VALUATIONS

TUTOR: MR PINIAS IKECHUKWU SHEFIKA

CONTACT: +264-81-560-8712
Date IKECHUKWU <#>
WHAT IS IT?

VALUATION IS THE PROCESS OF DETERMINING THE WORTH OF AN ASSET OR COMPANY. VALUATION IS

IMPORTANT BECAUSE IT PROVIDES PROSPECTIVE BUYERS WITH AN IDEA OF HOW MUCH THEY SHOULD PAY FOR
AN ASSET OR COMPANY AND FOR PROSPECTIVE SELLERS, HOW MUCH THEY SHOULD SELL FOR.

IKECHUKWU

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May 27, 2023
OVERVIEW

The most important factors that influence all valuations are the risk and the return
applicable to the asset being valued. The value is the present value of future cash flows.
To calculate this, an estimate of the future cash flows is needed. These amounts must
then be discounted to the present at the required rate of return, the appropriate rate of
return being determined by the risk pertaining to those future cash flows. This is the
basic principle upon which all valuations are based. We have valued debentures and
bonds by discounting future coupon payments and the principle amount at the market
yield. The valuation of preference shares is similar to the valuation of debentures and
bonds. We have used the dividend discount models, free cash flow models, price
multiples such as the P/E ratio

IKECHUKWU

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May 27, 2023
VALUATION OF BONDS AND DEBENTURES

 TIME VALUE OF MONEY IS CRITICAL TO THE VALUATION OF BONDS

 PAR VALUE RELATES TO THE STATED FACE VALUE OF THE BOND

 FIXED COUPON PAYMENTS EITHER ANNUALLY, SEMI-ANNUALLY, QUARTERLY AND SO ON;

 MATURITY DATE

 YIELD TO MATURITY OR IRR

 BONDS AND DEBENTURES WITHOUT REDEMPTION ARE PERPETUITIES

 REDEEMABLE DEBENTURES NEEDS TO BE VALUED AT THEIR PRESENT VALUES

 PMT, N, I/YR, PV=?, AND FV

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May 27, 2023
PREFERENCE SHARES

 NON-REDEEMABLE PREFERENCE SHARES

 PERPETUITY FOR THE ABOVE TYPE OF SHARES

 REDEEMABLE PREFERENCE SHARES

 PV OF FUTURE CASH FLOWS FOR THE ABOVE TYPE

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May 27, 2023
ORDINARY EQUITY

 DIVIDEND DISCOUNT MODEL

 MARKET RATIOS

 VALUE = EPS X P/E

 FREE CASH FLOW MODEL- JUST TO DETERMINE THE VALUE OF THE COMPANY, NET OF DEBTS WE GET EQUITY
VALUE

IKECHUKWU

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May 27, 2023
WORKED EXAMPLE 1

 Metro Ltd has issued bonds with a face value of N$100 which pay a coupon
rate of 6%. Coupon payments are payable semi-annually. The quoted yields on
similar bonds are currently 8% per year. The maturity date is in 10 years’ time.
What is the value of each Metro bond? What is the bond’s annual effective
yield?

IKECHUKWU

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May 27, 2023
 WORKED EXAMPLE 2

Large Ltd is a listed industrial company. Extracts from its annual report are as follows:

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.0

SHARE CAPITAL 198

RETAINED EARNINGS 178

SHAREHOLDERS’ INTEREST 376

FLOATING RATE DEBENTURES (REPAYABLE IN 20.4) 136

BORROWINGS 102

614

FIVE YEARS PROJECTION- YEAR END 31 MARCH 20.1 20.2 20.3 20.4 20.5

PROFIT AFTER TAX 120 144 173 207 249

DIVIDENDS PAID 40 48 58 69 83

RETAINED PROFIT 80 96 115 138 166

PROFIT AFTER TAX IS DETERMINED AFTER DEDUCTING THE FOLLOWING ITEMS

DEPRECIATION 62 74 89 107 127

INTEREST 19 19 19 19 19

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May 27, 2023
The retained profit will be used to fund expansion while the depreciation charge will be used to cover asset
replacement. The cost of equity is estimated to be 12% and the weighted average cost of capital is 11%. The average
price earnings ratio for industrial companies listed on the NSX is 15x. Financial analysts have estimated Large to have a
beta of 1.5. From the year 20.5, cash flows and dividends are expected to grow at the rate of 6% per annum in
perpetuity. The company tax rate is 28%.

Required

Calculate the value of the equity as at 30 MARCH, 20.0, using three different approaches.

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May 27, 2023
WORKED EXAMPLE 3

Mirton Ltd has non-cumulative non-redeemable preference shares in issue.

The issue price is N$100 each and the coupon preference dividend rate is 12%
per annum, payable once a year in arrears. The company has not paid out a
dividend in recent years but expects to recommence dividend payments in two
years time from today. What is the value of each preference share if similar
preference shares are quoting yields of 10% per annum?

IKECHUKWU

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May 27, 2023
THANK YOU
YOURS IN ACADEMICS

IKECHUKWU

Date IKECHUKWU <#>