Tutorial Sheet 2.3 Value Creation Flashcards
The return expectations of the owners of a levered company consists of two components:
If the company is 100% financed with equity, …
Operative risk and Financial risk
only the operative risk component remains.
EBITDA growth can be achieved through different levers
▪ Difference between EBITDA at entry and EBITDA at exit. Increase (or potentially also decrease) of EBITDA through:
1. sales growth and/or an increase in the EBITDA margin (organic growth)
2. …
As we know, it is common within the private equity industry to base the company valuation on EBITDA numbers. The enterprise value at entry and exit is …
▪ Within the given value creation model, the contribution of EBITDA growth is being calculated by multiplying the change in EBITDA between entry and exit with the EBITDA multiple at entry:
…
Acquisitions (inorganic growth)
determined a multiple of EBITDA
(EBITDAexit – EBITDAentry) * EBITDA multiple
Free Cash Flow Effect is influenced by several factors
▪ This value driver illustrates the free cash flows (FCF) generated on a company level and …
▪ The FCF effect is an operational value driver that is influenced by the following factors:
1. …
2. working capital effects
3. …
4. tax (and interest) payments
▪ Paying down debt (“de-leveraging“) is frequently mentioned as a … in the private equity industry, albeit the …being the true value driver. In this context, de-leveraging and the leverage effect are often mixed up.
being available for paying down debt and for financing dividends
EBITDA growth; investments
value driver; generation of the required cash flows
The multiple effect usually leads to a …
▪ Change in the EBITDA multiple between entry and exit that is used to…
▪ The change in multiple can be attributed to a change in the
(i) … environment, to the
(ii) re-positioning the company (i.e. size/ strategic alignment), or
(iii) the …
▪ In the context of the given value creation model, the contribution of the multiple effect is calculated by:
change between entry and exit
calculate the enterprise value
economic or capital markets; negotiation skills/ positions of buyers and sellers
Multiple Effect = (Multipleexit – Multipleentry) * EBITDAentry
Combination of EBITDA/Multiple
▪ Correction factor for the combined impact of …
For example, between entry and exit, it is possible that the EBITDA increases while at the same time the EBITDA multiple decreases. If this is the case, the increase in enterprise value due to the increase in EBITDA will be … than it would have been with a constant multiple.
Correction Effect = …
EBITDA and multiple on the enterprise value
less pronounced
(Multipleexit – Multipleentry) * (EBITDAexit – EBITDAentry)
