ACCA P4 BUSINESS VALUATION

hello this is Steve from ACCA calm so today we're going to do is to look at the business valuations so I chose to look at the business valuation they'll be sickly five aspects we like to know within your p4 time alright so first aspects we're going to look at is why do we need to value your business so we're going to look at the reasons why we get to Bodyguard business of course one of the reasons will they we're going to acquire another company that's why we need to know this value before we actually play for its shareholders okay second vague after we notice why do have to value that business the second question would be are there any valuation methods we can use in order to violin that business so most of the method most of the methods over here you've learned that in your life nice today we're going to take you further in default so that we're comfortable with the exams questions so after we've looked up how to value that based days usually determine whether or not we're going to pay for the shareholders by cash or by shares and also we've done that of course in the rear I've inspected even lists accomplished they are facing a host I will be every day which may mean that some of the other companies we more may want to buy our shares in order to remove the management of our company as a result of it of course this is not here the best dangers of a company as a result of that are there any defenses we need to make and we're going to protects our company not being acquired by an they with an objective just to remove our directors of a company okay because they're not satisfied with our directors so then so that they're going to a choir company to remove all of our directives so are there any defenses is to look at so this is our next question is the defenses to do host I'll bits so finally we're going to look at is something called the regulation towards the takeover which means a quadroon like another company are there any regulations we need to follow well it depends really we're going to introduce the UK city go city code over here just to try to give you a flavor of how the reputation at work okay so let's start off by have a look at the first question which is the reason why we get a value that business so when talking about the reason is divided up based based particular there will be three reasons over here okay so the first reason for babe we against invited that business because we're going to do some sorts of M&A in order to get some synergy okay as a result of they merge snap positions so I'm going to write it yeah so synergy is that after climbing is complete we can generate more wealth to our shareholders which may mean that one plus one tactic residents a merger what we what we mean by merging and what we mean by acquisitions so merger it means that comple one plots comes in two equals today compliment acquisition is the company one plus company two equals to country one plots comforting but what are they firstly for the merger is that after merging this company into our business that company disappear so one of the famous example will be the Adobe system and the Macromedia after the Adobe system merges the Macromedia company the Macromedia company does not exist anymore but instead the products from the macro media are now being sold in the Adobe Systems website so this is what anybody okay stick on p1 plus company two equal to accompany one but what about the acquisitions ax issue means we're going to acquire another company as a subsidiary as a reservist to Companies Act insist so conquer one plots computer equals two company one plus competent next question is about synergy so synergy how we're going to run by the synergy how can we how can we a one plus one is actually greater than soon so fig bars in this way let me take you the example for a PC accounting practice Center so one of the ways we can grow our business is to try to acquire another company in order to expand our business activities so here at a PC if you purchased our course of course you can get them videos you can get the study materials study materials mainly for the study note so you need to print the study notes on your only guess different countries yes all around the world international student but what if I'm going to say to you I'm going to print those study notes for you so from that perspective well I need to find somebody else to preen that study notes yes and then try to deliver to you but walked if I'm going to acquire those third party which providing the printing service so that I can you know consolidate that company and then use that company to print the materials solely for APC students rather than someone else so as a result of it okay so as a result of it this is what I mean by backwards integration we're going to integrate okay we're going to integrate with our suppliers which means printing service we can to provide this business for you together so that if your purchase of course providing your video buying you if they are printed study materials so that yes maybe one plus one greater than 2 so this is the idea behind me so some of the sinner to obey cost savings yes and also read new generations so as some sort of are climbing on the company because safe costs or we can increase our revenue a section so this for me bus imaging next reason why we're going to value our business is that the business is going to go on this date so as a result of it especially when you're trying to do the IPO initial public offer you to determine the share price you're going to sell all to share it so as a result of this it's no points that you don't know about the value of their company that trying to give trying to determine the share price you're going to so it's no point doing that so one of the ways we can do is to try to estimate the total by the so that's one we need to buy