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University College Dublin
Michael Smurfit Graduate School of Business
MASTER OF BUSINESS ADMINISTRATION
2006/07
Financial Markets & Valuation
Review of Lecture Slides(Topic 3, 5 & 6)
Fall 2006
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Table of Contents
1 FMV Exam Overview..........................................................................................................12 Cost of Capital & Capital Structure...................................................................................1
2.1 Definitions............................................................................................................................ 12.2 Acronyms............................................................................................................................. 12.3 Ordinary Shares................................................................................................................... 2
2.3.1 Dividend approach...............................................................................................................22.3.2 Risk/Return Approach......................................................................................................... .22.3.3 Capital Asset Pricing Model (CAPM)...................................................................................3
2.4 Loan Capital........................................................................................................................ 42.5 Preference Shares............................................................................................................... 5
2.6 Weighted Avg Cost of Capital (WACC)................................................................................52.7 Financial Gearing................................................................................................................. 5
2.7.1 Ratios...................................................................................................................................6
2.8 Breakeven Analysis............................................................................................................. 62.8.1 PBIT EPS Indifference Chart............................................................................................62.8.2 Calculate..............................................................................................................................6
2.9 Practical considerations in selecting source of finance........................................................72.10 Theories of Capital Structure.............................................................................................8
2.10.1 Traditional View.................................................................................................................82.10.2 Modigliani-Miller Approach...............................................................................................10
3 Working Capital Mgmt.....................................................................................................133.1 Mgmt of Stock....................................................................................................................13
3.1.1 Stock turnover....................................................................................................................143.1.2 Economic Order Quantity (EOQ) models...........................................................................14
3.2 Mgmt of Trade Debtors......................................................................................................153.2.1 Monitor Outstanding Debts................................................................................................16
3.3 Cash Mgmt........................................................................................................................ 173.4 Using Trade Creditors as a source of finance.................................................................... 17
3.4.1 Controlling Trade Creditors................................................................................................18
4 Mergers, Takeovers & Valuation of Shares....................................................................184.1 Why merger?..................................................................................................................... 184.2 The Three forms of Purchase Consideration.....................................................................19
4.2.1 Shares................................................................................................................................194.2.2 Loan Capital.......................................................................................................................204.2.3 Cash...................................................................................................................................20
4.3 Assessing Vulnerability to a Takeover...............................................................................204.4 Defense Strategies............................................................................................................21
4.5 Demerger...........................................................................................................................214.5.1 Divestment.........................................................................................................................214.5.2 Spin-off...............................................................................................................................22
4.6 Valuation of Shares...........................................................................................................224.6.1 Asset based methods........................................................................................................224.6.2 Stock Market Methods.......................................................................................................234.6.3 Cash Flow Methods...........................................................................................................23
Full Time MBA 06-07 Date: 03/12/2006
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1 FMV Exam Overview
3 out of 4 questions:1. Topic 3: Cost of Capital and Capital Structure
2. Topic 5: Working Capital Mgmt3. Topic 6: Mergers, takeovers and valuation of shares4. Descriptive: Based on two chapters:(Note: I wrote the scribbles below during class as he was speaking and have not read thechapters yet)
o Chp6
ord/pref shares
interest rates and int. rate risks
finance lease, Stroke Sales and lease back
Securization?
LT v ST borrowing (briefly in COK)o Chp7:
role and form of stock exchange (why do companies go on stockmarket; adv & limitations on stock mrkt;
Efficiency of stock market (share price reflect avail info of company orare companies over/undervalued; can u trust share price?);
Methods of share issue on stock markets (how u raise capital; stockexchange place etc.)
venture capital and business angels (nature, issues they look at in termsof assessing projects)
Tips:
Look at questions before reading case
2 Cost of Capital & Capital Structure
How do you determine the optimal source of capital (debt and/or equity) that will be thecheapest for firm?
