Topic 3: M&A Valuations

Question 1

What is the enterprise value formula?

Answer 1

EV= MV - Cash+ preferred shares + minority interests + total debt

Question 2

What is the enterprise value multiple?

Answer 2

EV/ EBITDA

Question 3

What are the two equity formulas for EPS and P:E

Answer 3

EPS= Net Income/ No. of shares 
P:E= Current share price/ EPS

Question 4

What are the two valuation methods using multiples?

Answer 4

CCA (Comparable Company Analysis)

CTA (Comparable Transaction Analysis)

Question 5

How do we calculate price per share using enterprice and equity multiples?

Answer 5

Enterprise- Use EV/ EBITDA - need to solve EV and then substitute in the formula to calculate MV and then divide by no of shares to calculate share price
Equity - Use P:E - easy - solve for P to calculate current share price using multiples

Question 6

Which number should you use for comparable companies when using CCA and CTA?
What is the goal of using these valuation methods?

Answer 6

MEDIAN

Goal: CALCULATE THE CURRENT SHARE PRICE

Question 7

What are the pros and cons of CTA?

Answer 7

Pros:
- Easy to calculate and communicate
- Useful current information on recent M&A control premiums
- Useful benchmark for the value of company for control- transferring functions
Disadvantages
- Information not usually publicly available
- Valuation subject to peer selection and market trends (e.g. may be outdated)

Question 8

What are the pros and cons of CCA?

Answer 8

Advantages
- Easy to calculate and communicate
- Useful current market information on industry trends, business risks and market growth
- Useful benchmark for value of company for a non-controlling (minority) investment
Disadvantages:
- Not useful for a few comparable companies (thinly traded)
- Sensitive to peer selection (subjective)

Question 9

What are the pros and cons of DCF?

Answer 9

Pros:
- Theoretically sound
- Not heavily influenced by current market conditions
Disadvantages:
- Sensitive to assumptions (Growth rate, PM, discount rate (WACC assumptions)
- Particularly sentivie to terminal values - based on subjective assumptions (a perpetuity growth or exit multiples methodology)

Question 10

What are the five steps in DCF?

Answer 10

1) project FCF
2) determine WACC
3) Determine TV
4) Use NPV to get to EV
5) Obtain MV via EV
6) Calculate theoretical share price