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14 Cards in this Set
- Front
- Back
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Principles of Valuation |
What is being valued? Enterprise value vs. equity value Who is valuing? Different valuations can arise from different potential synergies, different financial strategies and different strategic priorities Choosing a valuation Method - CF, NAV, Dividend and multiples. Difficult to deterine but is important to remember two points: -Rigourous analysis is most important, understand the assumptions, -Analysis is strengthened by using multiple methods, understand strengths nd weaknesses of each |
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Discounted cash flow methods |
Most theoretically sound and based on the fundamental principles that -required return is investors relevant required return taking in to consideration risk. -Cost of capital consistent with cashflow being values. Pre and post-tax and who is it available to |
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Entity DCF Method |
Most widely used and can be applied to SBUs -Discount pre-financing, after tax flows @ WACC -Operating profit - theoretical tax + depreceiation +/- non-cash adjustments +/- working capital changes - net capex |
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Equity DCF Method |
Values flows of business after debt servicing and discounted and corporate cost of equity -Operating profit - theoretical tax + depreciation +/- non cash adjustments +/- working cap changes -net capex -After tax interest payments + lon drawdown - loan repay |
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Including synergies into valuation |
If vauation is fir an acquisition then the CFs should include synergies expected. Operating and financial |
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Forecasting cash flows |
Should be based on thorough understanding of historicak cashflows in particular working capital dynamics and capital investment requirements. Both of which are often underestimmated. Both impacted by competition in market, tax dynamics and key performance drivers |
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Multi-period DCF Model methodology |
Stage 1 - Explicit forecast -Forecast ungeared, after tax flows of firm until flows become stable -Decide upon appropriate WACC -Calculate the NPV of flows - Enterprise is WACC and Equity is cost of equity Stage 2- Terminal value of a firm -Calculated based on sustainable, steady CF and discounted using perpetutity formula Stage 3 - Consider cash/debt -If value of equity is required, subtract net debt or add cash to enterprise value |
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Considerations when Calculating Terminal Values |
When calculating terminal value it is important to consider growth rates which can be broken down into inflationary and real growth. Valuation should explicitly state factors behind assumptions in growth rates and overall should avoid: -Growth above inflation in the long run -Extending short track growth in perpetuity -CF that don't take into consideration the capex and working capital required to achieve growth |
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Valuation using net asset value |
Looks at the net value of balance sheet for shareholders. Many adjustments are made to reflect accounting distortions. Fixed Assets (Land and property) - Saleable value may be higher with vacant posession than thr value of the same property when occupied. Equally factors such as regulation or market forces might have decreased the propertys economic value Fixed Assets (Plant and Equipment) - Will usually be shown in the books at cost less depreciation. However, to a purchaser the valuation will be based on future usefulness or likely market price as second-hand equipment. Overall value of asset in generating income may differ frome saleable value Intangibles - Most difficult to value |
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Circumstances where net asset value is useful |
-Firms in financial difficulty - Residual value in event of liquidation -Takeover Bids - Shareholders are unlikely to sell at less than NAV even if projected income growth is poor -Shortcut substitute method for income-flow-based-methods: such as firms who core business activity is to hold property assets, investment trusts, oil producers, mineral extractors and other resource-based firms |
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Dividend Valuation Models |
Based on the financial theory that the share value is the discounted value of all estimated future dividends. |
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Criticisms of dividend valuation models |
They are highly sensitive to the key assumption of the growth rate. If close to discount rate than an infinite vallue is predicted Quality of input data is often poor - Difficult to determine an appropriate discount rate G cannot exceeed Ke Cannot be used to value firms that do not pay out dividends or pay low proportion of earnings |
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Key factors that determine growth rates |
Retained earnings Rate of return earned on retained earnings - the efficiency with which resources are used Rate of return on existing assets - The return generated without additional resources. |
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What influences the key factors of the growth rate |
The strategic position of the firm - The competitive postion of the firm within the industry and the attractiveness of the industry overall. Overall the strength of their economic franchise Competence and integrity of the mnagers - Having capable managers, with a focus on increasing the wealth of shareholders runs a close second to strategic position for creating share value. Financial riskiness as reflected in financial strategy - high gearing should be accomoanied with a high expected growth rate Macroeconomic changes - Firm's growth rate may be influenced by the wider economy. FX, IR. |
