BIWS Valuation Questions CSV

Question 1

What are the 3 major valuation methodologies?

Answer 1

Trading Comparables, Transaction Comparables and DCF Analysis

Source: BIWS Guide pg. 102 (Q1)

Question 2

What are the two broad categories of valuation?

Answer 2

Relative valuation and intrinsic valuation

Source: BIWS Guide pg. 105 (Q13)

Question 3

Rank the 3 valuation methodologies from highest to lowest expected value

Answer 3

There is no concrete ranking. In general, Precedent Transactions will be higher than Trading Comps because of the control premium that’s built into acquisitions.

DCF may be higher or lower and tends to be more variable because it is based on assumptions

Source: BIWS Guide pg. 102 (Q2)

Question 4

When would you not use a DCF in Valuation?

Answer 4

Two cases:

1) When a company has unstable or unpredictable cash flows (e.g. a tech or biotech start-up)
2) When debt and working capital serve a fundamentally different role (e.g. banks don’t re-invest debt and working capital is a huge part of their Balance Sheets)

Source: BIWS Guide pg. 102 (Q2)

Question 5

Name 6 other valuation methodologies and cases in which they may be used

Answer 5

1) LBO Analysis (use when the company is a buyout target)
2) Sum of the Parts Analysis (used when a company has diverse, unrelated lines of business e.g. a conglomerate)
3) Liquidation Valuation (used in bankruptcy scenarios and with struggling busiensses)
4) Replacement Value
5) M&A Premiums Analysis
6) Future Share Price Analysis

Source: BIWS Guide pg. 103 (Q4-7)

Question 6

Name the five most common multiples used in valuation

Answer 6

1) EV/EBITDA
2) P/E
3) EV/Revenue
4) EV/EBIT
5) P/Book Value

Source: BIWS Guide pg. 103 (Q8)

Question 7

Name 2 industry specific multiples for Internet businesses

Answer 7

EV/Unique Visitors

EV/Page Views

Source: BIWS Guide pg. 104 (Q9)

Question 8

Name an industry specific multiple for retail/airlines businesses

Answer 8

EV/EBITDAR

Source: BIWS Guide pg. 104 (Q9)

Question 9

Why do we remove/add-back rent when comparing retail businesses?

Answer 9

It is a significant expense and on that varies significantly between different companies, depending on how they choose to finance their real estate

Source: BIWS Guide pg. 104 (Q9)

Question 10

Name an industry specific multiple for REIT businesses

Answer 10

Price/FFO (Funds from Operations)

Source: BIWS Guide pg. 104 (Q9)

Question 11

When using industry specific multiples like EV/Scientists or EV/Subscribers, why do we use Enterprise Value rather than Equity Value?

Answer 11

We use Enterprise Value because scientisits or subscribers are “available” to all of the investors (equity and debt) in a company

Source: BIWS Guide pg. 104 (Q10)

Question 12

Would an LBO or a DCF give a higher valuation?

Answer 12

This answer varies depending on our assumptions, but generally an LBO gives a lower valuation because sponsors generally want to minimze how much they will pay.

Source: BIWS Guide pg. 105 (Q11)

Question 13

How do you display your valuation?

Answer 13

As part of a football field, including the ranges that each of the valution methodologies yields

Source: BIWS Guide pg. 105 (Q12)

Question 14

How would you value a__________ (e.g. an apple tree)?

Answer 14

We would apply the same techniques that we would use to value a company. We would want to look at realtive valuation (what are comparable apple trees worth) and then we would want to look at the present value of the trees predicted cash flows (use a DCF analysis)

Source: BIWS Guide pg. 105 (Q13)

Question 15

Why can’t you use Equity Value/EBITDA as a mulitple?

Answer 15

Because EBITDA is available to all investors in a company and Equity Value is the part of the capital structure that is available to only Equity investors.

Source: BIWS Guide pg. 105 (Q14)

Question 16

When would a Liquidation Valuation produce the highest value?

Answer 16

This is unusual - it could happen if a company has substantial hard assets but the marketing is severly undervaluing it (e.g. because of an earnings miss or cyclicality)

Source: BIWS Guide pg. 106 (Q15)

Question 17

How would you value a company before it has any revenue (e.g. Facebook in 2004)?

Answer 17

You would use relative valuation and multiples that are more creative, like EV/Unique Visitors of EV/Pageviews.

DO NOT use a “far in the future DCF” because you can’t reasonably predict cash flows that don’t yet exist.

Source: BIWS Guide pg. 106 (Q16)

Question 18

What would you use with a Free Cash Flow multiple - Equity Value or Enterprise Value?

Answer 18

IT DEPENDS on what kind of FCF - for Unlevered FCF, we would use Enterprise Value. For Levered FCF, we would use Equity Value.

Source: BIWS Guide pg. 106 (Q17)

Question 19

How do you screen for Comparable Companies/Precedent Transactions?

