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Further Evaluation of Accounts. Dr. Clive Vlieland-Boddy FCA FCCA MBA 2009. Valuation of Businesses. Enterprise Value (EV) Net Asset Value. Earnings Multiple Values Discounted Net Present Value. EV/EBITDA = payback. Enterprise Value. Market Cap + Interest bearing debt –

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dr clive vlieland boddy fca fcca mba 2009
Dr. Clive Vlieland-Boddy



valuation of businesses
Valuation of Businesses
  • Enterprise Value (EV)
  • Net Asset Value.
  • Earnings Multiple Values
  • Discounted Net Present Value.
  • EV/EBITDA = payback
enterprise value
Enterprise Value
  • Market Cap +
  • Interest bearing debt –
  • Cash or Cash Equivalents

This is sometimes called the “takeover value”!

net asset value
Net Asset Value

The net asset value is arrived at by:

  • Total Current and Non Current Assets
  • Less: Total Current and Non Current Liabilities.
  • The same can be arrived at by taking total shareholders funds,
earnings multiple
Earnings Multiple
  • Often based on an adjusted P/E ratio or a standard market ratio.
discounted npv
Discounted NPV
  • Discounting the future expected cash flows to present value.
  • Valuation is one thing.
  • But the real issue is to find a price that buyer and seller agree.
linking ratios
Linking Ratios
  • These are essentially expanding the items examined but essentially the basis equation still exists.
dupont analysis

Dupont Analysis

Analysis of Return on

Stockholders’ Equity (ROE)

roe just tells us the return
ROE just tells us the return!

This could be because of the:

  • Profitability of the business.
  • The gearing of the business so that the Equity Shareholders are benefiting or otherwise from changes in debt financing.
  • Or could be from better or worse use of the NCA.

Du Pont expands the basic Formula…….

betas systematic risk
Betas = systematic risk
  • These are placed on enterprises by the market place. They normally range from 0-2
  • 1 is standard.
  • 0 means that the company is not affected by the general movement of the market.
  • 2 means that the company is moves more sharply than the market.
  • They can act as a general guide to the entity.
failure prediction models
Failure Prediction Models
  • These are useful tools to know about. They basically look at the liquidity of a company and create something called a “z” score. Altman’s which is the most well known is worth knowing.
  • At www.creditguru.com is an insolvency predictor which does the calculation for you.
altman s z score
Altman’s Z Score

Z Score = 1.2 A + 1.4 B + 3.3 C + 0.6 D + 1.0 E


A = working capital/total assets

B = retained earnings/total assets

C = EBIT/total assets

D = market value of equity/book value of debt

E = sales/ total assets

A score of 2.7 or more represents a strong company. A score of less than 1.8 indicates high risk of failure.

sustainable growth
Sustainable Growth
  • Internally by:
      • Improving Working Capital Management. (See 19.1.2)
      • Improving Assets Utilization.
      • Retaining Profits
  • Externally by:
      • Increasing Leverage.
      • Increasing Share Capital
sustainable growth1
Sustainable Growth

Financing Growth is essential. This can be done by several ways:

  • Improving Cash Management.
  • Improving Assets Utilisation.
  • Increasing Leverage.
  • Retained Earnings.
  • Increasing Share Capital.
sustainable growth cont
Sustainable Growth – Cont…
  • Most companies fund growth by not paying all the net profit out as dividends. Thus the “retained earnings” fund the growth. But often this is insufficient.
  • Some can fund the growth by effective working capital management. Lidl and Aldi.
  • Generally additional capital, debt or equity is often required.
sustainable growth cont1
Sustainable Growth – Cont..
  • Pay Out Ratio ( dividend Ratio) is the % or net profit that is distributed as dividends.
  • Plough Back Ratio is the % that is retained.
  • Some say that the Plough Back Ratio is the sustainable growth rate. But this is not altogether fair.
sustainable growth2
Sustainable Growth

Whilst this formula shows the internally generate profits will assist with growth, there are clearly other areas to achieve sustainable growth:

