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Please help me understand these two problems.
1) If the Dividend Growth Model shows a Market Share Price of $4 and there are 10m shares issued with a nominal value of $1. The Market Value of the Company using DGM will be (10m x $4) = $40m.
While SOFP shows total Equity of $30m consists of $10m in Share Capital and $20m in Reserves.
Is it true that since the Market Value of the Company is $30m in total and anybody consider buying or taking over the Company has to pay $30m BUT Dividend Growth Model is showing Market Value of Company of $40m.
Then, anybody considering buying the Company has to pay $30m or $40m? Is it possible that the Company Shareholders can ask even higher price than $40m for the Company?
2) Net Asset Method is simply calculated as Total Assets – Total Liabilities which is actually Equity of the company where we can calculate the company worth by simply looking at company SOFP BUT if we are considering buying a company having equity worth of $100m (lets say) where Retained Earnings consist of $15m; If we bought the company do we have to pay total $100m or $85m (less Retained Earnings because company can pay all its RE to its shareholders in the last year of company before ceasing to exist?)
Thank you for your time
Please Ignore the last question which I asked. Please help me understand these few problems.
1) If we are considering buying a business for (lets say) $100m based on its Equity value, do we inherit the ASSETS and DEBTS of this company too?
2) If the Dividend Growth Model shows a Market Share Price of $4 and there are 10m shares issued with a nominal value of $1. The Market Value of the Company using DGM will be (10m x $4) = $40m.
While SOFP shows total Equity of $30m consists of $10m in Share Capital and $20m in Reserves.
Is it true that since the Market Value of the Company is $30m in total and anybody consider buying or taking over the Company has to pay $30m BUT Dividend Growth Model is showing Market Value of Company of $40m.
Then, anybody considering buying the Company has to pay $30m or $40m? Is it possible that the Company Shareholders can ask even higher price than $40m for the Company?
3) Net Asset Method is simply calculated as Total Assets – Total Liabilities which is actually Equity of the company where we can calculate the company worth by simply looking at company SOFP BUT if we are considering buying a company having equity worth of $100m (lets say) where Retained Earnings consist of $15m; If we bought the company do we have to pay total $100m or $85m (less Retained Earnings because company can pay all its RE to its shareholders in the last year of company before ceasing to exist?)
Thank you for your time!
1. The SOFP never shows the true value of the equity. The amount anyone buying would have to pay is the market value.
2. A net asset valuation is generally used to calculate the minimum that the shareholders of the company being sold would be prepared to accept. You do not assume that the retained earnings will be paid out before the company is sold.
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