Please find correct answers (only one answer is correct)

1. What means "Value of business"?

a Total value of all business assets
b Price for which the business had been sold or will be sold
c Economic benefit which is given to the owner by the business, and amount of money which buyer is ready to pay for this business in open market

2. The value of business is…

a Constant over the time
b Alway determined using particular mathematic formula
c Is based on various assumptions and can change for different purposes and at different moments of time

3. Which of the following elements is not the critical precondition for existence of market value of property?
a Demand
b Possibility to transfer (identified ownership rights)
c Supply
d Usefullness

4. Choose a correct statement

a Current financial indicators (profit, sales, cash etc.) show long-term economic benefit for the owner of the company
b The value of business is defined to express the current condition of company's assets and liabilities
c The value of business considers future development prospects of the company and therefore expresses long-term value for the owner

5. Which element mentioned above is not included into the concept of the highest and best value of property?
a Technical possibility to perform such operations
b Legal possibility to perform such operations (no legal restrictions etc.)
c Capacity of current management is enough to organize such operations
d Proposed highest and best use is financially feasible

6. The concept of market value does not include such element as

a Date of valuation
b Specific interest of particular buyer and seller
c Arm's length transaction
d Existence of willing buyer and willing seller

7. Enterprise value (or value of business) is

a The same as the value of company or the value of equity capital
b Equal to value of equity plus all company's liabilities at the date of valuation
c Is dependent on the capital structure (what is proportion between own funds - equity, and liabilitites)

8. Asset based valuation approach

a Considers present value of company's assets and all company's liabilities
b Determines the value of business considering only data from balance sheet of the company
c Never considers the value of intangible assets
d Displays the value of equity for owner of non-controlling interest (minority shareholders)

9. Market based valuation approach

a Can be used both for valuation of majority and minority block of shares
b Uses only data from the market, with no attention to the company's financial performance (e.g. sales, profit, assets etc.)
c Normally is not used for valuation of business (with some exceptions like new business (start-up), holding company or company under liquidation)

10. Income based approach

a Is always based on company's management developed forecast of future cash flow
b Will always include discounting of several years' cash flow
c Can be performed using either discounting or capitalization method, on the basis of business appraiser's analysis of current condition
and future development prospects of the company
d Will give the same value of share within controlling and non-controlling block of shares
Task 1

Please perform valuation of 100% and 7% of shares of the company as of 31 December 2018

Information
The airline company is one of the leading market players in the region of Scandinavia, Baltic states and Eastern Europe, with routes also to Western Europe, Asia and America.
Main financial data of the company is given in the table below.

Profit and loss statement

2018 2017 2016
Net sales 231,857,000 205,869,000 185,477,000
Direct production costs 192,441,310 170,871,270 153,945,910
Gross profit 39,415,690 34,997,730 31,531,090
Costs of sales 20,751,000 20,635,000 18,934,000
Costs of administration 1,745,000 1,634,000 1,438,000
Other income 1,275,000 1,584,000 946,000
Other costs 10,574,000 9,788,000 10,238,000
Interest payments 1,573,000 1,276,000 1,189,000
Profit before taxes 6,047,690 3,248,730 678,090
Taxes 907,154 487,310 101,714
Net profit 5,140,537 2,761,421 576,377

Balance sheet
12/31/2018 12/31/2017 12/31/2016 12/31/2018 12/31/2017 12/31/2016
Assets Capital
Long-term assets 754,000 798,000 837,000 Equity 21,068,957 15,928,421 13,167,000
Other fixed assets 754,000 798,000 837,000 Share capital 20,000,000 20,000,000 20,000,000
Current assets 35,142,000 31,331,000 31,989,000 Retained profit 1,068,957 -4,071,580 -6,833,000
Stocks 5,428,000 4,871,000 5,093,000 Long-term liabilities 0 0 1,034,000
Accounts receivable 20,177,000 15,821,000 16,944,000 Bank loan 0 0 1,034,000
Cash 9,537,000 10,639,000 9,952,000 Short-term liabilities 14,827,043 16,200,579 18,625,000
Bank loan 828,000 1,040,000 1,213,000
Accounts payable 12,903,043 14,151,000 15,529,000
Other liabilities 1,096,000 1,009,579 1,883,000
Total liabilities 14,827,043 16,200,579 19,659,000
Assets 35,896,000 32,129,000 32,826,000 Total capital 35,896,000 32,129,000 32,826,000

