Ib1 Flashcards
How would you account for synergies in an M&A valuation?
- Revenue synergies: increase sales due to expanded market reach; improved pricing power due to reduced competition.
- Cost synergies: reduced operating expenses through economics of scale; removed the duplication functions (IT, HR); lower cost of goods sold due to bulk purchasing
- Financial synergies: lower cost of capital due to stronger combined balance sheet; tax benefits such as utilize NOLs
WACC
Weighted average cost of capital= cost of equity * equity% + cost of debt * debt%* (1-tax rate)
Key factors consider when selecting comparable companies for valuation
- Industry 2. Geography 3. Financial metrics ( size, growth rate, capital structure, growth rate)
Company A EQV 80, bought company B uses 100% debt. No premium. What’s combined enterprise value and equity value? What about with 25% premium
- No stock: combined EQV = A EQV = 80; EV = company A EV+company B EV
- With 25%: combined EQV = A EQV = 80, combined EV = company A EV + company B purchase enterprise value
What adjust would you make to a valuation for a company with high customer concentration risk
- Adjust WACC - higher risk premium, increase the company’s cost of equity to account for the elevated risk of revenue loss
- Reduce revenue projection: - apply a probability-weighted adjustment to future revenue to reflect the likelihood of losing key customers. Lower growth rate
How would you value intellectual property (IP) as part of a company’s assets?
- Cost Approach: values IP based on the cost required to recreate or replace it.
( calculate historical costs, including R&D l, testing, and legal fees) - Market Approach: values IP by comparing it to recent transactions of similar IP
- Income Approach: values IP based on its ability to generate future income (DCF)
How do you incorporate inflation into a valuation model?
- Adjust revenue growth = real growth + inflation
- Use nominal discount rate (1+nominal rate) = (1+ real rate ) * (1+inflation rate)
What is Yield and what is purchase equity value
- Yield is how much you get in net income for each $1 spent on sellers’ stock
- Yield = seller Net Income / Purchase Equity price
3.Purchase Equity price = sellers share price* S.O* (1+premium)
What is working capital and what does working capital measure
Working capital is the difference between current assets and current liabilities. It measures a company’s short-term liquidity and ability to meet day-to-day operational expenses.
What is discount rate
The discount rate is the interest rate used to calculate the present value of future cash flows. It reflects the time value of money and the risk associated with the cash flows.
Why do we need to adjust for working capital in cash flow statement
working capital help reconcile the income statement to the cash flow statement. While the income statement is based on accrual accounting, the cash flow statement reflects actual cash movement. Adjusting for working capital accounts (like receivables, payables, and inventory) bridges the gap between net income and cash flow.
Google owns 80% of a business, how is this represented in its EV and why
If Google owns 80% of a business, this ownership impacts its Enterprise Value (EV) through the inclusion of non-controlling interest (NCI). Here’s how:
1. EV Representation:
• EV includes the value of 100% of a consolidated subsidiary, even if the parent company (Google) owns less than 100%.
• The remaining 20% (NCI) is added to EV because EV reflects the total value of all operating assets, regardless of ownership percentage.
2. Why:
• EV is calculated on a control basis, representing the value of the entire business to account for all stakeholders, not just the portion Google owns.
This ensures EV consistently reflects the full value of consolidated operations.
Google owns 30% of a business, how is this represented in its EV and why
If Google owns 30% of a business, it is typically treated as an equity investment, not consolidated into its financials. Here’s how it impacts Enterprise Value (EV):
1. Representation:
• The 30% stake is not included in EV because Google doesn’t control the business.
• Instead, the value of this investment appears as a non-operating asset in Google’s balance sheet.
2. Why:
• EV focuses on assets directly contributing to operations. Minority investments are excluded from EV but affect Equity Value.
explain how convertible bonds work
Convertible bonds are a type of debt that can be converted into a predetermined number of the issuer’s shares. Here’s how they work:
1. Start as Bonds: Investors receive interest payments like regular bonds.
2. Conversion Option: At specific times or conditions, investors can convert the bond into shares at a set price (conversion price).
3. Benefits:
• Investors: Get downside protection (as a bond) and upside potential (if the stock price rises).
• Issuer: Pays lower interest rates since investors value the conversion feature.
They balance debt and equity characteristics.
Would shareholders prefer dividend or share buyback
Shareholders’ preference between dividends and share buybacks depends on their goals and tax considerations:
1. Dividends:
• Preferred by investors seeking regular income.
• Beneficial in stable, low-growth companies.
• May result in immediate tax liability for recipients.
2. Share Buybacks:
• Preferred by investors focused on capital gains.
• Increases share value by reducing supply and boosting earnings per share (EPS).
• Offers tax advantages as capital gains are taxed only when shares are sold.
Summary:
• Income-focused investors may prefer dividends.
• Growth-focused or tax-sensitive investors may favor buybacks.
What is goodwill
Goodwill is an intangible asset that arises when a company acquires another business for more than the fair market value of its net identifiable assets (assets minus liabilities).
Key Components:
• Represents intangible factors like brand reputation, customer loyalty, or intellectual property.
• Recorded on the balance sheet after an acquisition.
Formula:

It reflects the premium paid for the company’s future earning potential.
Would a company with a minority interest holder or one without have a higher EPS
Without is higher, because if a company has minority interest holders, it means part of it the earnings from its subsidiaries is allocated to those minority shareholders, reducing the amount available to the parent company’s shareholders
