401 - FINAL Flashcards
when using comps…
want themto have the similar RISK and GROWTH rates
—but also don’t always consider those with larger multiples to be outliers…it depends if you are trying to estimate current value or if you are estimating the future value with anticipated growth in profitability or future priojects
multiples comes from the roots of DCF
PV/FCFF(1+g) = 1 / (WACC - g)
–DCF if do GGM in first year - simplified
left side = 5 / 1 – shows company is worth 5 times its FCFFs
something is worth what people are willing to pay for it - in ex.. with houses did P/sq. ft - look at what similar prices were recently sold at…look at their P/sq. ft and multiply average by sq. ft. of my house
diff. multiples
EV/REV
EV/ FCF
EV / EBITDA
Price / EPS
Mkt equity / bk equity
P/E - something is worth what someone is willing to pay for it
linear relationship for multiples
can finda slope - linear relationship with growth on x axis and P/E multiple on the Y
- –growth explains the variation in the P/E ratios in the example
- -can then estimate the P/E ratio GIVEN their growth rate - find line of best fit and with the regression can calc. the expected P/E ratio then use that ratio to multiply earnings and find the PRICE
in another ex. ROE explained the variation in the mkt/bk of each comp
–couldn’t just use industry ave. bc the ROE and growth rate variations can skew the averages and cause you to over/under estimate the valueation
graphs help us see the big picture - look at slope to estimate
NEED TO UNDERSTAND WHAT FACTOR IS DRIVING VARIATION IN MULTIPLES AND USE THAT IN YOUR CALC. AND VALUATION
valuation football field
sensitivity analysis creates a range of values
have VALUE on Y axis then on X axis all the diff. valuation techniques
- -DCF (FCFF), (P/E multiples), (EV/REV), (EV/EBITDA) DCF FCFE)
- -all created diff. values that you plot using Y axis - then under diff. assumptions can create a rang of values
- –assumptions could be growth rate and WACC
if football gives approx. worth of $100M - but 1B compete and acquisition valued at $125B - worth what willing to pay? yes! all models say $100M so why?
- -goodwill, brand name, synergies - or growth rate too low? WACC too high?
- -means you didn’t take these hidden values into account when making the model - can help you improve it and look into other assumptions and changes you can make to manipulate model
- -shows that the point of the model is to know what the right questions are to ask - what are we missing? tells us where to go for our due diligence?
- -assumptions are the POINT of the model
FCFE - DCF
Equity value = EV + cash - debt
FCFE = FCFF - int.(1-t) + net borrowing
–the 1-t is where we take in to account the tax shield (bc don’t discount by WACC so have to take out the tax shield - bc in FCFF we overestimated taxable income by multipling by EBIT and not EBT ( bc tax shield on int. was already included in discount rate…but in this case it isn’t)
net borrowing = (LTD + STD)t - (LTD + STD)t-1
- –if negative means paid down debt holders so less $ available to equity holders
- -if positive means took out oan which is value o equity holders
equity value + cash + debt = enterprise value
–always add cash when switching btwn both sides!!!
do ex post bad outcomes mean ex anti poor analysis?
NO always change neg. things can happen
- -does not mean you were not careful in your study
- -world is full of uncertainty - know what risks you are exposing yourself to
realizze everything is not concrete - don’t build models to get an exact right answer - about making assumptions and diggind deeper
comps vs. DCF
Comps - good bc helps see what people are willing to pay for something that is similar to me - then can adjust
DCF - can do a lot of what if analysis -tests under diff. assumptions
–in liquidation of DCF - we capture the LAST YEAR Balance sheet value!!! not the diff.
M&M
Thought experiement - value from assets, not how they’re sliced
—see what frictions exist so that how they are sliced changes value
–most commonly accepted theory is the trade-off theory
three deficiencies of ROE
- the value problem
- the timing problem
- the risk problem
which would help you understand how to improve asset turnover?
collection period and inv. turnover
VC - do they make money by investing in startup comp. by leveraging their investment in firm with as much debt as firm allows?
FALSE
In an M&M world…
it would NOT matter whether or not firms paid div.
a project’s equity beta
- inc. with amount of leverage used to fin. project
- -inc. with amt. of systematic risk inherent in project
sources of risk captured in WACC - systematic risk and default risk
in CAPM world
firm specific risk is irrelevant!!!!!
diff. btwn comp. valuation and project valuation?
projects usually expected to have unlimited lives (liquidation ex.) - but companies will be assumed to go on forever (perpetuity)
