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HKSI Paper 11 study materials
HKSI Paper 11 study resources

HKSI Paper 11: Valuation methodologies and financial analysis

HKSI Paper 11 · Work through your exam, one topic at a time.

All guide sections

Valuation methodologies and financial analysis

Valuation methodologies and financial analysis

This domain tests whether you can select and apply a valuation method, bridge from enterprise value to equity value, and recognise the regulatory constraints on forecasts and fairness opinions.

The toolkit

  • Discounted cash flow: project free cash flow to the firm, discount at WACC (CAPM cost of equity plus after-tax cost of debt, weighted at market values), add a terminal value (Gordon growth or exit multiple), then subtract net debt to reach equity value.
  • Trading comparables: P/E, EV/EBITDA, EV/Sales and P/B applied to the target's matching metric; the peer set must be genuinely comparable by business, geography and growth.
  • Transaction comparables: multiples paid in change-of-control deals, which embed a control premium.
  • Asset-based: net asset value, and revalued NAV for property and investment holding companies.
  • Dividend discount model: suited to stable, high-payout businesses.
  • Option pricing: Black-Scholes for the equity component of convertibles and warrants.

Adjustments and regulation

  • A control premium (commonly 20-40% in Hong Kong privatisations) is added when valuing a controlling stake; a minority or marketability discount applies to a small, illiquid holding.
  • Profit forecasts published in a circular or offer document must be reported on by the financial adviser and auditors (Takeovers Code Rule 22); a forecast without that report is a serious defect.
  • Fairness opinions must state the basis of the valuation and any reliance on management projections.

Worked example

A target forecasts free cash flow of HK$100 million next year, growing at 3% in perpetuity, with WACC of 11% and net debt of HK$200 million. Terminal value at year 1 = 100 × 1.03 ÷ (0.11 − 0.03) = HK$1,287.5 million. Adding year-1 cash flow gives an enterprise value of HK$1,387.5 million; subtracting net debt gives equity value of HK$1,187.5 million. A 25% control premium over the minority trading price must be tested against this figure rather than simply accepted.

Traps

  • Mixing enterprise value and equity value - forgetting the net debt bridge.
  • Using book values instead of market values in WACC.
  • Applying a P/E multiple to EBITDA.
  • Publishing a profit forecast without the accountants' report required by Rule 22.
  • Using comparables from a different industry or growth profile without adjustment.