Tekniska frågor

Question 1

1. Why do we look at both Enterprise Value and Equity Value?

Answer 1

Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders (equity investors). You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value.

Question 2

2. When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?

Answer 2

Enterprise Value, because that’s how much an acquirer really “pays” and includes the often mandatory debt repayment.

Question 3

3. When would you not use a DCF in a Valuation?

Answer 3

You do not use a DCF if the company has unstable or unpredictable cash flows (tech or bio-tech startup) or when debt and working capital serve a fundamentally different role. For example, banks and financial institutions do not re-invest debt and working capital is a huge part of their Balance Sheets – so you wouldn’t use a DCF for such companies.

Jag skulle inte använda mig av en kassaflödes analys om:

1) Det framtida kassaflödet är osäkert och volatilt
2) Eller om en stor del av kassaflödet beror på finansiellt kassaflöde snarare en på operativa kassaflöden som kommer intäktsgenererande aktiviteter.

Question 4

The EV / EBIT, EV / EBITDA, and P / E multiples all measure a company’s profitability. What’s the difference between them, and when do you use each one?

Answer 4

P / E depends on the company’s capital structure whereas EV / EBIT and EV / EBITDA are capital structure-neutral. Therefore, you use P / E for banks, financial institutions, and other companies where interest payments / expenses are critical.

Question 5

När använder du EV/EBIT-multipeln och när använder du EV/EBITDA-multipeln?

Answer 5

EV / EBIT includes Depreciation & Amortization whereas EV / EBITDA excludes it – you’re more likely to use EV / EBIT in industries where D&A is large and where capital expenditures and fixed assets are important (e.g. manufacturing), and EV / EBITDA in industries where fixed assets are less important and where D&A is comparatively smaller (e.g. Internet companies).

Question 6

Walk me through an M&A premiums analysis.

Answer 6

1. First, select the precedent transactions based on industry, date (past 2-3 years for example), and size (example: over $1 billion market cap).
2. For each transaction, get the seller’s share price 1 day, 20 days, and 60 days before the transaction was announced (you can also look at even longer intervals, or 30 days, 45 days, etc.).
3. Then, calculate the 1-day premium, 20-day premium, etc. by dividing the per- share purchase price by the appropriate share prices on each day.
4. Get the medians for each set, and then apply them to your company’s current share price, share price 20 days ago, etc. to estimate how much of a premium a buyer might pay for it.

Question 7

24. How can we calculate Cost of Equity WITHOUT using CAPM?

Answer 7

Cost of Equity = (Dividends per Share / Share Price) + Growth Rate of Dividends

This is less common than the “standard” formula but sometimes you use it for companies where dividends are more important or when you lack proper information on Beta and the other variables that go into calculating Cost of Equity with CAPM.

Question 8

What’s an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx?

Answer 8

Take Cash Flow From Operations and subtract CapEx – that gets you to Levered Cash Flow. To get to Unlevered Cash Flow, you then need to add back the tax-adjusted Interest Expense and subtract the tax-adjusted Interest Income.

Question 9

If you use Levered Free Cash Flow, what should you use as the Discount Rate?

Answer 9

You would use the Cost of Equity rather than WACC since we’re not concerned with Debt or Preferred Stock in this case – we’re calculating Equity Value, not Enterprise Value.

Question 10

What’s the relationship between debt and Cost of Equity?

Answer 10

More debt means that the company is more risky, so the company’s Levered Beta will be higher – all else being equal, additional debt would raise the Cost of Equity, and less debt would lower the Cost of Equity.

Question 11

Vad menas med Equity Risk Premium?

Answer 11

1) The visar vilken avkastning en investerare skulle erhålla utöver den risk-fria avkastningen, givet en viss risk-nivå.
2) Investerar ska erhålla tillräcklig kompensation för den marknads eller bolagsrisk denne är utsatt för.
3) Man räknar bäst fram den genom historisk data och tar sedan det geometriska genomsnittet för att ta hänsyn till ränta-på-ränta effekten.