C39CN - Past Exam Papers.doc

Payment of liability among the more common valuation

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payment of liability Among the more common valuation methods are; 1. Discounted cash flows This can be done as a more complicated spreadsheet exercise if you wish to look at the effects of more complicated assumptions about future cash flow and growth rates. Note that assumptions about growth rates can have a very big impact on the valuation. One may want to look at some scenarios, then take an expected value. If growth can be assumed to be relatively constant, then it is possible to use simpler approach than spreadsheet modeling. This is; 2. Capitalisation of earnings. I.e. Cashflow is valued as a growing perpetuity 3. Comparable multiples The more conventional multiples are p-e ratio and price/ebitda. It should be noted that p-e ratio does not include a takeover premium. Valuation using price/ebitda often proceeds via previous using previous EV/Ebitda ratios to infer enterprise value. Many other metrics may be used, including Price/Sales, Price/Book, Price to net income, and average premium paid, all based on previous similar deals. In case of great uncertainty, a number of ratios may be calculated, and then averaged out to give a basis for negotiation. 4. Net asset value I.e. Assets minus liabilities. In theory, this should be an accurate basis for valuation. However, in practice, it may not be very accurate for the following reasons. DECEMBER 8
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C39 CN Firstly, assets may be recorded at historical cost. Secondly, given various accounting conventions, NAV may not correlate terribly well with earnings and cash flow which are more directly linked to shareholder value. Thirdly, in most business nowadays intangible assets are very important, but difficult to value. NAV can be useful where there are clearly defined assets and liabilities such as in Property investment companies Investment trusts Resource-based companies DECEMBER 9
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C39 CN SCHOOL OF MANAGEMENT AND LANGUAGES Accountancy and Finance MERGERS AND ACQUISITIONS Course Code: C39CN1 Friday, 14 th December 2012 09:30 – 11:30 INSTRUCTIONS Answer any TWO questions. All questions carry equal marks. Answer any TWO questions. All questions carry equal marks. Question 1 a) Outline and discuss the various means that acquiring companies might make use of to acquire stock in a target company, with particular reference to the advantages and disadvantages of each. DECEMBER 10
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C39 CN b) Explain what is meant by a proxy contest and discuss the impact such a contest has on a target firm. (50 marks) Question 2 a) What is the fundamental principle of financial valuation? b) Explain why alternatives to cash flow often have to be used in valuations and identify at least four of these alternatives. c) Elaborate on the need to use ratios, given your answers to a) and b). d) Define and explain the use of enterprise value with particular reference to the difference with equity value.
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