the business and divided by the number of shares we're going to issue as well so to this we can get the share price book in share we're going to sell off to a public ok so another reason why we're getting value that this is a start via in N in a semi strong form market which may mean that if you look at in this way for the public listed companies the share price quoted on to stock exchange is to be $15 a share you may say to me well Steve I'm going to bind our business by turn to take this $50 per share multiplied by the number of shares so that we can get to the total value of that company am I correct to do so well the answer is yes or maybe no why well the single reason being know is that while the $15 per share over here does not include they sense John form market information such as the inside the information so $15 per share that's not included inside the information so that's why we're going to actually buy the shares and sell it the next day of course maybe the share price is actually fluctuating quite a lot because of insider information so that's why we need to value that business not just to take the share ice if I multiplied by the sheikhs giving us the total value of the company but rather we need to do some sort of adjustment next to up so we can consider the inside motion in relation to those so that's why we need to divide it up company okay basically three reasons firstly we're going to do some MLA motor snap positions to arrive for the signature so that's why we need to divide your business secondly the companies go realistic and thirdly we need to consider the inside them information okay so if you solve the first question which is the reasons why we're going to find that business so the second pledge to obey at the end evaluation methods okay in the p4x time there will be type 1 a position method type student at position method and type 3 acquisition method and once we finish off all of those against look at the black so is option prior tomato that says option price of although the choice of value that equity of the company black so this option price model we have look it up in the previous section now we're going to repeat that again so let's have a look at the valuation method in more detail so I say to you the evaluation efforts we're going to have the type 1 type 2 type 3 and also black sails option pricing order the question is what are the detail methods within each type of these salvation effort we're going to use to value that component so first of all we're going to detail the type 1 acquisitions so before we dip into the type 1 type 2 type 3 acquisition detail method and then you tell your 180 ACCA has divided different types of acquisitions into type 1 type 2 type 3 well if you look at here this is based upon the risks so what we mean by that is that we're going to consider the business risk as well as the financial risk after applying this company business risk will change if we are going to diversify our activities which means we're going to acquire the new company in the new industry in a different industry far lesser risk will change if we're going to borrow more money from the bank yes maybe we can get some sort of I know the government subsidies a section so that the gearing of a company actually changes so that the phaneritic changes so for the type of acquisition then the business risk and the financial risk remains the same which may mean that we're going to acquire accompli reducing the same in the state as I come and also we do not have to borrow a large amount of debt to change the gearing of the company so that's it as a result of lis acquisition so that we're going to use the title method the type to Meffert simply say that the business risk will be the same but the financial risk will not be the same which may mean that we're going to acquire the company in the same industry as a company as a result of that climbing this company we need to borrow a lot of that to acquire that companies as a result of its business risk remains the same by is the FA's risk actually changes but for the type 3 acquisition we're going to assume that we're going to acquire the company which is not in the same industry as a company which means the business risk would change and also we're going to borrow a lot of debt so that they so that they're gearing of our pump actual changes as a result of the acquisition of the company starts while we're going to use the type free access to method so let's have a look at the type of acquisition methods in much more detail okay title acquisition efforts they'll put see click free types of sub acquisition methods within the time on then you have already seen your of nice today firstly we're going to use a book value approach where we're going to focus upon the SF theme for they particularly for the tangible asset and then we're going to consider how to value the intangible asset that's whoa so how's the value of the in terms of our sex what do you think so if it's first question is what will be my intangible asset in terms of our sex and the other sense we can't touch from that perspective you think about 99p as its slogan just do it how are you going to value that a saying is just do it what is it value okay we're going to use a some effort which I do value that slogan secondly once we look at us against your cut the market-based approach where we're going to focus upon the P ratio and also the different youth model P ratio is a ratio to charge measure the price earnings on company that try to estimate the future growth of the company the bigger the better the better again P ratio is always available from the stock exchange the dividend yield motto is that how much dividend we can get from the share price so it is a measure of day shares return our aim is to maximize the shareholders wealth shares wealth equals to be that you flops