BIWS Valuation Questions CSV Flashcards
What are the 3 major valuation methodologies?
Trading Comparables, Transaction Comparables and DCF Analysis
Source: BIWS Guide pg. 102 (Q1)
What are the two broad categories of valuation?
Relative valuation and intrinsic valuation
Source: BIWS Guide pg. 105 (Q13)
Rank the 3 valuation methodologies from highest to lowest expected value
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)
When would you not use a DCF in Valuation?
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)
Name 6 other valuation methodologies and cases in which they may be used
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)
Name the five most common multiples used in valuation
1) EV/EBITDA
2) P/E
3) EV/Revenue
4) EV/EBIT
5) P/Book Value
Source: BIWS Guide pg. 103 (Q8)
Name 2 industry specific multiples for Internet businesses
EV/Unique Visitors
EV/Page Views
Source: BIWS Guide pg. 104 (Q9)
Name an industry specific multiple for retail/airlines businesses
EV/EBITDAR
Source: BIWS Guide pg. 104 (Q9)
Why do we remove/add-back rent when comparing retail businesses?
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)
Name an industry specific multiple for REIT businesses
Price/FFO (Funds from Operations)
Source: BIWS Guide pg. 104 (Q9)
When using industry specific multiples like EV/Scientists or EV/Subscribers, why do we use Enterprise Value rather than Equity Value?
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)
Would an LBO or a DCF give a higher valuation?
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)
How do you display your valuation?
As part of a football field, including the ranges that each of the valution methodologies yields
Source: BIWS Guide pg. 105 (Q12)
How would you value a__________ (e.g. an apple tree)?
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)
Why can’t you use Equity Value/EBITDA as a mulitple?
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)
When would a Liquidation Valuation produce the highest value?
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)
How would you value a company before it has any revenue (e.g. Facebook in 2004)?
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)
What would you use with a Free Cash Flow multiple - Equity Value or Enterprise Value?
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)
How do you screen for Comparable Companies/Precedent Transactions?
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)
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?
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)
When do we use valuations?
Valuations are important for understanding investments, mergers, LBO opportunities, defenses of companies and many other situations.
Source: BIWS Guide pg. 108 (Q21)
What are two major flaws in trasding comparable companies analysis?
1) Companies may not be truly comparable
2) Our result can be affected by market distrotions
Source: BIWS Guide pg. 109 (Q23)
What are two major flaws in transaction comps analysis?
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)
Why does Warren Buffet prefer EBIT multiples to EBITDA multiples?
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)
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?
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)
Do you pay a higher multiple for a company that owns or leases equipment?
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)
How would you value a private company?
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)
Can we use private companies for relative valuation?
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)
How do we value banks and financial institutions?
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)
How do we run an IPO valuation for a company?
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)
Let’s say a company has FYE on Dec 31st and it’s now mid-April. How would you calcluate TTM/LTM data?
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)
