Lecture 4 - Deal Level - Deal Structuring Flashcards
General valuation methods
- DCF
- Real Options
- Multiples (EV/EBIT)
- Liquidation Value
What are real options?
Real options refer to the flexibility or choices that a company has to invest or change its operations in response to changing market conditions. These options can include the ability to expand or contract operations, delay or accelerate investment, or switch production to different products or markets. Real options are considered to be valuable assets for a company, as they allow it to respond to changing market conditions and capitalize on new opportunities. Real options are often difficult to value, as they depend on future market conditions, and are therefore not captured in traditional financial models such as discounted cash flow (DCF) analysis.
Why is EBITDA used?
- widely used as proxy for operating cash flow
- preferably used in PE as it serves as a fair “apples-to-apples” comparison between companies (EBITDA is independent of D&A, capital structure/interest and tax regimes)
What is EV?
Enterprise Value is the claim of both share- and debtholders
= Equity value + debt value - cash
= equity + net debt
Why do we subtract cash from EV?
Enterprise value (EV) is a measure of a company’s total value, including debt and equity. Subtracting cash from EV is done to obtain a more accurate representation of the company’s value, as cash on hand is considered a liquid asset that can be easily converted to other investments, and therefore is not indicative of the company’s operational performance. The resulting value, often referred to as “enterprise value less cash and cash equivalents” (EV-CCE), provides a more accurate picture of the company’s underlying value, and is useful for comparing companies in the same industry.
What does EV/EBITDA tell you?
It tells you how many times you have to earn EBITDA before you reach the EV
Pros of multiple valuation
- market-based instrument (based on public data reflecting growth and risk expectations)
- relativity: comparable over companies
- quick and convenient
- current: valuation based on “live” data
Cons of multiple valuation
- market-based: irrational bubble or bust period can skew valuation
- absence of relevant comparables: difficult to find peers for “pure play”/ conglomerates or niche companies
- company-specific issues: SWOT
External financing sources
- equity
- mezzanine
- debt
- debt-like
What is bullet redemption?
When the company pays back the full loan amount at the end and before that, only interest payments
What is the final redemption credit (PIK note)?
When you pay no interest payments but everything at once at the end
What is an installment credit?
When you pay back the redemption in equal yearly payments. (Interest gets less every year)
What is an annuity credit?
When the actual payment = debt service is equal every year (so interest + redemption should be equal every year).
What is a covenant?
Provisions in credit agreements to protect the lender. If a company breaches a covenant, the lender has the right to ask for immediate repayment or take control of the company.
What is a provision?
A provision is a clause or condition in a contract or legal document that specifies a certain requirement or action that must be fulfilled. It can also refer to a supply or resource that is set aside or available for a particular purpose. In accounting, a provision is an amount set aside to cover a potential future liability or loss.
