Key Rule #1 Flashcards
Why is the “formula” way of valuing co inaccurate?
DR and CFGR don’t stay the same forever
Why don’t DR and CFGR stay the same forever?
co may grow quickly in early days
growth rate falls when gets mature
DR might drop
What type of value does DCF give?
implied value
What type of valuation is DCF?
Intrinsic valuation
How accurate is DCF’s valuation?
most theoretically correct way to value co
What kind of valuation is the multiples method?
relative valuation
What kind of value does the relative valuation give?
current value
What’s the point of valuation?
Determine its implied value aka according to your views
So what if the implied value is different from current value?
- can invest and make $ if value changes
- tell client company what price it might get if it sells (diff from current value)
But public companies already have Market Caps and Share Prices. Why bother valuing
them?
- market cap and share price reflect current value- market might be wrong
- value co to check market’s views
What are the pros of public comps valuation?
- quick, easy
- accounts for current market perceptions (useful for IPO)
- good measure of relative value
- less distorted by overly optimistic financial projections
Quirky Cute Rioting Lemurs
What are the cons of public comps valuation?
- may not be truly comparable
- less accurate for volatile/ thinly traded cos
Pros of precedent transactions?
better reflect market mood and perceptors round such transactions
Cons of precedent transactions?
- data spotty
- may not be truly comparable
- mults could be distorted by acq premiums and specific deal terms
Pros of DCF?
- less influenced by market perception and moods
- detailed analysis of value drivers -> lest indiv components of biz to be valued separately
Cons of DCF?
- v dependent on assumptions
- if TV rep significant poriton of vol, TV assumptions rather than operating assumptions dictate overall value
1 statement to value company and why
- CFS
- only FS that can construct FCFE DCF on standalone basis
Pick 2 FS to value and why?
BS and IS b/c can build CFS from them
3 most common ways to value co?
- comparable companies
- precedent transactions
- DCF
which valuation method for what type of situation?
- to properly value co, use all 3 methods and triangulate appropriate range of values based on results
- -ve current earnings: comarable analysis
- +ve current earnings: DCF
- if value deal similar to those that have occurred- precedent transaction
When to use comparable companies?
-ve current earnings
When to use DCF?
+ve current earnings
When to use transaction analysis?
if value deal similar to those that have occurred
Which valuation technique results in highest value?
- precedent transactions b/c of control premium and synergies
- DCF: can also give highest values IF assumptions allow
- comparable companie-s the least
How high can precedent transaction values be?
Highest- b/c of control premium and synergies
How high can DCF values be?
can give high values if assumptions allow
Which should be higher, EBIT or EBITDA?
EBITDA is higher than EBIT so EBIT mults should be higher
How to find peer group for a private company?
- companies w similar traits
eg. same line of biz,
similar size/ market cap ,
similar growth stage (eg. startup, mature, growth, decline),
similar management structures
When is a DCF more useful than public comps/ precedent transaction?
- always build DCF b/c it is valuation, others are supplemental
- esp. useful when
co is mature w stable, predictable cash flows,
esp when lack good public comps and public transactions
When are public comps and precedent transactions more useful than DCF?
- if co is
- early stage & can’t determine future cash flows
- no path to positive cash flows
- problems w DCF eg. can’t estimate DR
Which one should be worth more: a $500 million EBITDA healthcare company or a $500 million EBITDA industrials company?
Assume the growth rates and margins are the same
- healthcare co worth more b/c healthcare is a less asset-intensive industry
- capex and WC lower -> FCF closer to EBITDA
How do you value an apple tree?
- DCF it
- look at how much similar apple trees have sold for -> calc expected future cash flows from this tree
- discount cash flows to present value, discount Terminal Value to PV
- add everything to get tree’s implied value
- DR based on opportunity cost- what I can earn each year by investing in similar apple trees
People say that the DCF is intrinsic valuation, while Public Comps and Precedent Transactions are relative valuation. Is that correct?
- not quite
- DCF is intrinsic valuation b/c based on expected future cash flows and your views
- but also depends on market, though less than the others
- eg. use multiples to calc TV -> mults linked to peer companies
