Technical questions

Question 1

How would you value a tech company with no profits?

Answer 1

Revenue multiples, industry multiples, DCF with carefully constructed forecasts

Question 2

How would you value the coffee shop down the street?

Answer 2

Revenue = price x volume
Gross expenses - 1kg coffee = $20 => 40 cups of coffee = 50c per coffee
Opex = staff costs + rent costs
Minimal D&A, capex, WC, etc.

Question 3

How would you value an airport?

Answer 3

Revenue primarily from aero charges + retail space + car parking

Aero: Aircrafts using runway * charge
Retail: Benchmark $/m^2
Car parking: PAX * penetration * charge

Expenses: Staff, security, maintenance, etc.
Maintenance capex + growth

Question 4

How would you value a bridge?

Answer 4

Toll road - public company EBITDA multiples / transactions

DCF: Revenue = ADT * toll fees, expenses, capex

Question 5

How would you value a company with no revenue?

Answer 5

Revenue multiple
Sector-specific multiples (e.g. subscribers)
DCF (tricky to forecast reliably)

Question 6

When should a company issue equity rather than debt to fund its operations? List 3.

Answer 6

1. When equity market is hot / frothy / there is appetite
2. When cash flows are not certain enough for debt - e.g. early stage tech
3. Owners want to exit / monetise

Conceptually, any time there already substantially debt funded and any more would increase risk - i.e., cost of incremental debt > cost of equity.

Question 7

What is operating leverage?

Answer 7

Fixed costs to total costs - indication of how revenue growth translates into growth in operating income. Also reflects how sensitive earnings is to revenue volatility

Question 8

How would a $10 increase in depreciation in Year 4 affect the DCF valuation of a company?

Answer 8

D&A is non-cash so no additional cash expense but you get a tax benefit from D&A.

PV = (10 * t) / (1 + WACC)^4

Question 9

How does a $10 increase in inventory affect the financial statements?

Question 10

What should a company do with excess cash on its BS?

Answer 10

1. Pay distribution
2. Reinvest / new projects
3. Debt repayments

Question 11

How can a company raise its stock price?

Answer 11

1. Improve operations -> Higher earnings
2. Stock repurchase
3. Accretive M&A
4. Potentially through dividend increases

Question 12

Combined equity value

Answer 12

Buyer equity value + equity issued

Note effected by equity financing

Question 13

Effect of deal financing on P/E

Answer 13

Debt / cash impacts on E but not P. Whether it makes the deal more accretive/dilution depends on relative yields

Equity financing moves P and acts as a lever to combined P/E and therefore acts as a lever to accretion / dilution

Question 14

Combined enterprise value

Answer 14

Buyer’s EV + seller’s EV.

Note unaffected by financing

Question 15

Effect of deal financing on EV/EBITDA

Answer 15

No effect - whether you pay with debt/cash/equity doesn’t change the resulting EV/EBITDA multiple

Question 16

Debt service coverage ratio (DSCR)

Answer 16

DSCR = EBITDA / (Interest + Principal repayment)

Commonly at least 1.5 - 2.0x

Question 17

Credit metrics - typical constraints

Answer 17

DSCR - min of 1.5 - 2.0x
Net debt / EBITDA - max of 6.0x
EBITDA / Interest - min of 2.5x

Question 18

How to maximise returns in LBO?

Answer 18

1. Structuring (pay less, maximise debt financing)
2. Improve operations -> Higher EBITDA
3. Expand exit multiple - > expand, reposition, improve management, etc.