the capital gain I can either get them from that company to increase the cash in hand so that maximize Fusheng as well or I can enjoy this increase in the share price as we're so degrees so it off to the first party so I can only cut to gain out of it so market based approach and once we look at us begin to focus upon the cash flow approach firstly we're going to look at something called the dividend valuation so why do we say is the cash flow approach is that the dividend if you think about your Calvin study if the company pays our dividend is going to debit the retailer least but credit to cash as a result of is of course the dividend is a catch so we're going to assume that a dividend we can get the diplom from that plum play is in perpetuity from that perspective you get the dividend divided by the cost of capital so that we can get the value of the company over 12 secondly the free cash flow approach and thirdly we're going to look at the economic value of it but what are the relationship between two free cash flow approach is looking at the value of a company that's a point in time but for the economic value of it we're going to look at the value a company from the period perspective but does it matter or the answer is yes it does matter because if I'm going to focus on this value adds up to a point in time may be the maximum may have some sort of shorts and behaviors by trying to not invest this money into the plant or non-current asset or in plant one set so if that is the case it is not good for the company's long term but rather we're going to look at it from the purist perspective from purist perspective so that we need to do a lot of adjustment so that we can say well some sorts of items even though it is an expend we have spend into the company like trading costs but I say that it is good for the company's long term so that that's why we're going to add it back again interested a stand up in into the value of the company as a profit here you can add by the expenses chain costs because it's good for the company from long-term perspective so this is the idea behind a okay so that's enough on the introduction so we're going to look at they type on a petition in much more detail okay so let's look at the first one which is the book value approach so we're going to look back to your study notes trying to have a look at some sorts some sorts of questions okay so the first question we are going to look at is called cheering we'll hit okay there stood note required is to calculate evaluation for the human committed based upon its net assets method so what women but net asset is that we're going to take the total assets minus the liabilities I know what you're thinking well Steve you don't have support at least because you can get to equity out of this statement of an obsession so that you can use that equity method use that equity value as the valuation am I correct or the arms race maybe no because next asset approach over here we are going to type into account only for the time to asset excluding any of this in front of our site okay and also the statement of noise repetition provided to us here maybe does not include the up-to-date information but sickly for the I so bigger soar example if I'm going to revalue our PVA but here in this table education it is just an historical figure to look back to a note to do some sort of adjustment next to that if I'm going to directly take the equity figure am I correct to do so we'll have the answer list you can say you can see ya know so that's why we're going to use the asset - the liability so that we can get the equity okay so let's look at this question we are toasted question there will be non fantastic turns out that if we total equity there will be total liabilities fine and the note to the SMP is that the pv8 as a replacement value of 15 what do I mean by placement replacement value is that we're going to replace this particular PPA in the current terms okay so from that perspective we can slopped this replacement value into the SFA okay if you replace the value of 100 oh yeah you may argue that's well Steve although I can get the asset out of the market for 15 now instead of 100 even a years ago but we get this other from the market it is the new asset from the market but it are that I'm kind of using it's been many years ago and if that is because those needs to be depreciated so do you have to consider the depreciation here well the answer is maybe yes maybe no because we are not toast there question any of these depreciation expenses that we are going to ignore that maybe some of the questions if you are given any sort of figures about the depreciation so that you need to account place the depreciated replacing the value so in this simple example we are going to say we're going to prepare this paper Constitution which is just the same as the previous one we're going to adjust for some values firstly instead of 100 we're going to replace it with 50 over here and the second note here is that 30 percent of the main three are no longer required by the human emitted as a result of it to get rid of it so we're going to take ten this is the original value minus 10 multiplied by first percent giving us free and we're toast a question that these particularly mentor is can be sold to customers for two dollars as we're sort of is of course we need to plot two so then we're going to write up a video of nine okay so this is the xf8 next question is how can we evaluate of course we're going to take the asset - the liability because we are only considering the tangible norm can target from that perspective we're going to take 15 plus 20 are they in tons one set and I'm also plus nine elementary plots 15 for the receivable we need to - any of these thirds here here for the goodwill figure is in time trial set you may like a question well Steve you