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ACT 3216 ADVANCED FINANCIAL ACCOUNTING 1

ACT 3216 ADVANCED FINANCIAL ACCOUNTING 1. Lecturer: Dr. Zaidi Mat Daud Contact Information: Room: A218, Tel: 03-89467718 Email: mrzaidi@econ.upm.edu.my. Administrative matters Course outline Assessment Lecture Topic 1 Share and Business Valuation.

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ACT 3216 ADVANCED FINANCIAL ACCOUNTING 1

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  1. ACT 3216 ADVANCED FINANCIAL ACCOUNTING 1 Lecturer: Dr. Zaidi Mat Daud Contact Information: Room: A218, Tel: 03-89467718 Email: mrzaidi@econ.upm.edu.my

  2. Administrative matters Course outline Assessment Lecture Topic 1 Share and Business Valuation ACT 3216 ADVANCED FINANCIAL ACCOUNTING 1

  3. Contents: Definition Approaches Illustrations Conclusion Share and Business Valuation

  4. A process by qualified valuation expertsto determine a fair market value of an owner’s interest in a business Definition

  5. Purpose of share/business valuation? Selling of a business interest Pay taxes such as on capital gain when it involves transfer/disposal of shares Motivating/incentive to employees – An entry into employee option scheme Cont’

  6. All the methods available to benchmark financial statements to present or fair market value Business Valuation Methods Income approach Asset based approach Market approach Approaches

  7. Uses a projection of future income to estimate present value Useful for a company that have a lot of potential but fewer assets & financial history e.g. a web business Two common methods Discounted cash flow (DCF) Income Approach

  8. Concentrates on potential cash generation of a business over certain period of time Uses a discounted rate – the rate of return required by the investors e.g. WACC A series of projected CF is divided by the discount rate to derive the Present Value (PV) DCF Method

  9. Computational steps: (1) Estimate or project the net cash flows attributable to equity (2) Select suitable discount rate that reflects the required rate of return (for example cost of capital) (3) Discount the future cash flows derived in step (1) to their present values. Cont’

  10. Determine the share value based on the value of its assets. No rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility Asset Based Approach

  11. Suitable for businesses such as bank holding companies whose principal function is to manage income-producing assets One common method Net tangible asset method Cont’

  12. NTA = Net tangible assets No. of shares NTA = (Book values of tangible assets – liabilities) + (Increase/-Decrease in fair value of assets & liabilities) Net Tangible Asset Method

  13. In arriving at the NTA attributable to equity shares, preference shares (if any) should be treated as part of liabilities. Number of equity sharesis the number of ordinary shares only since preference shares are treated as liabilities. Cont.

  14. Based on the supply and demand in the market The value of share would increase if there a lot of demands The value of share would decrease if there are over supply Market Approach

  15. Diverse methods to value a business for sale or purchase Some methods suite to certain industry and buyers Best option is not to depends on one method Conclusion

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