Key Rule 4

Question 1

Pros/Cons public comps

Answer 1

• based on real data as opposed to future assumptions
• May not be true comparables
• less accurate for thinly traded stocks or volatile companies

Question 2

Pros/Cons Precedent Transactions

Answer 2

• based on what real companies have actually paid for other companies
• data can be spotty, especially for private comp acquisitions
• there may not be truly comparable transactions

Question 3

Pros/Cons DCF analysis

Answer 3

• not as subject to market fluctuations
• theoretically sound since its based on ability to generate cash flow
• subject to far in future assumptions
• less useful for fast-growing/ unpredictable companies

Question 4

Pros/Cons Liquidation Valuation

Answer 4

• ignores noise in the market and determines value based on assets and liabilities
• not useful for most healthy companies as tends to produce extremely low values

Question 5

Pros/Cons M&A premiums analysis

Answer 5

• Same issues as with PT
• also can’t use acquisition of private comps for this as premiums only apply to public companies with stock prices

Question 6

Pros/Cons future share price analysis

Answer 6

• good as it tells you how much company may be worth
• but depends on assumptions

Question 7

Pros/Cons sum of parts

Answer 7

• more accurately values diversified, conglomerate-type companies
• bad as you often lack the appropriate data for each division

Question 8

Pros/Cons LBO analysis

Answer 8

• good as it sets a floor on valuation by determining the min amount a PE firm could pay to achieve its returns
• gives a relatively low floor rather than a wide range of values

Question 9

Precedent Transactions vs. Public Comps:

Answer 9

Transactions tend to be higher due to the control premium, i.e. the premium the buyer pays to acquire the seller

Question 10

Discounted Cash Flow conclusions

Answer 10

Hard, tends to be the most variable due to its dependence on future assumptions

Question 11

Liquidation valuation conclusion

Answer 11

99& of the time will produce lowest numbers as companies are significantly worth more than what their BS suggests

Question 12

Sum of the parts conclusion

Answer 12

If company is truly worth more in ‘parts’ then this one will tend to produce higher values than relative valuation method

Question 13

LBO analysis conclusion

Answer 13

Tends to produce lower values, usually lower than DCF or relative valuation, but once again it’s dependent on assumptions

Question 14

Link between metrics and multiples

Answer 14

Generally, there’s a correlation between growth rates and relevant multiples, and sometimes also between margins and multiples:

• All else being equal, a company with higher revenue growth will also have higher revenue multiples than companies not growing as quickly.
• Similarly, a company with higher EBITDA growth tends to have higher EBITDA multiples than companies not growing as quickly
BUT:
- just general rules, valuations impacted by everything
- basic math can ask so impact multiples, especially when cpmaones have very margins

Question 15

EV/Revenue and P/E multiples taken least serious because

Answer 15

1. Company should be valued on profits not sales
2. P/E is subject to non-cash and non-recurring charges, like different tax rates, company’s capital structure and other issues