Additional information
The company achieved good growth in previous years, but further growth with such intensity is impossible in the current market conditions.
Global market for airlines is in crisis since 2009. Passenger flows are increasing, but there is very high level of competition, as a result prices are decreasing but costs of operations goes up.
A lot of market players had gone to bankruptcy or merged together to continue their business. Market experts are forecasting further increase of total market in amount of at least 5% a year,
but further competition will not allow airlines to grow their profit; and market experts forecast that profitability of airlines will decrease. The management of target company forecasts increase of sales
in amount of 7% each year in the next 5 years, but due to increase of costs and decreasing profitability ratio the management forecasts that gross profit will remain approximately the same as in 2018 in the
next 3-5 years. The company leases aircrafts in operational leasing, so aircrafts and appropriate leasing are not shown in balance sheet of the company, as they don't belong to the company.
As aircrafts do not belong to the company, the company also doesn't calculate depreciation of these assets.
The management has calculated that leasing payments could remain the same in long-term period (as the company will gradually replace aircrafts). Leasing payments are displayed in the line "Other
costs", interest payments - in the line "Interest payments".
"Other income" include varios items which change from year to year, and are difficult to forecast for long-term period.

Information from financial markets

Risk-free rate 0.88%
ERP 7.61%
B 1.45
Long-term growth 2%

Market multiples
EV/Sales 0.25
EV/EBIT 7.8
EV/Net profit 10.5
Multiples received from European stock exchanges

Answer Indicator of the Value of 100%

company Market multiple capital
Net sales 0.25 231,857,000 57,964,250
EBIT 7.8 7620690 59,441,382
Net profit 10.5 224,236,310 2,354,481,255

823,962,296 EV

Calculation of value of 100% equity

-20,000,000 Amount of debt

843,962,296 Market value of equity 100%

Calculation of value of 7% of shares (equity)

59,077,361 Market value of 7% of shares
Task 2

The company is a real estate owner - hotel building and appropriate land plot. The company leases the building to other company, which operates the hotel business.
Company's management is analysing future prospects and evaluates two options:
1. Further operations in the current mode (leasing of own real estate to operator of hotel)
2. Cancelling of current business, and liquidation of the company, selling all the assets.
Please analyse the available information and advise to the management of the company what option to choose (i.e. what option is more efficient for the owner).

Profit and loss statement and cash flow

2018 2017 2016
Net sales 611,822 611,075 609,438 Net sales are received only from the lessee of the building (operator of the hotel)
Direct costs 238,327 240,932 241,859 Include costs of the owner of the building (electricity, heating, repairs etc.)
incl. depreciation 190,000 190,000 190,000
Gross profit 373,495 370,143 367,579
Costs of administration 18,732 18,004 21,844
Other income 0 0 0
Other costs 0 0 5,621
Interest payments 137,890 148,722 160,380 The company received a bank loan to buy its real estate, interest payments for this loan are being reflected here
Profit before taxes 216,873 203,417 179,734
Taxes 32,531 30,513 0
Net profit 184,342 172,904 179,734

Balance sheet
12/31/2018 12/31/2017 12/31/2016 12/31/2018 12/31/2017 12/31/2016
Assets Capital
Long-term assets 2,244,412 2,350,323 2,504,898 Equity 305,271 120,928 -51,976
Real estate 1,818,956 1,875,897 2,034,332 Share capital 3,000 3,000 3,000
Other assets 425,456 474,426 470,566 Retained profit 302,271 117,928 -54,976
Current assets 71,029 87,424 48,692 Long-term liabilities 1,500,000 1,800,000 2,100,000
Stocks 8,435 10,644 8,403 Bank loan 1,500,000 1,800,000 2,100,000
Accounts receivable 29,644 26,409 27,439 Short-term liabilities 510,170 516,819 505,566
Cash 32,950 50,371 12,850 Bank loan 500,000 500,000 500,000
Accounts payable 7,427 10,943 1,744
Salary 2,743 5,876 3,822
Total liabilities 2,010,170 2,316,819 2,605,566
Assets 2,315,441 2,437,747 2,553,590 Total capital 2,315,441 2,437,747 2,553,590

