Chapter 3: The Market Approach to Valuation Flashcards
How do you identify the guideline company that is comparable in terms of capital structure?
Total Liabilities/Total Assets (book value)
How do you identify the guideline company that is comparable in terms of growth?
Revenue percentage???
How do you identify the guideline company that is comparable in terms of profitability?
EBIT Margin or EBITDA Margin
How do you apply the price and earnings multiple to calculate the FMV of equity?
[Pre-tax income * price/earnings multiple * (1-tax rate)] + (net assets excluded from definition of price)
How does Pratt’s Stats determine EBITDA?
EBITDA - Net Other (non-operating) Income
How does Pratt’s Stats determine Discretionary Earnings?
EBITDA - Net Other (non-operating) Income + Owner’s Compensation
What does Pratt’s Stats exclude from MVIC?
Real estate, employment or consulting agreement values, and all contingent payments
What is MVIC (generally)?
Market Value of Invested Capital = long-term interest-bearing debt + market value of the equity
What is the principle of substitution?
An appraisal principle that states that nobody will pay more for something than he or she would pay for an equally desirable substitute.
How do you apply the MVIC to EBITDA multiple to calculate the FMV of equity?
MVIC = (EBITDA * MVIC/EBITDA multiple)
Equity = MVIC - long-term interest-bearing debt
What database has the largest known source of market transactions for small closely held businesses?
Institute of Business Appraisers (IBA) Market Database
Which database has contains the largest number of transaction data?
Thomson Reuters M&A
When is the price to earnings multiple most appropriate?
–Depreciation representing actual or economic physical wear and tear
–Average capital structure
What is a major advantage of Pratt’s Stats?
The database contains more data points for each transaction.
What transactions comprise the Public Stats database?
Transactions where 100% of the entity is sold.
When is the guideline public company method least relevant?
The subject company operates in a niche market in which there are no publicly traded competitors.
What are the three common valuation approaches?
Market approach, Asset approach, Income approach
What are the primary considerations for using prior transactions to estimate a value under the market approach?
- -Arm’s length transaction
- -Control characteristics
- -Date
What type of value estimate is yielded by the guideline company method?
Control or minority and marketable.
Which database is based on public companies?
Public Stats
What assets are excluded from the sale price listed with BIZCOMPS?
Cash, A/R, and real estate
What does R-squared indicate?
The larger the R-squared, the stronger the relationship between the numerator and the denominator.
What is the coefficient of variation?
Standard deviation/mean
