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Basics of valuations - Coggle Diagram

- - - - adjust P/E downwards
      - Adjust E/Y upwards
- - - - S.24J
        
        Interest deducted by debtor (borrower) and represents income in creditors (lender ) hands
        
        Yield to maturity method
        
        Helps prevent tax avoidance & is known as accrual method aswel
        
        Use formula in s.24J in the Act to calc rate
      - Limitation on interest deduction
        
        SA tax law also specifies several circumstances in which interest are limited (s.23)
        
        Interest payable to connected persons who are not subject to tax
        
        Interest payable in respect of reorganization transactions and acquisition transactions
      - Tax is based on current tax legislation
    - - What is a bond
        
        It's a type of interest-bearing security
        
        Encompass several securities such as bonds, notes, debentures end other
        
        They are usually unsecured & normally issued by
        
        Sovereign (self-determining) governments
        
        Local governments
        
        State owned utilities
        
        Large corporations
      - Sold with or without interest
        
        Date of selling bond usually does not coincide with date of payment of a coupon
        
        Can be classified as ex-coupon / ex-interest or cum-interest
      - What is securities
        
        Instrument issued directly to investors
    - - Characteristics
        
        It represents an obligation owed by a debtor to a creditor
      - Forms
        
        Finance decision mindmap
      - Factors affecting riskiness
        
        Security offered
        
        Risk associated with debt finance & its impact on a required return can be linked to security offered
        
        Debt covenants
        
        Conditions stipulated in a debt contract which may decrease the credit risk of the creditor
        
        May include requirement to maintain certain ratios & clauses prohibiting certain actions
        
        Interest & interest rate risk
        
        Interest based on floating rate expose debtor to changes in future cash-flow obligations
    - - Pre-tax amount is usually readily available
      - Main risk = credit risk
      - The expected amounts and their intervals will be based on contractual amounts
  - - - Amounts payable & intervls are usually readily available as dividend payable are specified in MOI
      - Unlisted pref shares expected rate of return not readily available , thus determined based on info available.
        Use similar listed company and adjust for differences
      - cum-div = new owner is entitled to current declared div
      - ex-div = new owner not entitled to current declared div
    - - Types
        
        Cumulative
        
        Div missed = paid in future
        
        Future expected pref div & pref capital are calculated by discounting @ fair rate of return
        
        Non-redeemable (perpetual)
        
        No maturity date, entity not required to buy back the shares
        
        Calc perpetuity of future div, capitalised @ fair rate of return.
        
        Must consider
        
        Fixed and variable div
        
        Many investors have policies not to invest in fixed div
        
        Convertible
        
        May be converted later into ordinary shares. Increase attractiveness
        
        Excluded from syllabus
        
        Non-cumulative
        
        Div is missed = never paid (increase risk)
      - Rights
        
        Pref dividends not declared = no ordinary dividend may be declared
        
        No voting rights, unless decision affects pref shares
        
        pref dividends does not have to be declared
      - Calculating values
        
        Cumulative non-redeemable pref shares
        
        Calc perpetuity of future div, capitalised @ fair rate of return.
        
        Must consider the probability that div will be missed
        
        When div missed = normal discounted cash flow techniques are recommended
        
        Redeemable pref shares
        
        Calculated by discounting cash flows @ fair rate of return
        
        Non-redeemable (perpetual) pref shares
        
        Perpetuity future pref div is capitalised or discounted @ fair rate of return
        
        Methods
        
        Gordon growth model
        
        Basic model
        
        Perpetual div / rate of return
        
        Non- cumulative pref shares
        
        Calc PV of expected future div & pref capital by discounting @ fair rate of return
  - - - Expected cash flow and timing
        
        consider the following
        
        A weighting of probabilities
        
        The expected cash flow linked to the associated tax implication and its expected timing
        
        The expected pre-tax cash flow and its expected timing
      - Required rate of return
        
        Target WACC
    - - Main risk adjusted for
        
        Credit risk
        
        Pref shares - not obligated to pay dividend, thus increase risk associated with pref shares
        
        Pref shares are more risky than debt, but less risky than ordinary shares