# Step 1 calculate the companys cfc cfc 200 000 40 x 1

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Step 1 : Calculate the company’s CFC CFC = 200 000 +[(40% x 1 000 000 x 10%) x (0.30)] = R 212 000 Step 2 : calculate the company’s unlevered cost of equity K e,L = (0.60 x 18% ) + ( 0.40 x 10% ) = 14.80% Step 3 : calculate the value of the company Company Value = _ 212 000 x (1 + 0.02 ) _ ( 0.148 – 0.02 ) = R 1 689 375

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- In a real-world example all three methods should yield the same values - The differences are caused by the assumptions made to keep factors constant Other Valuation Approaches - Comparing the valuations obtained from different methods could provide valuable information - The most commonly used valuation techniques include the following: Comparable Values - Two broad methods 1.) Comparable Company Method 2.) Comparable Transaction Method - Can consider values of similar companies - Can utilise comparable ratios, namely: The price-earnings ratio Market value of ordinary shares to book value of ordinary shares ratio Market value of ordinary shares to turnover ratio 12 | P a g e Example (page 129) Let’s suppose that WCB Ltd. identified two comparable listed companies that operate in the same industry as Meineken Ltd. The following information for these two companies is provided. Company A Company B Average P/E 36 32 34 MV/BV 19 21 20 MV/Turnover 100 140 120 Comparable Average Meineken value Market estimate P/E 34 31 500 =1 071 000 MV/BV 20 600 000 = 12 000 000 MV/Turnover 120 100 000 = 12 000 000 25 071 000 Average 8 357 000 Based on the values of the comparable companies it is calculated that the value of Meineken is R 8 357 000.
- Comparable value methods are easy to apply but have many weaknesses 1.) Difficult to find truly comparable companies 2.) Use of averages could lead to underestimation - Also possible to consider similar business combinations - Use following ratios to calculate values to compare: 1.) Transaction value to turnover 2.) Transaction value to earnings 3.) Transaction value to book value of ordinary shares Book Values - Not recommended if the company has a large amount of intangible assets - Use the values from the SFP - these are influenced by the company’ choice in accounting standards - Its difficult to classify some of the items - Reflects largely the historical position of the company rather than the future forecasts - Most likely method to result in significant undervaluation. Liquidation Values - Calculate the value of the company by calculating the total proceeds from the sale of individual assets less all the liabilities - Adopt this approach when the company is in financial distress or where valuation of individual operations is complicated - Possible to ignore intangible assets since their value is complex to determine Market Capitalisation - Use the current market capitalisation of ordinary share capital - In an efficient market the share market price should reflect all publically available information on past and future financial performance - Problem is often base decisions on information that isn’t available to public - Can be applied to companies that aren’t listed - Indicates the minimum value that the transaction should occur at Conclusion -

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