Real World Valuation Scenarios Flashcards
How would you present these Valuation methodologies to a company or its investors? And what do you use it for?
Use football field chart.
Could use for:
- pitch books and client presentations
- parts of other models
- fairness opinions
Why would a company with similar growth and profitability to its Comparable Companies be valued at a premium?
- reported earnings well above expectations and stock price has risen in response
- competitive advantage not reflected in its financials
- has just won a favourable ruling in a major lawsuit
- it is the market leader in an industry and has greater market share than competitors
How do you take into account a company’s competitive advantage in a valuation?
- Highlight 75th percentile or higher for multiples rather than median
- Add in a premium to some of the multiples
- Use more aggressive projections for the company
Do you ALWAYS use the median multiple of a set of public company comparables or precedent transactions?
No, always show a range, may make median the centre, but depends on if the company is outperforming or underperforming.
Two companies have the exact same financial profiles (revenue, growth, and profits) and are purchased by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other transaction – how could this happen?
- one process was more competitive and had a lot more bidders
- one company had recent bad news or a depressed stock price, so acquired at a discount
- in industries with different median multiples
- 2 companies have different accounting standards, and have added back different items when calculating EBITDA, so multiples not truly comparable
If you were buying a vending machine business, would you pay a higher EBITDA multiple for a business that owned the machines and where they depreciated normally, or one in which the machines were leased? The Depreciation expense and the lease expense are the same dollar amounts and everything else is held constant.
Lease. Purchase enterprise value would be the same, but depreciation excluded from EBITDA, so EBITDA is higher and EV/EBITDA multiple is lower for the one that owns its own machines.
- for company with leased machines, lease expense would show up in operating expenses, making EBITDA lower and EV/EBITDA multiple higher.
How would you value a company that has no profit and no revenue?
- Use comparable companies and precedent transactions and look at more creative multiples
- Use a far in the future DCF.
Depends on the industry
The S&P 500 Index (or equivalent index in other country) has a median P / E multiple of 20x. A manufacturing company you’re analyzing has earnings of $1 million. How much is the company worth?
Depends on how its performing relative to index, if higher maybe use a 25x multiple so EV is 25 million
If the same then 20 million
A company’s current stock price is $20.00 per share, and its P / E multiple is 20x, so its EPS is $1.00. It has 10 million shares outstanding.
Now it does a 2-for-1 stock split – how do its P / E multiple and valuation change?
They dont.
Company now has 20 million shares outstanding, but equity value constant, so stock price £10
EPS falls to 0.50, but share price fallen to 10, so P/E multiple remains 20x
Let’s say that you’re comparing a company with a strong brand name, such as Coca-Cola, to a generic manufacturing or transportation company.
Both companies have similar growth profiles and margins. Which one will have the higher EV / EBITDA multiple?
Coke due to its strong brand name.
