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value - Coggle Diagram

- - - - Valuation
        
        Maximise wealth of the shareholders
        
        Basic valuation model
        
        Draw a timeline
        
        Identify all cash flows attached to instrument over its remaining future life and plot these on TL
        
        Discount all cash flows to present value in year 0 at the required Rate Of Return
        
        Interpretation: answer is an indication of the value of the instrument
        
        Ordinary shares
        
        Price-Earning (PE) Method
        
        PE ratio = Market price per share (MPS)
        /
        Earnings per share( EPS)
        
        Indicator of investor confidence
        
        Weakness : uses profits rather than cash flow
        
        Risk is indirectly reflected in the PE ratio
        Higher risk = lower PE
        
        Adjusting PE for a private company
        
        The size of the firm being evaluated
        
        The growth prospects
        
        Liquidity of the investment
        
        The role of assets in the firm
        
        Earnings yield (EY) method
        
        Earnings yield (EY) = Earnings per share (EPS)
        /
        Market price per share (MPS)
        
        Inverse of PE
        
        Present value of perpetuity (R/%)
        
        Estimated Future earnings per share
        /
        Return that investors expect
        
        Net Asset Value (NAV)
        
        = Market value of assets - market value of liabilities
        
        Used as a reasonableness test
        
        Market Capitalization = Shares x today's value
        
        Reason why NAV differs from valuation:
        Company does not derive its value from its assets, but from its income-generating potential
        
        Valuation > NAV : excess represents Goodwill
        
        Preference shares
        
        Par value
        
        What is preference dividend
        
        When is it paid
        
        Cumulative or non-cumulative
        
        Cumulative = paid in future so combine both redeemable (PV) and non-redeemable (perpetuity)
        
        Redeemable
        
        What price
        
        Non-redeemable = perpetuity
        
        What is the required return of investors on instrument of similar risk
        
        Debentures