Lecture 10b Flashcards
What is an exit strategy in business?
A plan for how and when a founder intends to sell their stake in a company to maximise financial gain.
Why is valuation important for exit strategies?
To negotiate a fair sale price for the founder’s shares.
How is the share price calculated during an exit?
Share price=fair valuation of the company/ number of ordinary shares
What is the formula to calculate Net Assets?
NCA+(CA−CL)−NCL
Net assets always= equity
How do you calculate the book value of a share?
shareholders funds(net assets)/ number of shares
What are 2 strengths of book value method?
- objective and based on factual data
- easy to understand and widely taught
Name 2 weaknesses of the book value method?
- Backward looking and ignores future potential
- Doesn’t value intangible assets
What does the future earnings method do?
Values a company based on its projected profits, discounted by the cost of capital
How is perpetuity calculated?
Annual earnings/ cost of capital
How do we discount future values?
Present value=future cash flow/ (1-r)^t
r=discount rate
t=time
What is 2 strengths of this method?
- Future orientated and includes the time value of money
- considers time value of money
What is 2 weakness of this method?
- depends heavily on uncertain earnings forecast
- chosen discount rate-how do we know its accurate
What are financial options?
contracts giving the right to buy or sell assets in the future
What are the 2 types of option?
Put options
Call options
What are “put” options?
The right to sell a company’s shares at some point in the future at a price agreed today
What are “call” options?
Right to buy something at a set price in the future.
What is a “real option” in valuation?
Management’s flexibility to pursue future opportunities (e.g., R&D, licensing), treated like call options.
Why do real options add value?
they reflect future opportunities (e.g R&D) treated like call options
What are 2 strengths of real options valuation?
- Dynamic and realistic
- Values managerial flexibility
What are 2 weaknesses of real options method?
- Complex and not widely used
- Competitors may have similar options
