TMI BlogCORPORATE RESTRUCTURING – VALUATION OF SHARES, BUSINESS AND BRANDSX X X X Extracts X X X X X X X X Extracts X X X X ..... If this method is employed, the fixed assets of all the amalgamating companies should preferably be valued on a going concern basis. An asset based valuation can be further separated into four approaches: (a) Book Value The tangible book value of a company is obtained from the balance sheet by taking the adjusted historical cost of the company s assets and subtracting the liabilities, intangible assets (goodwill) are excluded in the calculation. Using book value does not provide a true indication of a company s value, nor does it take into account the cash flow that can be generated by the company s assets. (b) Replacement Cost - Replacement Cost reflects the expenditures required to replicate the operations of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , are deducted and net earnings are taken. An alternate to this method is the use of Price earning (P/E) ratio instead of the rate of return. The P/E ratio of a listed company can be calculated as: P/E = P ______ EPS Where P is the current price of the shares The Share price can thus be determined as: P = EPS x P/E ratio 4. Merger negotiations: Significance of P/E ratio and EPS analysis In practice, investors attach a lot of importance to the earnings per share (EPS) and the price earnings (P/E) ratio. The product of EPS and P/E ratio is the market price per share. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following steps 1. Estimate the future cash flows of the target based on the assumption for its post-acquisition management by the bidder over the forecast horizon. 2. Estimate the terminal value of target at forecast horizon. 3. Estimate the cost of capital appropriated for the target. 4. Discount the estimated cash flows to give a value of the target. 5. Add other cash inflows from sources such as asset disposals or business divestment 6. Subtract debt and other expenses, such as tax on gains from disposals and divestment, and acquisition costs, to give a value for the equity of the target. 7. Compare the estimated equity value for the target with its pre ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... io: A. Market Price Of Shares If the offeree and offeror are both listed companies, the stock exchange prices of the shares of both the companies should be taken into consideration which existed before commencement of negotiations or announcement of the takeover bid to avoid distortions in the market price which are likely to be created by interested parties in pushing up the price of the shares of the offeror to get better deal and vice versa. B. Dividend Payout Ratio (DPR) The dividend paid in immediately past by the two companies is important as the shareholders want continuity of dividend income. DPR = Dividend ________ Earnings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e market value method. Fair Value of Shares = Value of net assets method + Value of yield method ________________________ 2 10. Free Cash Flow (FCF) It is a financial tool. It will be close to the profits after tax without taking into account depreciation. FCF of a company is determined by the after tax operating cash flows minus interest paid/ payable duly taking into account the savings arising out of tax paid/ payable on interest and after providing for certain fixed commitments such as preference shares dividends, redemption commitments and investments in plant and machinery required to maintain cash flows. Valuation o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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