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Share Valuation Share Valuation

Share Valuation - PowerPoint Presentation

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Share Valuation - PPT Presentation

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

share dividend valuation company dividend share company valuation profits cash assets growth model adjust rate standard profit calculate gail

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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