add it back the and in terms of our textbook excluding the goodwill why well it is soon - because the only time I said since I have recognized it into the SFA because it is identifiable because we've got the contract okay we've got a contract to those it has was it maybe we have purchased the copyrights we've purchased the legal right that kind of thing so from that perspective we need to include into our calculation there's no point out saying you're spending money purchasing that intangible asset but you're going to exclude up into your value of the business calculation okay but for the goodwill here recognising the goodwill and stands for maybe in the consolidations perspective the excess amounts are paid to acquire that subsidiary from that perspective does it mean something or the other piece getting no we need to exclude out - the total liability is to be 25 oh yeah I'll text - that I've really given us first night the next arson finger so first and I will be the value of that business am I going to use this first first night to determine that we are going to pay maybe 42 the shape of this well the answer is no because valuation it is not an accurate science okay it is just an art what you may mean that the prize we're going to we are going to do tell me - so to purchase our company will be through the negotiations okay so that's why most of the companies they always like to use the net assets approach as a basis to find that company okay as a basis divided that company we're going to use a lot of methods later on - barley that come to giving us the total figure given up giving us the different beers so that's why we're going to use those figures as a range determine what price is being able to pay for to shareholders let one okay so that's it's no more and is this method good or bad what do you think than that task this method well it's good but guess all of the information are from the sfv and they have been they have been audited so the information will be reliable yes but you know it is stop it is subject to manipulation by the management especially we're trying to buy another company the target company Mullins they trying to refineries are set up yes in order to argue a better price yes that happens quite a lot again change the method to value our you may trade from life Oh from a weighted average to fight for method as a result of is closing meant to regulate experimenter abilities actually images to argue a vector price or maybe we're going to provide for a less amount of allowance for receivable about this so that you boost the receiver prices up so that's increased the value you're going to increase the price you're going to pay for me so it's subject to manipulation especially with the accounting policy and can estimate by platinum so that's why we're going to say via it's just a basis going up against mark at this our tech it's just the basis to value that business okay so after we look at that we're going to focus on the Sigma the book value approach to 20 value just do it okay from the 90s perspective is in college of art X so you can see here in Title IX according to the IES number 38 in your p2 exam is that I can only recognize those in times of our sense only if they're identifiable of course different fear the asset definitions as well so some of the architects atomic in tons market such as the customer relationship such as his reputation such as slogan that kind of aims those slop golden reputation relationships has not been purchased by a third party it is just a value expressed on your own from that perspective we cannot recognize that value into our sfn but rather only if they have been purchased by other party of course I can recognize Oh smiling so from that perspective for the internally generated hood room included the reputation slogan a lot of relationship with customers how we go to families of course we're going to use to approach to value this we're going to use the CI v they're going to use the emblem okay simple as that CIT approach means we're going to count place in countable values of this money by CI be calculated in times of volume MV is the market to book approach okay so we're going to look at that one but long Thursday let's focus on the CI me approach the value the sloppy so looking back to your language we can see the idea behind the CIB is that we are going to take the average for bit divided by the average answer so that we can gives us the percentage for example today it will be point immersing so 20 percent within your company operated into the education industry but from the markets perspective the industry average for this particular figure is to be just to be 10 percent but you are 20 percent industry average is to do is to become yourself the cluster is why there'll be a difference between its own given they're using the same property plant equipment same lecturer that point of it well the answer is of course it is because of the in current market your company has for example you have a very good reputation from the customers that Steve Harris is providing the lectures to do as a result of that it will be better than the industry average of just 10% so that we're going to use Steve who generates in to feed chip can only benefit given us the figure of 20 percent so plug my cell 10 the differences will be 10% so 10% will be up in countable value so this is the idea behind it okay so let's look at the example just to illustrate what's going on okay so this question is called and CRP is called independence limited we apply this to calculate the value of the income architect music CIB approach so we're toasting the question that the average profit before tax of the company is to be six thirty sixty six point two average assets of the independence company are two hundred and thirty dollars so from that perspective we can work out the average