01. last session recap - ca sri lanka...11/23/19 conducted by nadun kumara 2 01.01 –last session...
TRANSCRIPT
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PGDBFS 301Cases in Business Finance and Strategy (CBFS)Postgraduate Diploma in Business Finance & Strategy
SESSION 02
Conducted by – Nadun Kumara
01. Last Session RecapDo you remember the basics?
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01.01 – Last Session Recap3
Read Situational Analysis
Assumptions & Missing
informationProblem
DefinitionStrategic Analysis Alternatives Recommen-
dations
R S A P S A R
02. Situational AnalysisThe theories…
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02.01 – Situational Analysis5
Read Situational Analysis
Assumptions & Missing
informationProblem
DefinitionStrategic Analysis Alternatives Recommen-
dations
Situational Analysis
Internal
“SW”OT Ratio Analysis
External
SW“OT” PESTEL P5Fs
02.01 – Situational Analysis – SWOT6
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02.01 – Situational Analysis – Ratio Analysis7
▸Gross Profit Ratio
02.01 – Situational Analysis – Ratio Analysis8
▸Net Profit Ratio
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02.01 – Situational Analysis – Ratio Analysis9
▸ROCE
02.01 – Situational Analysis – Ratio Analysis10
▸Current Ratio
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02.01 – Situational Analysis – Ratio Analysis11
▸Gearing Ratio
02.01 – Situational Analysis – PESTEL12
Political
Economical
Social
Technological
Environmental
Legal
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02.01 – Situational Analysis – P5F’s13
03. Strategic AnalysisMore theories…
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03.01 – Strategic Analysis – Vision & Mission
▸ Vision
▸ Mission
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03.01 – Strategic Analysis – Goals & Objectives
▸ Goals
▸ Objectives
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03.01 – Strategic Analysis – Porter’s Generic Strategies
▸ Porter’s Generic Strategies
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03.01 – Strategic Analysis – Ansoff’s Matrix
▸ Ansoff’s Matrix
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03.01 – Strategic Analysis – BCG Matrix
▸ BCG Matrix
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03.02 – Strategic Analysis – Share and Company Valuation
▸ BCG Matrix
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Of use to:• Investors
• Managers wishing to understand what increases shareholder value
• Companies either considering merger and acquisition activity, or the target of such activity (to organise defences or simply to know which price to sell at)
01.Stock Market
Valuation
02.Net Asset
Value Based
Valuations
03.Income Based
Valuations
Valuation Approaches
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03.02 – Strategic Analysis – Share and Company Valuation
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Stock Market Valuation = No. Shares x Current Market PriceThe market value is “ theoretically correct” if the Efficient Market Hypothesis Holds
Issues• Managers may have extra
information• Quotes share price does not
reflect the value of all shares• Can’t do it for private
companies• Usually requires a
substantial premium to get shareholders to give up their shares
02. Net Asset Based ValuationNet Asset Valuation is has three main ways to value a companies assets. Net Book
Value & Net Realisable Value/“Fairness Opinions”Effectively for both ways though the equation is the same.
The only difference being how you value each of those different components.
Fixed Assets Current Assets
Non current liabilites
Net Asset Value+ - =
• Uses historical costs which are both factual and available
• Ignores intangible assets such as goodwill, human capital & brand names • Issues with depreciation method company has chosen (i.e. straight line vs
reducing balance)• Doesn’t value the entity as a going concern, and has little link to future
wealth generation ability
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03. Income Based ValuationsIncome based valuations of shares and companies have the innate advantage in that they are orientated towards the future assuming that the company will continue to remain a going concern for the foreseeable future.
Two main methods examined in this module are:
• Discounted Cash Flow Models
• Dividend Valuation Models Gordon’s Dividend Growth Model
Example - Discounted Cash Flow Method
End of Year Cash Flow ( $ M) D/F (10%) Pv ( $ M)1 20 0.909 18.182 32 0.826 26.433 40 0.751 30.044 30 0.683 20.495 20+100 0.621 74.52
169.66
Terminal Value 100M
03. Income Based Valuations
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03.02 – Strategic Analysis – COST OF CAPITAL25
Options Available
2. Debt
•Debentures – 2.1 (Redeemable / Irredeemable)•Long Term Loans / Overdrafts – 2.2
1. Equity
•Ordinary Shares – 1.1•Preference Shares –1.2•Internal Funding – 1.3
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Cost of Capital
How to CALCULATE?
Is it “EQUITY”?
COST OF EQUITY
DIVIDEND GROWTH MODEL
CAPM
Is it “DEBT”?
COST OF DEBT
BANK LOAN / OD Debentures
Cost of CapitalType of Funding Cost of Capital Equity -Ordinary Shares
Expected Rate of Return by the future share holders to compensate risk , using CAPM
Equity -Preference Shares
Fixed dividends stated in the prospectus.
Debentures Interest Rates stated in the prospectus
Bank Loans Commercial interest rates set in the loan agreement
Internal Funding Current Return On Investment (ROI) of the company
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Cost of Capital –Equity – Ordinary Shares – Listed Companies
ke = (d1 / p0) + g
Gordon’s Dividend Growth Modelke = Cost (k) of equity (e)
d1 = Dividends in Y1
p0 = Price of Share in Y0
g = Growth rate in dividends
Capital Asset Pricing Model (CAPM)ke = Rf + (Rm – Rf) b Rf = Risk Free Return
Rm = Market Return
b = Beta factor (risk factor)
ExampleCost of Ordinary Shares - DGM
ProblemSuppose the Gadget Company has a currentdividend of £2 per share. The current price of ashare of Gadget Company stock is £40. TheGadget Company has a dividend payout of20% and at a dividend growth rate of 9.6%.What is the cost of Gadget equity?
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ExampleCost of Ordinary Shares - CAPM
Problem:If the risk-free rate is 3%, the expected market risk premium is 5%, and the company’s stock beta is 1.2, what is the company’s cost of equity?
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Cost of Capital –Equity – Ordinary Shares – Unlisted Companies
• Estimate the ke of similar listed companies and then add a further risk premium for business and financial risk
• To the Risk free rate (Rf) rate add estimated risk premiums for both the Business risk and the Financial risk of the entity
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Cost of Capital –Equity – Preference Shares
kp = Cost (k) of Preference (p) share
DPS = Dividends per Share
MPS = Market Price of Share
Preference Shares - Irredeemable
kp = DPS / MPS
Preference Shares - Redeemable
kp = IRR of Preference Share0
ExampleCost of Preference Shares
Problem:A company issues 10,000 shares 10% PreferenceShares of £100 each. Cost of issue is £2 per share.Calculate cost of preference capital if these sharesare issued (a) at a premium of 10%, and, (b) at adiscount of 5%.
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Cost of Capital – Debt
kd = I (1 - t)
Bank Loan / Overdraftkd = Cost (k) of debt (d)
I = Interest rate
t = tax rate
MP = Market Price of Debenture
IRR = Internal Rate of ReturnDebentures - Irredeemable
kd = [ I (1 - t) ] / MP
Debentures - Redeemable
kd = IRR of Debenture0
ExampleCost of Debt – Bank Loan
Problem:A company is considering raising of funds of aboutGBP 100 million via a 14% institutional term loan.Assume a tax rate of 20%. What is the cost of debt?
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Cost of Capital - Overall (WACC)
k = Cost
V = Value
keVe + kdVd + kpVp
Ve + Vd + Vp
WACC =
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