Introducing Corporate Valuation (Reverse)

Question 1

Find depreciation/amortization in the cash flow statement, and then add it to EBIT to derive EBITDA.

Answer 1

How do you derive EBITDA if depreciation/amortization is not located on the income statement?

Question 2

EBITDA

Answer 2

Which metric is used as a proxy for free cash flow?

Question 3

Market value of equity + value of debt + value of preferred stock + minority interest - cash

Answer 3

What is the enterprise value formula?

Question 4

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.

Answer 4

What are the two types of buyers in an M&A deal?

Describe each buyer.

Question 5

Value of shareholders’ interests. It is also the market value of a company’s equity in the stock market.

Answer 5

Generally speaking, what is equity value?

Question 6

Share price x fully diluted shares outstanding

Remember, fully diluted shares takes into account options and convertible debt.

Answer 6

How is market value of equity derived in the enterprise value formula?

Question 7

Non recurring items:

Restructuring charges

Gains or losses on the sale of a division or investments

Asset impairment charges

Legal settlement

Answer 7

What are examples of nonrecurring items to adjust for when deriving EBIT?

Question 8

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.

Answer 8

How could a company’s market value be different from its book value?

Question 9

SG&A expense and COGS. Professionals read the footnotes and the MD&A

Answer 9

Where do professionals search in the line items and income statement to find other nonrecurring items?

Question 10

EBIT

Interest income, interest expense, gains/losses, investment income, other income, taxes

Answer 10

Which financial metric would you use to compare companies operating profits?

Name examples of line items excluded from operating profits.

Question 11

Add value of debt + value of preferred stock + minority interests - cash/cash equivalents

Answer 11

How do you derive enterprise value when your starting point is equity value?

Question 12

125 million

= 100 + 10 + 15

Answer 12

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.

Question 13

1. Total debt - cash/equivalents
2. 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
3. All interest bearing liabilties

Answer 13

1. What is the formula for net debt?
2. Explain the difficulty with using market value of debt in the enterprise formula.
3. Debt should include what?

Question 14

1. Comparable companies analysis
2. Acquisition comparables analysis (precedent transactions analysis)
3. DCF analysis
4. Merger consequences analysis
5. LBO analysis

Answer 14

What are the 5 most commonly used company valuation methods?

Question 15

A company’s OPERATING income. Therefore, exclude other income, interest income, investment income, gains/losses, taxes, etc

Answer 15

EBIT is used to derive what and excludes what?