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Unit 6 Business Valuation - Coggle Diagram
Unit 6 Business Valuation
Purpose and Methods of Business Valuation
The purpose of carrying out a business valuation can be split into
primary Functions
Argumentation function
Advisory function
Brokering function
secondary functions.
Net Asset Value Method
In the net asset value method, which of the items listed below must
be subtracted from the gross asset value
to arrive at the net asset?
Value of Debt
What is the net present value of free cash flow for the second year
based on the following data and a discount rate of 10%?
Net Present Value (NPV) for Second YearThe question asks for the
NPV of the free cash flow for the second year only:
Free Cash Flow (Year 2): 15.
Discount Rate: 10%.
Formula: $PV = \frac{\text{Cash Flow}}{(1 + r)^t}$.
Calculation: $\frac{15}{(1 + 0.10)^2} = \frac{15}{1.21} \approx 12.396$.
Correct Selection: 12.4
Total Valuation Methods
Comparitative Value Method
Compares Values With Similar Companies
Share Price: €75.80Shares
Issued: 2,500,000Total
Market Value (Company A): $75.80 \times 2,500,000 = \mathbf{€189.5 \text{ million}}$
Find the Profit Multiplier (P/E Ratio)
Pre-tax Profit (Company A): €80.6 million
Multiplier: $\frac{189.5 \text{ million Market Value}}{80.6 \text{ million Profit}} = \mathbf{2.351}$
Apply that same market multiplier to Company B's specific earnings:
Pre-tax Profit (Company B): €20.6 million
Company Value (B): $20.6 \text{ million} \times 2.351 \approx \mathbf{€48.43 \text{ million}}$
EVA Economic Value Added
EVA is calculated as the result of the difference between return on invested capital
and the cost of capital multiplied by invested capital.
Discounted Cash Flow Methods
CAPM Model Is used To Determine the Cost OF Equity (Discount Rate ) For DCF Analysis
Expected cash flows are considered a "significant indicator of a company’s self-financing
and dividend-distribution capacities"
Future free cash flows are discounted when determining a company’s value
Discounted cash flows reflect the company’s future expected profitability.
Dividend Discount Model
Weighted Average Cost of Capital (WACC)
Components of WACC:
Cost of Equity (e)
Link to Valuation Methods
Once you have calculated the cost of equity (via CAPM) and the overall WACC,
these values are used as the discount rate for Total Valuation Methods found
in Section 6.3, such as Discounted Cash Flow (DCF) and Economic Value Added (EVA)
Determinants internal To The Company
Determinants External To The Company
Circularity Problem
How can the circularity problem be solved?
By adopting an iterative approach
By setting the target capital structure as a constant
Cost of Equity Problem
Risk-free rate ($R_f$): 6%.
Market Return ($R_m$): 8%.
Beta ($\beta$): 2.6.
Formula: $Cost = R_f + \beta \times (R_m - R_f)$.
Calculation: $6\% + 2.6 \times (8\% - 6\%) = 6\% + 5.2\% = \mathbf{11.2\%}$.
Study Goal
the rationale and purpose of carrying out business valuations.
the basic methods used in company valuation.
which methods are useful in practice.
how you can use selected methods to determine the value of a business.