Mark FieldingPritchard Share Valuation Share valuation is an art not a science You are valuing shares in unquoted companies Prepare a valuation report with a range of values Choose the value that best fits what you are valuing ID: 380765
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Slide1
Share Valuation
Mark Fielding-PritchardSlide2
Share Valuation
Share valuation is an art not a science
You are valuing shares in unquoted companies
Prepare a valuation report with a range of values
Choose the value that best fits what you are valuing
Then adjust to get a negotiation value (increase of selling/ reduce if buying)
Most valuations are carried out for tax purposesSlide3
Share Valuation
Four main methods
Assets
Dividends
Profits
Cash flows
Usually calculate the first 3 to get a range of values then pick the most appropriate
For exam you should know
How to calculate
When each is most appropriate
Advantages & disadvantagesSlide4
Asset Valuation
To calculate we restate the balance sheet at realisable value
Add in any assets not shown
ie
intangibles at net realisable value. Include extra liabilities
ie
tax
Assumption is company ceases to trade so assets sold at break up value
AdvantagesIn practice easy to calculateEasy to understandQuick
DisadvantagesIgnores goodwillGives artificially low valueOnly relevant if the business is not a going concern
When Used?
Will be the most appropriate valuation when
the value of the assets is the value of the company
A farming company makes $3k a month profit but the land could be sold for housing development for $5m
The value of the company is the landSlide5
Dividend Model
We use the Gordon growth model in the exam
/ (
- G)= P
P = Price of an ordinary share
= Dividend in 1 years time
G= Annual dividend growth
Slide6
Dividend Model
Mathematically we are assuming the dividend received in 1 year is a perpetuity
The discount rate is
- G
Advantages
In exams easy to
calculate
Easy to understand
Quick
Disadvantages
Mathematically weak, calculating share price in terms of cost of equity.
Assumes constant growth of dividendsIf dividend is nil, value is nilWhere do you get
When Used?
When the only real benefit is to share in dividends, usually small holdings of shares
Pointless if the shareholder can control dividend policy
Gordon growth is not used in real lifeSlide7
Dividend Model
Ronno has an equity beta of 0.8 which reflects the fact that profits have been rising at 4% pa for many years. The risk free rate is 2.8% and the market portfolio is yielding 8.1%
Ronno
has just announced a dividend of 10c per share
/ (
- G)= P
7%
P= [10c (1.04)]/ 0.07- 0.04= 347c or $3.47
Slide8
Profits
We take the profit from the income statement (as for EPS)
P= P/E ratio x profit
P/E includes share price so we take P/E of quoted company and adjust for known differences
Start with that P/E
Usually for lack of quote 50%
For majority stake 30%
Adjust for any other differencesSlide9
Profits
Gail, an ecologically clean burger manufacturing company has EPS for 2015 of 150c
The P/E of
S
ashsca
which is a quoted company is 18.
Sashcha
is considered riskier than average because it sources its food products from non ecological sources
P/e of
Sashsca18Reduction for non quote
(9)
Gail is smaller, les access to capital, less broad customer base
9
Ecology (10% x 9)
0.9
Bonus to goodwill for ecology
9.9
Increase for control (30%)
3
Standard increase for controlling packet of shares
P/E of Gail
12.9Slide10
Profits
The adjustment for lack of a quote is a standard that has built up over time. The same for the 30% for control which comes from
te
KPMG study for takeovers in the UK during the 1980s. After the study it became a standard.
Everything else is an estimateSlide11
ProfitsSlide12
Discounted Cash flows
Prepare a cash flow and discount it
Adjust the cash flow for one off items
Discount rate = WACCSlide13
Discounted Cash flow