2.1 Definitions
Cost of funds rate of return the firm must earn on its projects for the market value of thefirm to remain unchanged (i.e. NPV = 0)Cost of capital usually a combination of debt and equity
Cost of loan - interest rate attached to loanIrredeemable pays interest only every year; never pays capital backGearing = borrowing; debt; leverageRights issue - existing SH have the option to keep the same control as beforeDebentures = long-term loans
2.2 Acronyms
CAPM capital asset pricing modelPBIT Profit Before Interest & Tax
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2.3 Ordinary Shares
2.3.1 Dividend approach
The current market value of the share is the present value at rate Ko of all future dividends forthe next n years:
Po = D1 + D2 + D3 + Dn
(1 +Ko)l
(1 + Ko)2
(1 + Ko)3
(1 + Ko)n
where:
Po = the current market value of the shareD = the expected future dividend in years 1 to nn = the number of years over which the business expected to issue dividendsKo = the cost of ordinary shares to the business (i.e. the required return for
investors)
Note: Po = P zero = time nowKo = K ordinary (as in ordinary share); also Ko is in decimal format (i.e. 0.18not 18%)
If dividends are constant (perpetuity):Po = Do
KoThis can be seen in a mature industry (not a software company).
If dividend grows at constant rateg(Gordon growth model)Po = Do .
Ko g
Example P3s7
2.3.2 Risk/Return Approach
Reduce risk by diversifying over many projects
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Figure 5.14 Reducing risk through diversification
2.3.3 Capital Asset Pricing Model (CAPM)
Ko = Krf + (Km - Krf)
where:
Ko = the required return for investors for a particular share
Krf = the risk-free rate on government securities
= beta of the particular shareKm = the expected returns to the market for the next period
(Km- Krf) =the expected market average risk premium for the next period
Diagram P3s10 on how to calc. this equation
Beta is a measure of risk. The more risk the more premium investors will expect. The marketas a whole has a Beta of 1. Aggressive stocks have a Beta > 1 (extreme changes with respectto the market) while defensive stocks have a Beta < 1.
The figure below shows the relationship between expected return and Beta (level of risk). The
line is referred to as the security market line. When Beta = 0 (no risk) the investors willrequire the risk-free rate.
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2.4 Loan Capital
Cost of loan = interest rate attached to loan; can also have traded loans traded like sharesbetween investors.Irredeemable pays interest only every year; never pays capital back
Pd = I .Kd
Where:Pd = the current market value of the loan capitalI = the annual rate of interest on the loan capitalKd = the cost of loan capital to the business
Note:
d stands for debt Kd < Ko (shares are more risky and cost more)
With taxes
Kd = I(1 - t)
Pd
where t is the rate of corporation tax payable.
or the real interest rate of the
company. (example P3s16,17-18)
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Expected
Return (%) Slope of line
(Km- Krf)Km
0.5 1.0 1.5 2.0 2.5 3.0
Beta
The figure shows the relationship between the expected level of return and
the level of risk as measured by beta. The risk/return characteristics of aninvestment will lie at some point on the continuous line (which is referred to
as the security market line).Where there is no risk, the return required from
investors will be the risk-free rate. As the level of risk increases, investors
ill demand an increasingly large risk premium to compensate. The market
as a whole will have a beta of 1.
(cap asset pricing model = security market line)
(risk free rate)
(Beta tells u how sensitive shares movement is to movement in market as a whole)
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2.5 Preference Shares
Pref. shareholders (SH) get dividend before ordinary shareholders. Therefore ordinary SHexpect more return due to higher risk.
Irredeemable
Pp = DpKp
Pp =the current market price of the preference shares
Kp= the cost of preference shares to the businessDp= the annual dividend payments
Note: p = preference shares(e.g. P3s20, 21(note in this example there should be brackets around 5.0 and 55.0))
2.6 Weighted Avg Cost of Capital (WACC)
Weighted in proportion to overall contribution to the company.
Figure 8.5 Calculating WACCFigure 1 - Calculation WACC
(e.g. P3s22-26)Limitations to this approach:
1. Assumes same risk as existing projects (new project may be in new industry or havediff. risk profile)
2. Assumes cap. Structure will remain stable (new project may not be financed using thesame proportions)
2.7 Financial Gearing
Gearing = borrowing; debt; leverage
(Cogged wheel diagram P3s30)
Financial gearing ratio = Loan Capital + Pref. Shares (if any) x 100%
Total long-term Capital
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(e.g. P3s31-34,35-39)
Higher gearing means company is more sensitive to changes.
2.7.1 RatiosReturn of ordinary SH funds (ROSF) = Earnings avail. To ord. SH
Ord. shares + reserves
Earnings per share (EPS) = Earnings avail. To ord SH# of ord. shares
Note: can improve EPS by getting more debt which comes at a cost
Interest Cover Ratio = Profit before interest and taxInterest payable
Gearing (Debt) Ratio = Loan Capital . x 100%Ord. shares + reserves + loan cap.
