Introducing Corporate Valuation Flashcards
Where do professionals search in the line items and income statement to find other nonrecurring items?
Line items:
SG&A expense and COGS.
Income Statement:
Footnotes and MD&A
EBIT signifies what and excludes what?
A company’s OPERATING income. Therefore, exclude other income, interest income, investment income, gains/losses, taxes, etc
How is market value of equity derived in the enterprise value formula?
Share price x fully diluted shares outstanding
Remember, fully diluted shares takes into account options and convertible debt.
How do you derive enterprise value when your starting point is equity value?
Add value of debt + value of preferred stock + minority interests - cash/cash equivalents
What are the two types of buyers in an M&A deal?
Describe each buyer.
Strategic and financial
Strategic buyers are competitors within an industry (although not always the case), looking to benefit from the synergies achieved resulting from the merger
Financial buyers, typically PE funds, are looking to buy the firm as an investment and hoping to sell it for a greater price at a future time.
- What is the formula for net debt?
- Explain the difficulty with using market value of debt in the enterprise formula.
- Debt should include what?
- Total debt - cash/equivalents
- Not all debt is publicly traded. Thus, professionals typically use the book value of debt. But, make sure to check when market value of debt varies from book value of debt. Hence, this is why I say “value of debt” instead of “market value of debt” in the enterprise formula
- All interest bearing liabilties
How could a company’s market value be different from its book value?
A company’s market value changes daily based on market conditions. This differs from the book value of equity, which contains CS, APIC, AOCI, T-Stock, and retained earnings. If the company has been operating at a loss for a while, then it will have negative retained earnings and potentially a negative book value of equity.
Which metric is used as a proxy for free cash flow or CFO?
EBITDA
How do you derive EBITDA if depreciation/amortization is not located on the income statement?
Find depreciation/amortization in the cash flow statement, and then add it to EBIT to derive EBITDA.
What is the enterprise value formula?
Market value of equity + value of debt + value of preferred stock + minority interest - cash/equivalents
Generally speaking, what is equity value?
Value of shareholders’ interests. It is also the market value of a company’s equity in the stock market.
What are examples of nonrecurring items to adjust for when deriving EBIT?
Non recurring items:
Restructuring charges
Gains or losses on the sale of a division or investments
Asset impairment charges
Legal settlement
A company has the following reported information: operating income is 100 million, COGS is 45 million, depreciation is 10 million, and amortization is 15 million. Calculate EBITDA.
125 million
= 100 + 10 + 15
