Syllabus B. Advanced Investment Appraisal B4. Valuation and the use of free cash flows

B4a. Valuations - Introduction 1 / 11

Syllabus B4a)

Apply asset based, income based and cash flow based models to value equity. Apply appropriate models, including term structure of interest rates, the yield curve and credit spreads, to value corporate debt.

When are Valuations needed?

  1. Takeovers (Price paid would be MV + a takeover premium)

  2. When setting a price for an I.P.O (Initial Public Offer)

  3. Selling ‘private’ shares

  4. When using shares as loan security

  5. When negotiating a sale of a private company

  6. For liquidation purposes

What information helps Valuation?

  • Financial statements

  • Non current asset summaries

  • Investments held

  • Working capital listing (debtors, creditors and stock)

  • Lease agreements

  • Budgets

  • Current industry environment

What are the limitations of the information provided?

  • Does the PPE need a costly revaluation?

  • Are there any contingent liabilities not taken into account?

  • Has deferred tax been calculated appropriately?

  • How has stock been valued?

  • Are all debtors receivable?

  • Are there any redundancy costs?

  • Any prior charges on assets?

  • What shareholding is being sold? Does it mean the business carries on?