Note: need to look at industry date to see if this ratio is too high or low.
2.8 Breakeven Analysis
2.8.1 PBIT EPS Indifference Chart
Figure 8.10 PBITEPS indifference chart for two financing optionsIntersection = indifference point = both options provide same return to SH
2.8.2 Calculate
To calculate use definition of EPS
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(X I1) (1 - t) = (X - 12) (1 - t)
El E2
where:
X = the profit before interest and taxation at which the two financing options
provide the same return to ordinary shareholders
I = the annual interest charges under each financing option
E = the number of ordinary shares in issue
(e.g. P3s43-44)
2.9 Practical considerations in selecting source of finance
1. Impact on existing financial struct. And financial risk of company2. operational gearing
o sensitivity of op. profits to changes in sales volume
o amount of fixed costs you have in income statement; greater chance of
bankruptcy the higher the fixed cost3. duration of investment
o matching long term projects should be matched with long term finances
4. business risko high risk businesses more suited to equity finance (i.e. software company)
5. prospects for investorso EPS, DPS and investors attitudes towards these
6. foreign currency risko financing payment should match currency of revenues generated
7. future prospects of businesso look at budgets and cashflow forecasts
8. avail. of financial sources at reasonable cost9. target capital structure of business
o min. overall cost to company
10. company have realisable assets to use as borrowing security?
11. will the company be able to borrow again in the future?o Shouldnt move to far away from optimal structure
12. movement in interest rateso i.e. if interest rates expected to fall use short-term financing
o speculative
o violates matching principle
o risky i.e. rate increases or banks might not want to roll over financing
13. legal restrictionso companys articles of assoc.
o loan covenants on existing debt
14. pecking ordero on average companies use:
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retained earnings
debt
equity (ord. shares)15. signalling managers signal based on financial structure
o i.e. taking on more debt signals future profit potential
16. Asymmetric info public disclosure of information may not be in the best interest ofthe company (i.e. competitors may get data)
2.10Theories of Capital Structure
2.10.1 Traditional View
Level of borrowing determined by risk how volatile earnings are
The figure assumes that at low levels of borrowing, ordinary (equity)
shareholders will not require a higher level of return to compensate for the
higher risk incurred. As loan finance is cheaper than equity finance, this will
lead to a fall in the overall cost of capital. However, this situation will
change as the level of borrowing increases. At some point, the increased
returns required by ordinary shareholders will begin to outweigh the benefitsof cheap loan capital and so the overall cost of capital will start to rise. The
implication is, therefore, that there is an optimum level of gearing for a
business.
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Theories of capital structure
(1) traditional view
Figure 8.11 The traditional view of the relationship between levels of borrowingand expected returns
(no debt)
(required return going to goup as we request more debt)
50/50
(software company) (supermarket)(Volatile)
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Figure 8.12 Relationship between the level of borrowing, the cost of capital andbusiness value: the traditional view
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2.10.2 Modigliani-Miller Approach
The MM view assumes that the cost of capital will remain constant atdifferent levels of gearing. This is because the benefits of cheap loan capital
will be exactly offset by the increased returns required by equity
shareholders. Thus, there is no optimum level of gearing.
Figure 8.13 The MM view of the relationship between levels of borrowing andexpected returns
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The first graph shows that, according to MM, the cost of capital will remain
constant at different levels of borrowing. The second graph shows the
implication of this for the value of the business. As the cost of capital isconstant, the net present value of future cash flows from the business will
not be affected by the level of borrowing. Hence, the value of the business
will remain constant.
Figure 8.14 Relationship between the level of borrowing, the cost of capital andbusiness value: the MM view
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Assumptions
(I) perfect capital markets- no transaction costs
- personal borrowing rate = corporate borrowing rate
(2) no bankruptcy costs- no legal costs- assets realise market value
(3) risk- companies exist that have identical business risk
(4) no taxation
(personal lower)
(well relax this assumption and see what happens)
(cost assoc. with financial stress)
(assets that dont transfer well IP)
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The first graph displays the MM (including tax) view of the relationship
between the cost of capital and the level of borrowing. We can see that as
the level of borrowing increases, the overall cost of capital decreases. The
second graph shows the relationship between the value of the business and
the level of borrowing. A decrease in the overall cost of capital results in a
rise in the value of the business and so, as the level of borrowing increases,the value of the business increases.
