Business Valuation and Restructuring
Analysis
Business Valuation and Restructuring
Syllabus tag: KASNEB CPA | Intermediate Level | CA22 Financial Management | Topic 10 Business Valuation and Restructuring
Lesson objectives
By the end of this topic, you will be able to:
- Value a business on an asset basis, an earnings basis and a cash flow basis
- Apply the P/E, earnings yield and dividend growth methods
- Explain why the methods give different answers for the same company
- Identify and value synergy in an acquisition
- Set a maximum price a bidder should pay
Why this matters
Every earlier topic fed into this one. Time value supplies the discounting, Cost of Capital the rate, Dividend Policy the growth, and Ratios the multiples. Valuation is where they meet.
One company throughout
Tembo Ltd: earnings after tax KES 12,000,000; 8,000,000 shares; dividend per share KES 0.60; growth 7%; cost of equity 15%; WACC 12%. Industry average P/E is 14. Assets have a book value of KES 95,000,000 against liabilities of KES 30,000,000. Free cash flow is KES 9,000,000, growing at 4%.
EPS = 12,000,000 / 8,000,000 = KES 1.50
Asset basis
Net asset value = Assets − Liabilities
= 95,000,000 − 30,000,000 = KES 65,000,000, or 65,000,000 / 8,000,000 = KES 8.13 per share
This is the floor, not the value. It counts what the company owns and ignores what it earns — so it says nothing about a brand, a customer list, or a skilled workforce. It matters most for a business being wound up, and least for a profitable service business whose real assets walk out of the door every evening.
Earnings basis: the P/E method
Equity value = EPS × P/E multiple
= 1.50 × 14 = KES 21.00 per share, so 21.00 × 8,000,000 = KES 168,000,000
The judgement is entirely in the multiple. Using a listed company's P/E to value an unlisted one overstates the answer, because the unlisted shares cannot be sold easily. A discount of a quarter to a third for lack of marketability is usual.
Earnings yield is the same relationship inverted:
Earnings yield = EPS / Price = 1.50 / 21.00 = 7.14%
Dividend growth basis
P0 = D1 / (Ke − g) = (0.60 × 1.07) / (0.15 − 0.07) = 0.642 / 0.08 = KES 8.03 per share, so KES 64,200,000
This values the dividend stream, which is what a small shareholder actually receives. It is the right method for valuing a minority holding and the wrong one for valuing a controlling stake, because a buyer taking control can change the dividend policy at will.
Cash flow basis
Discount free cash flow at the WACC:
Value = FCF1 / (WACC − g) = 9,000,000 / (0.12 − 0.04) = KES 112,500,000
Theoretically the strongest method, since cash is harder to manipulate than accounting profit — and the most sensitive to its assumptions. Move g from 4% to 5% and the value jumps to 128,571,000, a rise of 14% from a single percentage point.
Why the answers differ
Same company, four methods:
| Method | Value |
|---|---|
| Net assets | 65,000,000 |
| Dividend growth | 64,200,000 |
| Discounted cash flow | 112,500,000 |
| P/E multiple | 168,000,000 |
The spread is not an error. Each method answers a different question — what the company owns, what a small shareholder receives, what the business generates, and what the market pays for comparable earnings. A valuation report gives a range and argues for a point within it. A single confident figure should make you suspicious.
:::checkpoint You are advising a minority shareholder selling a 2% stake, and separately a buyer acquiring 100%. Using the table above, say which method you would lead with in each case and why they differ. :::
Synergy and the maximum price
Tembo (168,000,000) bids for Simba, worth 90,000,000 standalone. Combining them saves 25,000,000 in present value terms.
Combined value = 168,000,000 + 90,000,000 + 25,000,000 = KES 283,000,000
The maximum Tembo should pay is Simba's standalone value plus the whole synergy:
90,000,000 + 25,000,000 = KES 115,000,000
Pay more and Tembo's own shareholders are worse off. Pay exactly 115,000,000 and every shilling of benefit has gone to Simba's shareholders. The bargaining range is the 25,000,000 between 90 and 115 million, and where the price lands inside it decides who gains from the deal.
Most acquisitions that destroy value do so by paying for synergies that were assumed rather than demonstrated.
:::checkpoint A bidder justifies paying 130,000,000 for Simba by pointing to expected cost savings. What has gone wrong, and what would you ask to see before agreeing? :::