1. Reasons to value a business

    • Efficient Market Hypothesis
    • Go listed
    • M&A a company
  2. Types of valuation methods
    1. Book value approach
      • Tangible assets
      • Intangible assets
    2. Market based approach
      • P/E ratio
      • Dividend yield model
    3. Cash flow based approach
      • dividend valuation model(dividend growth model)

Reasons to value a business

 
The 1st question is why do we need to value a business?

Well, the reasons being:

  • We want to acquire another company so we need to determine how much we are going to pay for them.
  • For listed companies you would notice they have their own share price then we can take it multiply by number of shares giving us total market capitalization then why do we still need to value them?
  • The reason is because we are in a semi market hypothesis so the share price quoted may not include insider information then we need to do extra calculation to verify whether that share price is the value of the company.
  • Other reason includes eg, why we need to value the company would be company may want to go listed onto the stock exchange then how would you determine your share price? Of course you need to value it first then divide by the number of shares and hence you can get share price you are going to quote.
  • Or we would like to merge another company(Co1+Co2=Co1) or acquire another company in order to make it become a subsidiary, eg, creating synergies(1+1>2) so we need to understand how much it’s worth before we purchase it.

 

Efficient Market Hypothesis

 
How quickly share price will react to information?

Weak form -reflect past information

Shareholders can’t just analyze the past information to generate abnormal return.

Semi Strong form -reflect published information

Shareholders can’t just analyze the published information to generate abnormal return.

Strong form -reflect past +published + private information

Shareholders can’t just analyze the inside information to generate abnormal return.

 

Q HJ[EMH]

HJ is about to acquire pc and expect a profit after tax after the acquisition to be $0.096m.

If HJ is not going to announce this to the public then the value of the HJ is $17.44m.

P/E ratio of HJ is 7.5.

 

Required:

Assuming a semi-strong form efficient capital market, calculate and comment on the post acquisition market capitalisation of HJ Co if the expected after-tax savings are made public. (3 marks)
 

Answer:

Value 17.44
Revised value

Changes in PAT X P/E

$0.096mX7.5

0.72
Total value 18.16

 

So if HJ announces the annual tax saving then total market capitalization would increase from 17.44 to 18.16 given shareholders would analyses published information of company to make investment decision either to buy or sell a share.