Figure 8.16 Relationship between the level of borrowing, the cost of capital andbusiness value: the MM view (including tax effects)
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The figure shows the revised MM view. As the level of borrowing increases.
the greater the tax benefits to ordinary (equity) shareholders. These tax
benefits will increase with the level of borrowing and so the overall cost of
capital (after tax) will be lowered as the level of borrowing increases. This
means that there is an optimum level of gearing and it is at the 100 per cent
level of gearing.
Figure 8.15 The MM view of the relationship between levels of borrowing andexpected returns (including tax effects)
(dec. due to tax deductibilityOf interest)
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(e.g. P3s55-57)
3 Working Capital MgmtWorking capital = current assets current liab.
= stock + debtors creditors
How do you maximize SH value?1. Stock 2. Debtors3. Cash4. Trade creditors5. Overdraft
3.1 Mgmt of Stock
Issues:
Conflict between Mgrs (sales would like lots of stock while production mgr wants to
min. cost of production)
Cost of low stock levels
o Lost sales
o Loss of goodwill
o Increased transport cost for replenishment
o Lost production
o
Inefficient production schedulingo Higher purchasing costs to replenish quickly
Holding costs:
o Storage
o Insurance
o Handling costs
o Financing
Control systems
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Region A small # of items but considerable valueRegion C large # of items but low value
Note: should concentrate on high value items (i.e. not paperclips)
3.1.1 Stock turnover
Avg. stock turnover period = Avg. stock held x 365 daysCost of sales
Note: avg. stock held = opening + closing
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3.1.2 Economic Order Quantity (EOQ) models
Which order level minimizes order cost?
(formula for EOQ on P5s13 but Paul said we dont need to memorize; e.g. P5s14)
3.1.2.1 Saw tooth (simplest model)
Assumptions:
Stocks depleted evenly over time Stocks will be replenished just at the point when existing stock runs out
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3.1.2.2 Stockholding and stock order costs
The more frequently you order the more costly it will be i.e. to maintain low stock levels.In other words, the less orders you make the cheaper it will be BUT the holding cost willincrease the more stock you order. Balance = point E; total costs are minimized.
3.2 Mgmt of Trade Debtors
Issues:
Which customers do you give credit to? (the 5 Cs of credit:o Capital
What percentage of the consumer is owned by a bank?
The more geared up they are the less likely they are to default(???)o Capacity
Ability to repay
Look at cashflow or liquidity or do credit checko Collateral
What assets do they have?
To what extent can you get your money back?
o Conditions Economic conditions of industry
The more volatile the more likely to get into troubleo Character
Character of mgmt team
Reputations and track record in business
Managerial experience
Sources of Credit Information
o Trade references
o Bank references
o Accounts Liquidity
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Profitabilityo Site visit
o Credit agencies
Bond ratings (i.e. double A, triple C)o Other suppliers
How much credit do you offer and for how long? Look at:
o Credit terms within the industry
o Degree of competition
o Bargaining power of customers
o Risk of non payment
o Marketing strategy
o Capacity to offer credit
Cash discount
o i.e. 2/10 net 30 (2% discount if you pay in 10 days otherwise pay in 30 days)
Collection policies
o Develop customer relationships
Meet freq.
Good if seasonality in cash flows etc.o Publicize credit terms
You must let the customer know (i.e. on invoices)o Invoice promptly
o Clear procedures for disputed items
o Monitor outstanding debts (see next section)
How many days stock do you have outstanding?
(e.g. P5s16-18)
3.2.1 Monitor Outstanding Debts
Avg Settlement period (for debtors) = Trade debtors x 365 daysCredit sales
(e.g. P5s20)
Deal with slow players
Reduce the risk of non payment by
Getting customers to pay in advance
Setup offsetting arrangementso If you are buying and selling from same company offset (i.e. you buy $5 of
apples from them and they buy $8 of oranges from you, then they only oweyou $3)
Third party guarantee
o Someone else will pay if they cant
Legal title retention (???)
Insurance
o Factoring insurance will pay in case of default (see more examples of
factoring below)
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3.3 Cash Mgmt
Why hold cash?
Transactions
Precautionary (just in case)
Speculative; i.e.o For bank liquidity purposes
o Interest rate movements
How much cash should be held?
Depends on nature of business
Look at opportunity cost of holding and not using cash
Inflation
Avail. Of near liquid assets
o You dont need cash if you have something that you can convert to cash
quickly Look at cost and availability of borrowing
o Interest rate high?
