400 MI Questions - BIWS

Question 1

what are the 3 major valuation methods?

Answer 1

Comparable Companies, Precedent Transactions and DCF Analysis…. Other models like Net Asset Value or Dividend Discount Model for different types of businesses.

In general, precedent transactions are typically the most valuable. No ranking always holds though.

Question 2

When would you not use a DCF in valuation?

Answer 2

If the company has unstable or unpredictable cash flows (start up… for ex.).

Question 3

What are the most common multiples used in valuation?

Answer 3

EV / Revenue, EV / EBITDA, EV / EBIT, P/E (Share Price / EPS)

Question 4

What are tech specific multiples used?

Answer 4

EV / Unique Visitors, EV / Pageviews - for internet companies.

Question 5

Why couldn’t you use equity value / EBITDA instead of enterprise value / EBITDA?

Answer 5

EBITDA is available to all investors in the company - rather than just equity holders. Similarly, enterprise value is also available to all shareholders so it makes sense to pair them together.

Question 6

How are companies selected for comparable companies / precedent transations?

Answer 6

1. Industry classification
2. Financial criteria (revenue, ebitda, etc.)
3. Geography

Question 7

EV / EBIT, EV / EBITDA, and P / E multiples all measure a company’s profitability. What’s the difference between them and when do you use each one?

Answer 7

P / E depends on the company’s capital structure whereas EV/EBIT and EV/EBITDA are capital structure neutral… Therefore, use P/E for banks, FIs, and other companies where interest payments and expenses are critical. EV/EBIT includes D&A whereas EBITDA excludes it all. You’re more likely to use EV/EBIT in industries where D&A is large and where capital expenditures and fixed assets are important… like manufacturing… EV/EBITDA is used where it’s less important (like internet companies).

Question 8

How are net operating losses valued?

Answer 8

NOLs are valued based on how much they will save in taxes in future years…. NOLs can be used to offset taxable income.

Question 9

Why would a company want to acquire another company?

Answer 9

1. Buyer wants to gain market share
2. Grow faster
3. Buyer believes seller is undervalued
4. Buyer wants to acquire sellers customers
5. Buyer thinks seller has critical technology
6. Buyer believes companies have synergies.

Question 10

Why would an acquisition be dilutive?

Answer 10

An acquisition is dilutive if the additional amount of Net Income the seller contributes is not enough to offset the buyer’s foregone interest on cash, additional interest paid on debt, and the effects of issuing additional shares… Acquisition effects - like amortization of intangibles - can also make an acquisition dilutive.

Question 11

Can you easily determine whether an acquisition will be dilutive or accretive?

Answer 11

If the deal involves just cash and debt, you can sum up the interest expense for debt and the foregone interest on cash then compare it against the seller’s pre-tax income.

Question 12

A company with higher P / E acquires a company with lower P / E - is this accretive or dilutive?

Answer 12

can’t know unless it’s an all stock deal…

Question 13

What are the complete effects of an acquisiton?

Answer 13

1. Foregone interest on cash: Buyer loses interest it would have otherwise earned.
2. Additional Interest on Debt: If debt is used.
3. Additional Shares Outstanding: If buyer pays with stock, it must issue additional shares.
4. Combined financial statements - after the acquisition, the seller’s financials are added to the buyers.