Capital Investments

Question 1

What is the definition of a capital investment?

Answer 1

Any investment for which the economic benefit is greater than one year.

Question 2

What are examples of capital investments?

Answer 2

Opening a new factory, Entering a new market, acquiring another business, and research and development of new products.

Question 3

What are the the two techniques for valuing an investment?

Answer 3

Net Present Value and IRR

Question 4

What is the definition of Net Present Value?

Answer 4

The value of all future cash flows over the entire life of an investment discounted to the present.

Question 5

What is the definition of the internal rate of return?

Answer 5

The expected compound annual rate of return that will be earned on a project or investment.

Question 6

What is the formula for present value?

Answer 6

FV x 1/(1+i)n i = discount rate or cost of capital

Question 7

What is the definition of terminal value?

Answer 7

Value of free cash flow beyond a forecast period

Question 8

What are the two formulas to determine terminal value?

Answer 8

Growing perpetuity formula and Exit multiple formula

Question 9

How do you calculate the Growing Perpetuity Formula?

Answer 9

Free cash flow x (1+growth)/Cost of capital - growth

Question 10

How do you calculate the exit multiple formula

Answer 10

Financial metric (i.e. earnings, ebitda) X multiple

Question 11

What are the drivers of free cash flow?

Answer 11

Business strategy, revenue, cost structure, asset utilization

Question 12

What are the drivers of cost of capital?

Answer 12

Risk, current capital structure, and macro factors

Question 13

What is the definition of enterprise value and how is it calculated?

Answer 13

Value of entire business, = equity value + Debt - cash also NPV of a business

Question 14

What is the definition of equity value and how is it calculated?

Answer 14

It is the value shareholders would receive if a company was sold, share price X outstanding shares or NPV of business - debt + cash

Question 15

What are the benefits of a M&A transaction?

Answer 15

Cost savings, revenue enhancements, increase market share, and enhance financial resources

Question 16

What are the potential drawbacks?

Answer 16

Overpaying, large expenses associated with the investment and negative reactions to the merger or acquisition

Question 17

What are steps in 10-step acquisition process

Answer 17

1. Acquisition Strat
2. Acquisition Criteria
3. Searching for a target
4. Approaching Targets
5. Data & Detailed Valuations
6. Negotiation
7. Due Diligence
8. Purchase & Sales Contract
9. Financing
10. Integration

Question 18

What are strategic buyers

Answer 18

Operating businesses

Question 19

What are financial buyers

Answer 19

Private equity or professional investors looking to maximize equity returns.

Question 20

What is best practice when acquiring a target

Answer 20

Consideration paid should be less than stand-alone value of business plus net synergies

Question 21

What are issues in a structuring environment to consider?

Answer 21

1. The strategic plan
2. Hostile vs. friendly takeover
3. The capital structure
4. Public vs. Private investment
5. Competing Bidders

Question 22

What are issues to consider in market environment in an acquisition?

Answer 22

1. Contract Law
2. Accounting Rules
3. Tax
4. Market Conditions
5. Corporate Law
6. Available Financing
7. Antitrust Laws