What are the current economic conditions?
Look at relationships with suppliers
(e.g. cashflow P5s22, 26-28)
Operating cash cycle = amount of time between payment made to supplier and cash receivedfrom customer
3.4 Using Trade Creditors as a source of finance
Advantages:
Relatively easy to obtain
o Automatically get credit when relationship established
Directly linked to financing of goods or services
Frees up bank lines of credit
May be free
o i.e. no interest
Disadvantages Suppliers may increase prices to recover cost (risk) of extended credit
Suppliers may charge interest
Lose out on discounts
Suppliers may be alienated if you take extended credit without authorization
To determine optimal use of trade credit financing take into account:
Cost of lost discounts
Cost of borrowing
Loss of suppliers goodwill
(e.g. P5s30)
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3.4.1 Controlling Trade Creditors
Avg. settlement period of creditors = Trade creditors x 365 daysCredit purchases
Factoring
Another company can offer:
Administration of your sales/accounting function
o i.e. undertake collection of trade debts for fee of 2%
Cash advances (a source of finance but you have to pay interest rate)
o i.e. theyll pay up to 80% of trade debtors
Insurance (in case of default)
(e.g. P5s32-33, 34-35, 36-39)
4 Mergers, Takeovers & Valuation of SharesMerger share per share exchangeTakeover generally overpay for the company
Horizontal peer companiesVertical companies that are up/down the value chain
4.1 Why merger?Synergy outcome is more than the sum of the individual contributions (2+2 = 5) Earnings
o Increase EPS
o Acquire less risky earnings (cash cow)
Tax considerations
o If company gen. losses there exists unused tax shield that can offset buyers
own tax liability (usually have to stay in same business and not just sell offassets)
Diversification
o
Spread risk over conglomerates (but SH can do that with their own stockportfolio dont need company to do it for them)o Stick to core competency?
Economies of scale
o Easier access to capital markets
o R&D
o Advertising
o Overheads
Marketing
o Increase/maintain Mkt share
o
Eliminate/hold off competition Barriers to entry
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o Can enter market at lower cost than if company were to develop own resources
(i.e. buy someone whos already doing it)
Complete product lines
Acquire mgmt
Increase purchasing leverage (raw materials & cap. Equip.)
o Power over suppliers
Improve assets
o Acquire company that has higher earnings relative to assets
o Buyer will improve its risk profile and liquidity
Cash
o Acquisition of cash rich company (i.e. they are not investing in enough
projects)
Utilize excess capacity
o i.e. if two companies operating at 50%; buy and close down other plant
Personal obj. of mgmt
o Bigger firm will have greater prestige, power, remuneration
Level out seasonality of business
o Offset highs and lows
Cheap acquisition
o Target firm may be undervalued
4.2 The Three forms of Purchase Consideration
4.2.1 Shares
Ordinary shares are more likely to be used following a period of strong stock mrkt
performance
Ord. shares are used to ensure combined business is treated as a merger
Companies with good growth prospects use shares
Evidence of poor subsequent performance for share-for-share acquisitions
o More restrictions on company if loans had been used
o Overestimated synergy?
Advantages:
Ordinary shares are more likely to be used following a period of strong stock mrkt
performance
Ord. shares are used to ensure combined business is treated as a merger
Companies with good growth prospects use shares
Offeree SH will not be immediately liable to capital gains tax
If offerors shares are trading at a premium (i.e. high P/E) it is normally in the buying
companys interest to make a share offer, thereby purchasing assets and earningsrelatively cheaply
Offeree SH will be happy if there is a synergy and share price increases are expected
Disadvantages:
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Control
o New issue of shares may upset the balance of control within the company
Dilution of EPS and net assets per share
o Should worry more about risk than maximizing EPS
May require a resolution of the company at a general meeting
o Company may have insufficient authorized but unissued shares
Offeree may require greater value due to higher risk of shares over cash
Dividend policy of offeror may affect offeree SH decision
o Clientele effect some SH attracted to certain company that have certain div.
policies
4.2.2 Loan Capital
Advantages:
Interest is tax deductible
No control impact (in terms of voting power)
Loan creditor likely o require a lower rate of return (less risk than SH)
Disadvantages
Loan creditor is likely to require security
Loan creditor may place constraints on company activities
o E.g. require board representation or restrictions on dividends
Over-gearing
Company may exceed borrowing limit outlined in articles of association
4.2.3 Cash
Advantages:
Useful where offeror and/or offeree have substantial cash
No control aspect
Usually price is cheaper and no risk to offeree SH
No dilution of EPS or net assets per share
Disadvantages:
Over-gearing?
