Topic 8.docx - Topic 8 | BBMF3183 Strategic Financial...

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the stock market value is not necessarily suitable because existing56For a takeover that involves a large number of shares (in order to gain control),3.Therefore, valuation in practice involves considerable informed guesswork (insideinformation often helps as well)4.The over-valuation problemPaying more than the current market value, to acquire a companyrecognisable market (e.g. shares in unquoted companies)During an acquisition, there is typically a fall in the price of the bidder and anincrease in the price of the targetOvervaluation may arise as miscalculation of potential synergies orOverestimationT8: VOPICALUATION OF MERGES ANDACQUISITIONSofValuationProblem1.So long as the market is reasonably efficient, the market price can be trusted asa fair assessment of value2.However, problems arise in valuing unique assets, or assets that have nosmooth earnings figures).Poor business decisions that are aimed at creating the impression of success.Poor acquisition decisions financed by inflated equity.6.Valuation of quoted companiesexample, delaying expenses and bringing forward revenue recognition toThe stock market value is readily available:For trading in small numbers of shares, the stock market value is a fair valueto be usedabilityofacquiringfirm'smanagementtoimproveperformanceTopic 8 | BBMF3183 Strategic Financial ManagementBoth lead to a higher price than current market value5.Problems with failing to respond to overvaluationsUse of creative accounting to continue the illusion of good results (for
Use statement of financial position as starting pointThis technique is sometimes used to estimate a minimum value for anunquoted company that is in financial difficulties or is difficult to sell.57If there are similar listed companies (i.e. proxy), estimates can be made usingproxy data e.g. cost of equity, beta, dividend yield, P/E ratiohowever, thishas to be discounted by 20% to 30% because:Relative lack of marketability of unquoted sharesGreater risk ofpoorqualityfinancialinformation& beingsmallerValuation of unquoted companiesshareholders will not have the incentive to selltherefore, a premium isnormally offered on top of the current stock market valueConclusion: The current stock market price is used as the starting point forcalculations7.companies with more volatile earningsNo stock market value & less information published:If there has been a recent private sale of the company’s shares, that pricecan be used as a starting point for calculationsDividend growthBook value ofequityP/E x Net profit(Market Value)modelDiscounted CashCIV methodFlow method1.Asset-based modelsAsset-basedValuation MethodsBPP165 - 177Valuation MethodsCash Flow basedTopic 8 | BBMF3183 Strategic Financial ManagementvaluationvaluationPresent Value)(Book Value)Earnings-basedvaluation
2.Calculated Intangible Assets (CIV)Intangible assets differ from tangible assets as they do not have physical

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Term
Spring
Professor
N/A
Tags
Time Value Of Money, Net Present Value, Generally Accepted Accounting Principles

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