Lecture 5 Flashcards
Name the steps in a DCF
- Analyse historical performance
- Project FCF
- Calculate WACC
- Project Terminal Value
- Discount FCF and TV to get Enterprise Value
Calculate FCFF
EBIT (1-tax rate) + D&A + Non cash flow items - CAPEX - Change in net working capital
Enterprise value to equity value
EV - net debt - non-controlling interests - preferred stock
Different typ och cash flows
Unlevered cash flow and levered cash flow
Advantages of DCF
- Expected changes in the target company’s cash flows (e.g. from operating synergies and cost structure changes) can be readily modeled
- An estimate of intrinsic value based on forecast fundamentals is provided by the model
- Changes in assumptions and estimates can be incorporated by customizing and modifying the model
- What-if scenarios strengthen the final value range
Disadvantages of DCF
- It is difficult to apply when free cash flows do not align with profitability within the first stage. E.g. high growth companies
- Estimating cash flows and earnings far into the future is not an exact science. There is a great deal of uncertainty in estimates for the following year, and even greater uncertainty in perpetuity
- Estimates of discount rates can change over time because of capital market developments or changes that specifically affect the companies in question. These changes can also significantly affect acquisition estimates
- Terminal value estimates often subject the acquisition value calculations to a disproportionate degree of estimate error. The estimate of terminal value can differ depending on the specific technique used. Additionally, the range of estimates can be affected dramatically by small changes in the assumed growth and WACC estimates
Steps in precedent transaction analysis
I. Select the universe of comparable acquisitions
II. Locate the necessary deal-related and financial information
III. Spread key statistics, ratios and trading multiples
IV. Benchmark the comparable acquisitions
V. Determine valuation
What is precedent transaction analysis?
- Is designed to reflect ”current” valuation based on transaction multiples
- It is a “Private Market” valuation (don’t be confused by the fact that many deals are done in public markets)
- It is a “Relative Value” valuation. Different from “Intrinsic Valuation” analysis such as Discounted Cash Flow Analysis
- Just as comparable companies analysis, its major disadvantage is that no two companies, nor two transactions, are exactly the same so assigning a valuation based on the indicators of similar transactions may fail to accurately capture a company’s intrinsic value
- As a result, trading comps should be used in conjunction with other valuation methodologies
- Includes a control premium
What is comparable companies analysis?
- Is designed to reflect ”current” valuation based on prevailing market conditions and sentiment (based on market trading multiples of comparable companies)
- It is a “Public Market” valuation
- It is a “Relative Value” valuation. Different from “Intrinsic Valuation” analysis such as Discounted Cash Flow Analysis
- Does not include a control premium
What are the steps in comparable companies analysis?
1) select the universe of comparable companies
2) locate the necessary financial information
3) spread key statistics, ratios and trading multiples
4) benchmark the comparable companies
5) determine valuation
How do you select peers?
Business profible (sector, products and services, customers and end markets, distributions channels and geography)
Financial profile (size, profitability, growth profile, return on investment, credit profile)
What is disadvantage of comparable companies analysis?
Major disadvantage is that no two companies are exactly the same so assigning a valuation based on the trading indicators of similar companies may fail to accurately capture a company’s true value
As a result, trading comps should be used in conjunction with other valuation methodologies
Name some key trading multiples
o EV/Sales o EV/EBITDA o EV/EBIT o P/E o P/BV
