1. Revise Lecture 25

2. Just in time - JIT Advantages of JIT
Management seek to eliminate waste at all stages of the manufacturing
Stronger relationship between buyer and supplier. (Security to supplier who benefits from regular orders, continuing future business.)
Buyer – lower holding costs, lower investment in stock & WIP, bulk discount

3. Just in time - JIT Advantages of JIT
Emphasis on quality control in production reduces scrap, reworking and setup cost

4. 4 key areas of AR (Debtors)
4 key areas of accounts receivable management are;
Formulation of policy
Assessment of creditworthiness
Credit control
Collection of amount due

5. 4 key areas of AR (Debtors)
Formulation of policy
A framework needs to be established
Terms of trade
Period of credit offered
Early settlement discounts
Must consider whether to charge interest on over-due accounts

6. Factoring
Factoring is the outsourcing of the credit control department to a third party
Factoring is the way of speeding up the receipt of funds from accounts receivable

7. Factoring
The company can choose some or all of the following three services offered by the factor;
Debt collection and administration (recourse or non-recourse)
Financing
Credit Insurance

8. Factoring Non-recourse
The client loses control over decisions about granting credit to its customers.
Therefore some client prefer to retain the risk of irrecoverable debt and opt for a ‘with recourse’ factoring service.
With this type of service the client decides whether extreme action (legal action) should be taken against a non payer.

9. Business Valuations
Why we do valuations of company?

10. Business Valuations
Valuation is described as ‘an art not a science’. The real worth of a company depends on the viewpoints of the various parties.
Various methods of valuation will often give widely different results /31

11. Business Valuations
Valuations of shares in both public & private companies are needed for several purposes by investors included;
To establish terms of takeovers and mergers etc.
To be able to make ‘buy and hold’ decisions in general.

12. Business Valuations To value companies entering the stock market
To establish values of shares held by retiring directors, which the articles of a company specify must be sold
For fiscal purpose (capital gain tax CGT) inheritance
Divorce settlement

13. Business Valuations
In making a bid for another company, it is important for the buyer to create a range of values within which a buyer would be prepared to negotiate.
When deciding to float or sell the company again the seller must create a range of values within which to negotiate

14. Business Valuations Different methods Book value Assets basis
Dividend basis
Earnings basis
Discounted cash flow basis

15. Business Valuations Book Value
Also called balance sheet value but the book value of assets will differ from their market value

16. Business Valuations Assets basis
If a business is difficult to sell, its owners may be prepared to accept a minimum bid that matched the value that they get from liquidation.
There are 2 ways of assessing this
Balance sheet value
Realisable value

17. Business Valuations Realisable value – better but harder to calculate.
Net realisable value (NRV) term used to define method of evaluating an assets worth.
NRV is generally equal to the selling price of the stock goods less the selling costs (competition and disposal)

18. Business Valuations
Weakness Asset based valuation Investors do not normally buy a company for its balance sheet assets but for the earnings / cash flows that all of its assets can produce in the future. We should value what is being purchased i.e. the future income / cash flows

19. Business Valuations Weakness Asset based valuation
The asset approach also ignores non-balance sheet intangible assets e.g.
Highly-skilled workforce
Strong management team
Competitive positioning of the company’s products

20. Business Valuations
It is quite common that the non-balance sheet assets are more valuable than the balance sheet assets /31

21. Business Valuations Usefulness of Asset based valuation
When asset based valuation are useful?
For asset stripping (minimum acceptable to owners)
To identify a minimum price in a takeover
To value property investment companies

22. Business Valuations
Dividend basis The value of a share is calculated as the present value of the future dividends being generated by the existing management team.

23. Business Valuations
Value of a company P0 =

24. Business Valuations
Problems or weaknesses It uses a set figure for G which assumes that dividends growth smoothly. In reality, dividend change according to the decisions made by managers who do not necessarily repeat historical trends. Therefore very difficult to accurately predict the future dividend growth rate.

25. Business Valuations Business risk (Weakness)
Dividend growth model does not explicitly consider risk, particularly business risk.
The company may change its area of business operations and economic environment is notoriously uncertain. Therefore share price will however fall as risk increases, leading to an increased cost of capital /31

26. Business Valuations
Model also ignores the effects of taxation and assumes there is no issue costs for new shares

27. Business Valuations Capital Assets pricing Model – CAPM
CAPM = Required return = Rf (Rm – Rf) beta
Rf = risk-free rate
Rm = average return on the market
(Rm- Rf) = average market risk premium
Beta = systematic risk of the investment compared to market and therefore amount of the premium needed /31

28. Business Valuations Capital Assets pricing Model – CAPM
This model assumes that investors have a broad range of investments and are worried how fall in the stock market as a whole would affect their investments.
Main advantage CAPM over the DVM is that it does explicity consider risk. Particularly systematic risk of individual investments /31

29. Business Valuations
Disadvantage of CAPM Formula does require estimates to be made of Excess return , The risk-free rate and Beta values. All of these can be difficult to estimates, but are more reliable than dividend growth used in dividend valuation model (DVM) 29/31

30. Business Valuations
Earnings Basis Income-based methods of valuation are of particular use when valuing a majority shareholding; Ownership bestows additional benefits of control not reflected in the DVM model Majority shareholders can influence dividend policy and therefore are more interested in earnings. 30

31. Business Valuations Market value = P / E * Earnings
P / E = shows the market’s view of the growth prospects / risk of a company
Earnings = shows the current profitability of the company