Company valuation

Question 1

what are the types of valuations

Answer 1

discounted FCF methods: WACC, adjusted present value (APV), FTE
multiples valuation

Question 2

APV?

Answer 2

calculate the value of the investment as if there was no debt financing and then add the value of the ITS

Question 3

what is the debt capacity

Answer 3

is the amount of debt at a certain time that is required to maintain the firm’s target debt-to-value ratio

Question 4

formula interest paid with APV

Answer 4

r x D(t-1)

Question 5

FTE method

Answer 5

is a valuation method that calculates the free cash flow available to equity holders taking into account the all payments to and from debt holders

Question 6

advantages and disadv of FTE method

Answer 6

more transparent for equity holders
easier to use when firm has complex capital structure and when the market value of certain securities in the capital structure are not known

dis: you have to compute the debt capacity before capital budgeting decisions can be made

Question 7

how can we estimate the debt cost of capital

Answer 7

bond yield
default spread
new debt interest rate
interest coverage ratio

Question 8

how can we estimate the equity cost of capital

Answer 8

capm
factor models
implied cost of capital

Question 9

method of comparables

Answer 9

is a method to estimate the value of a firm based on the value of other, comparable firms that we will expect to generate similar cashflows in the future.

Question 10

disadvantages of multiples

Answer 10

more likely to result in inconsistencies
more likely to reflect current mood of stock market
the lack of transparency regarding the implicit assumptions