  • Improving working capital management. (Aldi & Lidl)
  • Access to debt and capital markets to generate funds on a regular basis.
good readings
Good Readings
  • See 17.1.11
environmental scanning1
Environmental Scanning



Strenghts, Weaknesses, Opportunities and Threats Analysis

Other Tools

Economic Development Scenarios

environmental scanning2
Environmental Scanning


Other Tools




The Company

  • Strengths
  • Weaknesses

The Environment

  • Opportunities
  • Threats
swot analysis
SWOT analysis
  • Popular method used for summarising of the innovation analysis results;
  • Provides an overview of regional strengths and weaknesses as well as opportunities and threats the region is currently facing or may face in the future.
internal factors
Internal factors
  • A STRENGTH is a is a resource or capacity of the region that it can take advantage of to improve its innovation system and competitiveness, e.g.
    • Access to well-educated labour force;
    • Good communication and infrastructure;
    • Diversified regional economic structure;
    • Well-functioning public services;
    • Etc.
internal factors1
Internal factors
  • WEAKNESS is a limitation, fault or defect in the region that will keep it from improving the innovation system, e.g.
    • Limited number of start ups in the region;
    • Peripheral location and low population density;
    • High degree of long-term unemployment;
    • Lack of cooperation between companies;
    • Etc.
external factors
External factors
  • OPPORTUNITY is a favourable situation in the region's environment, e.g.
    • Availability of EU funds and programmes;
    • New markets through increased internationalisation;
    • New educational opportunities;
    • Cross-border cooperation;
    • Global increase for demand in tourism services;
    • Etc.
external factors1
External factors
  • THREAT is an unfavourable situation in the region's environment that may potentially damage the strategy, e.g.
    • Increasing of energy prices;
    • Termination of regional development funding;
    • Decrease of population;
    • Emigration of high-qualified labour force;
    • Etc.
swot design
SWOT Design
  • One SWOT strategy for the whole region; or
  • A set of SWOT strategies
    • Relevant if different views of the parties involved in the SWOT process;
    • E.g. a regional economic strength may be regarded as a weakness from environmental point of view;
    • May be structured along different sectors (economic, environmental, social, etc) or target groups (companies, public agencies, R&D sector, etc).
swot analysis main steps
SWOT Analysis – Main Steps


1 2 3


1 2 3

Scaning of Regional Environment

Analysis of Strenghts and Weaknesss

Analysis of Opportunities and Threats

Opportunities 1 2 3

OS Actions OxSx OxSx OxSx

OW Actions OxWx OxWx OxWx

TS Actions TxSx TxSx TxSx

TW Actions TxWx TxWx TxWx

Threats 1 2 3

SWOT Matrix

using swot as a basis for development strategy
Using SWOT as a Basis for Development Strategy

The strategy shall define priorities and actions that

  • Build on STRENGTHS;
  • Eliminate WEAKNESSES;
  • Mitigate the effect of THREATS.
swot golden rules
SWOT Golden Rules
  • Be realistic about the strengths and weakness of your region when conducting the SWOT;
  • Avoid general SWOT! It should always be specific;
  • Distinguish between where your region is today and where it could be in the future;
  • Keep your SWOT short and simple.
pest or pest el

Environmental Scanning

  • Political Issues
  • Economic Issues
  • Social Issues
  • Technical Issues
  • Environmental Issues
  • Legal Issues
development scenarios
Development Scenarios
  • An alternative to SWOT analysis
  • Development scenarios are not predictions or forecasts of the future!
  • They intend to explore a number of wide-ranging „possible futures“ and access their implications for the region and its main actors
development scenarios main steps
Development Scenarios – Main Steps

Identification of Regional Drivers and Regional Issues

Development Scenario 1

Development Scenario 2

Assessment of Regional Drivers and Dependency Analysis

Elaboration of Dependency Matrix

Development Scenario 3

Development Scenario 4

  • Market Value Added (MVA) is the difference between the firm’s market value and the amount of capital supplied.
  • MVA measures how wellmanagers are doing at maximizing shareholders’ wealth.
market value added1
Market Value Added


value added


Total market value

Debt &




  • Economic Value Added (EVA) is like MVA, but applied on an annual basis.
  • EVA = Operating profit - (Total capital x Cost of capital).
  • EVA represents economic profit, as opposed to accounting profit.
eva drives mva
EVA Drives MVA

Companies that consistently earn profits in excess of their required return ...




