e.g. intangibles
- Reliant on accounting conventions (manipulation)
4
Q
Earnings Based
(Business Valuation)
A
PAT x P/E
- Use P/E of similar business and make adjustments
5
Q
Earnings Based (P/E) - Business Valuation
(Ads / Disads)
A
Advantages
- Quick
- Considers future potential
- Useful to value unquoted companies
- Good for valuing controlling interest
Disadvantages
- May need to adjust P/E or PAT
- Based on profit, not cashflow
- Which P/E to use in takeover?
6
Q
DCF Business Valuation
(Ads / Disads)
A
Advantages
- Considers future potential
- Can be used to value any business
- Considers time value of money
Disadvantages
- Future cash flows are estimates
- Cost of capital needed
7
Q
Dividend Growth Model
(Business Valuation)
A
Market value of business = P.V. of all future dividends
P0 = d1 / ke - g
P0 = d0 (1+g) / (ke - g)
8
Q
Dividend growth model Business Valuation
(Ads / Disads)
A
Advantages
- Considers future cash flows to shareholder
- Relevant for minority interests
Disadvantages
- Assumes divi grow at constant rate
- Requires cost of capital
- What if don’t pay divi, or g>ke
9
Q
Efficient Market Hypothesis (EMH)
A
What info. assumed to be factored into share price?
- Weak Form - only historic info. e.g. financial reports
- Sem-Strong Form - historic and publicly available new info.
- Strong Form - historic, publicly available and privately known info of directors
* If semi-strong take care over timing/content of annoucements
