400 Questions

Question 1

Is it always accurate to add Debt to Equity Value when calculating Enterprise Value? Why?

Answer 1

Yes, in most cases the buyer will have to refinance the seller’s debt. Or, the buyer will outright pay down the seller’s debt.

Question 2

Should you use the book value or market value of each item when calculating Enterprise Value?

Answer 2

Ideally, use market value. But, finding market value for debt may be difficult. Hence, book value of debt is used as a proxy.

Question 3

Could a company have a negative Enterprise Value? What would that mean?

Answer 3

Typically, it is because a company has a large cash balance. This is common for financial institutions. Or, it could also be because the company has a low market cap, but it has a decent amount of cash

Question 4

Two companies have the exact same financial profile and are bought by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other transaction – how could this happen?

Answer 4

The targets were in different industries, thus having different comp sets Different growth projections

Question 5

What are shortcomings to the formula for EV?

Answer 5

It excludes long term and short term investments and NOLs (treated like cash). It excludes pension obligations and capital leases (treated like debt)

Question 6

A company has 1 million shares outstanding at a value of $100 per share. It also has $10 million of convertible bonds, with par value of $1,000 and a conversion price of $50. How do I calculate diluted shares outstanding?

Answer 6

Basic shares: 1,000,000 # of bonds: 10,000,000/1,000= 10,000 bonds shares/bond: 1000 (par value)/50 (conversion price)= 20 total shares: 10,000 bonds x 20 shares.bond = 200,000 new shares: 1,000,000 basic shares + 200,000 convertible shares = 1,200,000 total shares Or $10,000,000 in bonds/$50 conversion price= 200 shares

Question 7

When would you use a Liquidation Valuation?

Answer 7

In bankruptcy scenarios

Question 8

Walk me through an M&A premiums analysis.

Answer 8

The purpose of this is to analyze historical premiums paid in an acquisition 1) Identify precedent transactions 2) Get the seller’s share price 1, 30, 60, and 90 days out 3) Calculate premiums based on final bid 4) Take median and/or average premiums of precedent transactions and use as base for current analysis *only do this for public companies, not private companies

Question 9

The 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 9

P/E is dependent on capital structure (due to accounting for interest expense), whereas EBIT and EBITDA are capital structure neutral (not taking into account interest expense)

Question 10

Name all of the various valuation methodologies to include in a football field

Answer 10

• 52 week high/low - Equity research price targets - Comparable company analysis - Precedent transactions analysis - DCF analysis - Sum of parts - LBO - Premiums analysis

Question 11

Can you use private companies as part of your valuation?

Answer 11

Only in the context of precedent transactions

Question 12

Both M&A premiums analysis and precedent transactions involve looking at previous M&A transactions. What’s the difference in how we select them?

Answer 12

M&A Premiums Analysis must use public companies (premium to share price), whereas Precedent Transactions Analysis can analyze transactions involving private companies

Question 13

How do you account for convertible bonds in the Enterprise Value formula?

Answer 13

If they are in-the-money, they’ll be included into the market value of equity calculation. If they’re out-of-the money, then they’ll be included in debt

Question 14

When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?

Answer 14

Enterprise value, because that is how much a company “truly” ends up paying due to accounting for debt, etc

Question 15

Why do you need to add Minority Interest to Enterprise Value?

Answer 15

To achieve numerator-denominator consistency when calculating a multiple to EBITDA. EBITDA will include income to NCI, thus EV needs to contain the NCI amount

Question 16

When do you use an LBO Analysis as part of your Valuation?

Answer 16

Establish the floor that strategic buyers would have to overcome in order to drive out bids from PE firms

Question 17

Let’s say a company has 100 shares outstanding, at a share price of $10 each. It also has 10 options outstanding at an exercise price of $15 each – what is its fully diluted equity value?

Answer 17

$1000, because the strike price is above the current price, thus those options would not exercise. You want outstanding and in-the-money options.