Answer 19

Look for companies that have similar business characterists (e.g. industry classification and geography) and financial profile (e.g. similar size, growth profile, credit profile)

For precedent transactions, we take other factors, such as date the trasnaction occured, into consideration

Source: BIWS Guide pg. 107 (Q19)

Question 20

How do we apply the 3 valuation methodologies to actually get a value for the company we’re looking at? How do we create a football field?

Answer 20

For comps (trading and transaction): We take the median multiple for our company set and multiply it my the relevant financial metric. E.g. if median EV/EBITDA is 8x and EBITDA is $500M, our implied EV would be $4B.

For DCF: We sensitize our output to get a range of possible values.

We create a football field by showing the range of values that each methodology produces (e.g. for comps we may display the 25th percentile, median and 75th percentile).

Source: BIWS Guide pg. 108 (Q20)

Question 21

When do we use valuations?

Answer 21

Valuations are important for understanding investments, mergers, LBO opportunities, defenses of companies and many other situations.

Source: BIWS Guide pg. 108 (Q21)

Question 22

What are two major flaws in trasding comparable companies analysis?

Answer 22

1) Companies may not be truly comparable
2) Our result can be affected by market distrotions

Source: BIWS Guide pg. 109 (Q23)

Question 23

What are two major flaws in transaction comps analysis?

Answer 23

1) Past transactions are rarely 100% comparable (the transaction structure, company size and market cyclicality all have huge effects)
2) Data for precedent trasnactions is less available than for public companies

Source: BIWS Guide pg. 110 (Q27)

Question 24

Why does Warren Buffet prefer EBIT multiples to EBITDA multiples?

Answer 24

Because FCFU = EBIAT + D&A - CapEx - Inc. in NWC… EBITDA neglects CapEx, so for a company with high CapEx or where D&A = CapEx, EBIT may be closer to FCFU

Source: BIWS Guide pg. 110 (Q29)

Question 25

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

Answer 25

EBITDA is not affected by capital structure, tax regime, or accounting policy (D&A). EBIT is affected by D&A, but not capital structure or tax regime. P/E is affected by capital structure, tax regime and D&A.

We use P/E for banks and financial instituions because interest payments/expense are critical.

We would use EV/EBIT for companies in capital intensive industries where D&A and CapEx are large.

EV/EBITDA is used in most other industries.

Source: BIWS Guide pg. 110 (Q30)

Question 26

Do you pay a higher multiple for a company that owns or leases equipment?

Answer 26

We assume that the value of the company is equal and that the D&A expense from owning equals the lease payments from renting. Therefore, Enterprise Value is the same. D&A does not affect EBITDA for the owned company, while lease expense does reduce EBITDA in the case where you are renting. Therefore, the multiple that you pay for the company where you own the equipment would be lower

NOTE: I THINK THIS REALLY DEPENDS ON THE TYPE OF LEASE - CHECK IT

Source: BIWS Guide pg. 111 (Q31)

Question 27

How would you value a private company?

Answer 27

Use the same methodologies! Two differences:

1) For trading comparables analysis, you may apply a discount because the company doesn’t receive a liquidity premim from investors. Note that the same discount doesn’t apply to transaction comps because investors do not pay for a liquidity premium in that situation
2) When running a DCF analysis, we would need to use public comps to calcluate the cost of equity. We would calculate an asset beta for our comps set and then re-lever that beta using our target’s capital structure

Source: BIWS Guide pg. 111 (Q32 & 33)

Question 28

Can we use private companies for relative valuation?

Answer 28

We can not use private companies to calcluate trading comps

We can use private companies to calcluate transaction comps if the purchase price and multiple are available

Source: BIWS Guide pg. 112 (Q34)

Question 29

How do we value banks and financial institutions?

Answer 29

3 key differences:

1) We use P/E and P/BV multiples since interest (on loans) is a crucuial component of a bank’s reenue and debt is a core driver of it’s business model
2) Use NAV (Net Asset Value), a bank-specific metric
3) Use a Dividend Discount Model rather than a DCF

Source: BIWS Guide pg. 113 (QA1)

Question 30

How do we run an IPO valuation for a company?

Answer 30

1) We focus on public company comparables, since we’re interested primarily in pricing the company’s shares
2) We estimate Enterprise Value and then calculate Equity Value - don’t forget to subtract the new cash from IPO proceeds!
3) Once we have an equity value, divide by the number of outstanding shares to get price per share

Source: BIWS Guide pg. 113 (QA2)

Question 31

Let’s say a company has FYE on Dec 31st and it’s now mid-April. How would you calcluate TTM/LTM data?

Answer 31

April is in Q2, since end of Q1 is March 31st. We’ll assume that the company has release Q1 numbers. TTM = Most Recent Fiscal Year + New Partial Period - Old Partial Period, so we would take 2014A + Q1 2015 - Q1 2014 to get TTM numbers

Source: BIWS Guide pg. 113 (QA3)