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Topic 3 - Fair Value Measurement - A211 - Example of Valuation
Topic 3 - Fair Value Measurement - A211 - Example of Valuation
Earning/market approach
Judgement is involved not only when applying a valuation technique, but also in its
selection of the valuation technique.
1
Net Asset Model
• Answer:
Assuming the financial position figures are realistic:
(000)
Noncurrent asset RM23,600
Current assets 8,400
Less: 6% unsecured loan (8,000)
Current liabilities (4,800)
19,200
Value per share =19,200K
8,000K
=RM2.4 per unit
4
Net Asset Model
EXAMPLE 2:
Ray Sdn Bhd is considering a takeover bid for AMD Sdn Bhd. AMD has been making
losses in the last 2 years, so it is considering that an asset based valuation method
would be appropriate to value the business.
REQUIRED
Calculate the expected fair value of AMD, using net asset value.
6
Net Asset Model…cont
Answer:
(000) Justification
• assuming that the value of an asset (or line of business or company etc) can be
measured by comparing it to similar assets (or lines of businesses or companies etc)
for which a market price is available
• For the purposes of measuring the fair value of the equity instruments of an
investee, an investor can consider the fair value of the equity instruments of similar
entities (ie comparable company peers) for which a market price is available.
• the fair value measurement of unquoted equity instruments consists of the following
steps:
1. Identify comparable company peers.
2. Select the performance measure that is most relevant to assessing the value for
the investee (ie the performance measure that market participants would use to
price the investee).
3. Apply the appropriate valuation multiple to the relevant performance measure of
the investee to obtain an indicated fair value of the investee’s equity value
Earnings /Market Approach…cont
PE multiple
• Value of a company = Earnings x PE (proxy co)
• For unlisted company, the value usually lesser, 2/3 of PE listed proxy company.
Example 3:
PQR is a successful unlisted games software development firm. An asset-based
valuation is not appropriate as the value of its key assets (its games and its
development team) are not reflected on the balance sheet. A similar listed
company has recently floated on the stock market. It has earnings per share of
RM0.50 and a current share price of RM10. PQR earns profits of RM1.2m per
annum.
Calculate the value of PQR based on the information given.
9
Earnings /Market Approach…cont
Answer:
PE of proxy company = 10/0.5
= 20
*For unlisted company, the value is usually lesser, 2/3 of PE listed proxy
(judgement)
10
Income Approach:
Dividend Growth Model
• Gordon growth model
• Assuming either constant or growth dividends
• Formula:
Constant dividends Constant Growth
P0 = d0 P0 = d0(1+g)
ke ke- g
12
Dividend Growth Model…cont
Answer:
a) Constant dividends
P 0 = d0
ke
= 250000/0.14
= EUR1.786 mil @ = EUR 0.893 per share (ie, 1.786M / 2M)
b) Constant Growth
P0 = d0(1+g)
ke- g
= 250000 x 1.04
0.14-0.04
= EUR 2.6 mil @ EUR 1.30 per share (ie, 2.6M / 2M)
13
Discounted Cash Flow Model
A value of company equity is derived by estimating future annual after tax
cash flows of the entity and, discounting these cash flows at an appropriate
cost of capital (discount rate).
Example 5:
The expected after-tax cash flows of XYZ, and all-equity financed company with 2
million shares in issue is as follows:
Year GBP
1 120,000
2 100,000
3 140,000
4 50,000
5 onwards 130,000
14
Discounted Cash Flow Model…cont
Answer:
YearGBP Disc factor(12%) PV
1 120,000 0.893 107,160
2 100,000 0.797 79,700
3 140,000 0.712 99,680
4 50,000 0.636 31,800
5 onwards 130,000 0.567 73,710
NPV392,050
Assuming after year 5 the cash flow is infinity, the PV of the cash flow will be 130,000/0.12 =GBP
1,083,333
So, the PV = 1,083,33 x 0.567 = GBP614,250
The total PV = 392,050 + 614,250 = GBP 1,006,300
Therefore the value per share = GBP1,006,300/2mill
= GBP 0.50 per share. 15
Expected Cash Flow Model
Uses a range of cash flows and incorporates the probabilities of those cash flows to
provide a more relevant measurement of FV. Cash flows estimates may be based on
own experience or of professional & independent assessor.
Example 6:
Assume that the expected cash flows & its probability of a remodeled machine are as follow:
RM100,000 30%
RM200,000 50%
RM300,000 20%
Traditional model will estimate the FV based on the cash flow with the highest probability :
RM200,000
The expected cash flow model will estimate the FV based on the following calculation:
= (100,000x0.3)+(200,000x0.5)+(300,000x0.2)
= RM190,000