Additional information
As you can see from the data given above, the only business of the company is leasing of its own real estate to the operator of the hotel. The company covers real estate costs, which further are being
forwarded to the lessee as a part of leasing payments. The company plans to continue this business, with the same rent. No new development projects are being planned. The company had received a
bank loan to buy this real estate, and residual amount of loan at 31.12.2018 is EUR 1 500 000, it should be repaid in 5 years by equal annual principal payments, annual interest rate 3,5%.
According to the leasing contract all necessary investments into the building makes the lessee, so the company does not have any investment cash flow and does not plan to have it in the future.
The company had ordered valuations of its property, and the results as of November 2018 are:
Real estate 5,200,000
Other fixed assets (furniture, computers etc.) 370,000

The company does not have intangible assets and off-balance liabilitities. The company states that it doesn't have unmarketable stocks, but it has doubtful debtors in amount of EUR 10 600.

Financila market data

Risk-free rate 1.09%
ERP 7.61%
B 1.38
Long-term growth 2%

The market value of 100% of equity capital needs to be calculated, using the income approach.
Residual sum of
loan in the Residual sum of
beginning of the Principal loan in the end Interests
Period year repayment of the year payable
2018 1,500,000 300,000 1,200,000 67,500
2019 1,200,000 300,000 900,000 52,500
2020 900,000 300,000 600,000 37,500
2021 600,000 300,000 300,000 22,500
2022 300,000 300,000 0 7,500

year 2018 2019 2020 2021 2022

Net sales 611,822 633,236 655,399 678,338 702,080
Direct production costs 238,327 246,668 255,302 264,237 273,486
Gross profit 373,495 386,567 400,097 414,101 428,594
Administrative costs 18,732 18,732 18,732 18,732 18,732
Other costs 67,500 52,500 37,500 22,500 0
Profit before taxes 287,263 315,335 343,865 372,869 409,862
Corporate income tax 15% 43,089 47,300 51,580 55,930 61,479
Net profit 244,174 268,035 292,285 316,938 348,383

Adjustments to cash flow

1. Adjustment for depreciation (+) 190,000 190,000 190,000 190,000 190,000
2. Adjustment for investments (-) 0 0 0 0 0
3. Adjustment for loan received (+) 0 0 0 0 0
4. Adjustment for loan repaid (-) 300,000 300,000 300,000 300,000 0
5. Adjustment for interest payments (-) 0 0 0 0 0

Net cash flow 134,174 158,035 182,285 206,938 538,383

As the equity capital is being valued, CAPM should be used to calculate the discount rate

E = Rf+B*ERP
10.37%

855,065

Calculation of terminal value

Capitalization rate = discount rate -long-term growth rate (2%)

8.37% capitalization rate
Terminal value (undiscounted) 6,432,291
Terminal value (discounted) 3,927,448

Calculation of the final value of equity

4,782,513
Task 3

Using information from the Task 2, please calculate the value of 5% shares of the target company to inform minority shareholder about possible selling price of his shares. Use at least 2 valuation approaches.
For this calculation assume that the company will continue its operations in the present mode.

Additional information:
Market multiples
P/Sales 6.1
P/Net profit 19.7
P/Total assets 1.8
Data is collected from European stock exchanges

Discount for lack of control 40%

(use if necessary)

Answer Indicator of the Value of 100%

company Market multiple capital
Net sales 611,822 6.1 3,732,114
Net profit 184,342 19.7 3,631,537
Total assets 2,315,441 1.8 4,167,794

3,899,666 PV

Calculation of value of 100% equity

0 Amount of debt

3,899,666 Market value of equity 100%

Adjusting value of 100% for 5% = multiplying with coefficient 0,05

194,983 Market value of 5% of shares