filter is name so we're going to start your page for this so your question is called independence limited so firstly the return on the asset of the independence Limited is to be 66 points so you find by two-thirds and giving us 29% for the sucker well it is return from the asset from using this asset so sixty six point two is the arm which point or tax figure 230 is the answer figure five the next thing is that we are telling a question that they are return Eliza pre-tax in the industry is to be 20% so the average figure in the industry is to be 20% so from that perspective our company if I'm going to operate the same asset I can have a twenty by twenty nine percent on return but in the state is to be transmitting excess amount would be nine cents over here but be to to the in times of asset maybe because of this locker so that Nike has sold more shoes than any of these are the competitors yes so from that perspective that it has an essence return is that we're going to take the esses amount of my percent over here multiplied by day I'll say figure yes that they independence them it is currently operating of 230 so that it can given us 21 okay so from that perspective that they are said if the vintage context of the independence limited is to become $1 but is it the end of this customer the answer is no because our company is operating on a going concern basis into the foreseeable future and some surgeries we can't say that well and you get the internal I said 21 dollars so after we've got this asset at the company would go bankruptcy the static if it's sucked okay is that the case for being dependence limited well the answer is maybe though so that's why we need to take into account the future aspect for this interpreting so we're going to say that in volume of the implant of our sect after tax equals to $21 multiplied by one minus the tax rate given in the question is to be first percent divided by the weighted average cost of capital is to be then I st. given us 147 okay we're going to take into account the future aspect as well okay so that's why we need to take an infinity approach trying to take the asset value divided by the cost of capital so they can gives us the total value for the intangible asset because the in terms of our said yes we need to pay tax on that maybe if your capital gains that start point of it I don't know so that perspective yes need to take into account of the tax of X given us total amount 147 okay so please finish off our independence and limit X and this is the CIP approach which is quite straightforward but term is that good or bad for the cie approach so it is good because it's constable isn't it so the idea would be quite straightforward but the downside to that is if you look if you're going to look back here we're going to take the average profit before tax divided by the average our set of a company which may mean that the average we're going to take year 1 year 2 year 3 year 4 year 5 and 6 divided by 6 if you're going to take six years so it doesn't give us gives us a clue of how the years we should select in order to calculate the value of dendup the value of the entire Plaza but sickly vikon no in the first year operating the species is well it would be lost speaking so from that perspective you are going to take that amount into the calculation of a portrait it would drag the price down should I use the reason three years port if you can or the answer is maybe yes maybe no because well if you're going to use that one of the year that a company's operating is just to be lost making on paper I can say that there's no profit at all in these three years as a recidivist dividing the total assets actually equal to zero but it's this is the case or the other based on paper now yes so there are some limitations with Augustus CIP approach okay it is just that gets work using this approach we're going to introduce another method is called mb approach is the market to book model approach try to value that company so the idea behind it is that the company has a market value let's say st is to be 20 but a book value of that company is just to be 10 why whoa it's maybe that although I have an asset of 10 but now that other people may try to see well these are said it's not just to be 10 but rather is to be 20 it's simply because maybe he has lots of advertisement so that it creates the bank of the brand recognition within the market as we're so to this the excess amount we finger to would be in punch boxing okay so from that perspective so let's have a look at the MV see over here so aside the gay men the book volume the total equity is to be assuming too many dollars and the share price is to be $20 each there will be quantum in Chesnee ship as a result of it this is the book value and this is the market value is to be 400 million dollars begin to multiply by the share price wave number shape so that we're going to compare the margin value of the book product 400 and 200 giving us a total figure of 200 the dividing of the entire closet okay so these are sort of things you need to know in the exam nothing more really so that's quite stable isn't it okay so we've finished off the first approach within tighten up decision which is the book value approach where we're going to focus upon the financial statement okay

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Keywords: acca, acca p4, acca advanced financial management, acca financial management, acca f9, acca islamic finance, acca online, acca online study, acca london, acca nigeria, acca examiner, acca global, acca 2013, acca video, acca techniques, acca technique, acca apc, acca pass, acca p4 free cash flow, acca free cash flow, free cash flow to firm, business valuation, acca business valuatoin, type1 acquisition, acca material

Id: ABGY3BQQgmw

Length: 38min 56sec (2336 seconds)

Published: Tue Jul 16 2013