4.3 Assessing Vulnerability to a TakeoverTypical cases when company:
Has a low share return in preceding 4 years
o Underperforming
Has a higher growth-to-resource mismatch
o Not developing company
Low avg. sales growth (not growing)
High avg. liquidity (not reinvesting)
Low avg. gearing (conservative)o Growing too big too fast (rel. to capital)
High avg. sales growth (growing fast) Low avg. liquidity (investing a lot)
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High avg. gearing (conservative)
Is a small companies
o Tend to be taken over more
Is in an industry that was not acquisitive in previous years
o Deregulation?
4.4 Defense Strategies
Convert to private company
Employee share options
Circulating SH (tell them offer is too low)
Making the company unattractive
o Poison pill
Sell the crown jewelso
Golden parachute Mgr compensation schemes (i.e. bonuses) in event of takeover
Takes money out of companyo Dividend distribution
Convince SH to stay with existing company
Pac-man defense
o Counter-offer for their company
White-knight
o Friendly bidder
White-squire
o Someone who acquires strategic interest (thwarts overtures of unwelcomebidder) but doesnt take over
4.5 Demerger
De-couple or split the company into a number of indep. Units.Demerger may take place if:
Business is unprofitable
Parts of business do not fit with the strategic plan
It is higher risk than the remainder of the group companies
Two types of Demerger: Divestment
Spin-off
4.5.1 Divestment
Selling off part of the business to another company.Reasons include:
To ensure survival
Concentrate on core activities
Reduce the size of the business because it is difficult to control
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4.5.2 Spin-off
Existing company creates a new company.
New company is allocated assets from existing company
Ownership of new company remains with existing SH of existing company
Shares of new company usually distributed to SH in proportion to holdings in existingcompany
Reasons include:
Defense against takeover
o Protect the crown jewels
Improve performance
o Give mgmt more autonomy
o Focus on key activities
Market reaction
o Existing shares are undervalued; nature and value of various operating
divisions may be more appreciated after spin-off
Attract potential investors
o Merge
o Be acquired
o Floated on stock market
SH investment
o Some parts of business more attractive to SH than others
o SH adjust his/her investment
4.6 Valuation of Shares
(e.g. P6s16)
Goodwill
o Intangible assets
o Synergy
o Company is worth more than just its assets
4.6.1 Asset based methods
Assets: Seller will want to use replacement value while buyer will want to use resale
value.
4.6.1.1 Net Book Value Method
Po = tot. assets at bal. sheetvalues tot. liab.# of ord. shares issued
(e.g. P6s20)
4.6.1.2 Liquidation Value Method
Po = tot. assets at net realizable values tot. liab.# of ord. shares issued
(e.g. P6s20)
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4.6.1.3 Replacement Cost Method
Po = tot. assets at replacement cost tot. liab.# of ord. shares issued
Note: replacement cost includes goodwill.(e.g. P6s21)
4.6.2 Stock Market Methods
4.6.2.1 P/E Ratio
P/E ratio = Mkt value per shareEPS
Po = (P/E ratio of similar listed company) x (EPS of unlisted company)
Limitation: Variance of company selected as comparable
(e.g. P6s22)
4.6.2.2 Dividend Yield Method
DY = Gross div. per share x 100Mkt value per share (Po)
ThereforePo = Gross div. per share x 100
DY of comparable company
Note: Gross div. per share = DPS / (1 std. rate of tax)
(e.g. P6s23)
4.6.3 Cash Flow Methods
4.6.3.1 Discounted Dividend Method
Po = Do (as seen in cost of capital section above)Ko
Limitation:
Presupposes its a mature company with stable dividend (steady state)
Have to calculate cost of capital
(e.g. P6s24)
4.6.3.2 Future Cash Flow (FCF) Method
Po = PV long-term loans at current market value*
# of ord. shares
23
7/30/2019 FMV Slides Review (Topic 3, 5, 6)
26/26
FMV Slides Review
Advantages:
Best method if you have the data
o Interested in what you will get out of assets
Limitations:
More complicated (forecast cashflow and work out cost of capital but thats what
mgrs and paid to do)
(e.g. P6s25)Note: example on P6s26-31 but he did not do it in class (ran out of time)
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