Gain a premiums to book value.





relationship of eva to mva mva is the npv of the eva s
Relationship of EVA to MVAMVA is the NPV of the EVA’s


Year 1 Year 2 Year 3 .... Year n







EVA + EVA + EVA + ... + EVA

1 + r (1 + r)2 (1 + r)3 (1 + r)n



Market value is based on establishing the

economic investment made in the company

(capital), making a best guess about what

economic profits (EVA) will happen in the future, and discounting those EVAs to the present to get market value added.

capital structure theory
Capital Structure Theory
  • Modligliani and Miller theory
    • Zero taxes
    • Corporate taxes
    • Corporate and personal taxes
  • Trade-off theory
  • Signaling theory
  • Debt financing as a managerial constraint
mm theory zero taxes
MM Theory: Zero Taxes
  • Modligliani and Miller (MM) prove, under a very restrictive set of assumptions, that a firm’s value is unaffected by its financing mix:
    • VL = VU.
  • Therefore, capital structure is irrelevant.
  • Any increase in ROE resulting from financial leverage is exactly offset by the increase in risk (i.e., rs), so WACC is constant.
mm theory corporate taxes
MM Theory: Corporate Taxes
  • Corporate tax laws favour debt financing over equity financing.
  • With corporate taxes, the benefits of financial leverage exceed the risks: More EBIT goes to investors and less to taxes when leverage is used.
  • MM show that: VL = VU + TD.
  • If T=40%, then every dollar of debt adds 40 cents of extra value to firm

Under MM with corporate taxes, the firm’s value increases continuously as more and more debt is used.

dividend policy
Dividend Policy
  • There is an agreement that companies should not pay dividends as they should be able to generate a return far in excess of that an ordinary shareholder could do with the money.
  • This argument that capital gains will accelerate faster with no dividend policy is an argument supported by many.
  • In reality, shareholders need cash flow.
structural analysis of industries michael porter
Structural Analysis of Industries Michael Porter













barriers to entry
Barriers to Entry
  • Economies of Scale
  • Product Differentiation
  • Capital Requirements
  • Switching Costs
  • Access to Distribution Channels
  • Cost Disadvantages Independent of Scale
  • Government Policy
  • Experience Curves
  • Expected Retaliation
factors affecting rivalry among existing competitors
Factors Affecting Rivalry Among Existing Competitors
  • Numerous or Equally Balanced Competitors
  • Slow Industry Growth
  • High Fixed or Storage Costs
  • Need to operate at capacity …. Price cutting
  • Lack of Differentiation
  • Capacity Augmented in Large Increments
  • Diverse Competitors
  • High Strategic Stakes
  • High Exit Barriers
bargaining power of buyers is high when
Bargaining Power of Buyers is High When....
  • Purchasing is concentrated or is in large volumes relative to seller’s sales
  • The product represents a large proportion of buyer’s costs
  • There is little differentiation or there are low switching costs
  • Backward integration is a credible threat
  • Product performance / quality is unimportant to buyer’s performance
bargaining power of suppliers is high when
Bargaining Power of Suppliers is High When....
  • Supplying industry is dominated by a few firms and is more concentrated than the customer industry
  • The product has few substitutes
  • The customer industry is not important to the supplier
  • The supplier product is an important input, is differentiated, or has high switching costs
  • The supplier group poses a credible threat of forward integration
barriers and profitability
Barriers and Profitability

Low, stable returns

Low, risky returns




High, stable returns

High, risky returns





preparation for next session
Preparation for next session
  • Exercises 17,23 and 27
the end
The End…
  • to be continued…..