Valuation

Question 1

How do you calculate Liquidation Value (Net Asset Value)?

Answer 1

Total Asset Value - Total Liability Value

Question 2

When would a DCF not be very useful?

Answer 2

Asset heavy industries
Cash flows are unpredictable (b/c high growth industry or on brink of bankruptcy)

Question 3

When are public comps and precedent transactions not very reliable?

Answer 3

Data is spotty
The company is unique and can’t be compared easily to others

Question 4

Liquidation Value (Asset-Based Valuation)

Answer 4

Value the company’s assets and assume they are sold to repay its liabilities, and then whatever remains goes to equity investors and company’s equity value

Question 5

M&A Premiums Analysis

Answer 5

Select precedent transactions but calculate the premium the buyer paid for the seller (what % over the share price)

Question 6

Future Share Price Analysis

Answer 6

Project a company’s future share price based on the P/E or other multiple of comparable companies and discount it back to its present value

Question 7

Sum of The Parts

Answer 7

Split a company into different segments, pick different sets of public comps and precedent transactions for each, assign multiples, value each division separately, and then add up all the values at the end to determine the company’s total value

Question 8

LBO Analysis

Answer 8

Assume a private equity acquires a company and needs to achieve a certain Internal Rate of Return (IRR), and work backwards to calculate how much they could potentially pay to achieve that return

Question 9

When is EV/EBIT used?

Answer 9

Most useful for companies where CapEx is more important to factor in (Since D&A follows CapEx closely)

Question 10

When is EV/EBITDA for?

Answer 10

Most useful for companies where CapEx and D&A are not as important

Question 11

When is P/E used?

Answer 11

Most relevant for banks and financial institutions; distorted by non-cash charges, capital structure, and tax rates

Question 12

When is EV/Unlevered FCF used?

Answer 12

Used when CapEx or changes in Operational Assets and Liabilities such as Deferred Revenue have a big impact

Question 13

Why is P/E seldomly used?

Answer 13

Includes non-cash charges and is impacted by tax rates and capital structures

Question 14

What are some “issues” with the FCF multiples?

Answer 14

Take more time to calculate
May not be standardized (companies include different items in CFO section of CF Statement)

Question 15

Book Value Multiples (P/BV)

Answer 15

Tell you haw valuable a company is relative to its Balance Sheet. Seldom used because companies balance sheets are far different than their true market value.
Equity Value/Book Value
Price per Share/Book Value

Question 16

How to value based on multiples (comparable companies)?

Answer 16

Once you’ve calculated all the relevant multiples, you normally find the minimum, maximum, median, 25th percentile, and 75th percentile each year then apply them to the company’s own financial figures

Question 17

Does a valuation tell you how much a company is worth?

Answer 17

No, a valuation gives us a range of possible values of a company

Question 18

Why might we not want to use liquidation value to value a company?

Answer 18

It’s useful for most healthy companies because it tends to produce extremely low valuations

Question 19

Why might it not be ideal to use a future share price analysis?

Answer 19

It is highly dependent on future assumptions.

Question 20

Which valuation method tends to produce the lowest valuation?

Answer 20

Liquidation value will produce the lowest value 99% of the time because most companies are worth significantly more than what their balance sheet would suggest

Question 21

Growth Rate x Relevant Multiples Relationship

Answer 21

Higher Revenue Growth = Higher Revenue Multiple
Higher EBITDA Growth = Higher EBITDA Multiple
*All else equal

Question 22

PEG Ratio

Answer 22

P/E divided by EPS growth
Accounts for growth to get a better view of company’s real value

Question 23

When are multiples most useful when valuing companies?

Answer 23

When growth rates and margins are in similar ranges

Question 24

Why are EV/Revenue and P/E multiples taken least seriously?

Answer 24

A company should be valued based on its profits, not its sales
P/E is subject to non-cash and non-recurring charges

Question 25

What are some reasons company valuations may be valued different than what their financial statements suggest?

Answer 25

Employees, IP, legal rulings, product benefits, recent news and announcements

Question 26

Owning vs. Leasing a building - impact on EBITDA

Answer 26

When you own a building, it will have a depreciation and interest expense (from the mortgage) associated with it (neither of which are reflected in EBITDA. If you’re leasing a building, the rental expense will show up in EBITDA and reduce it.

Question 27

What should you do it a company has no profit and/or revenue?

Answer 27

You can still use revenue multiples or CF based multiples
DCF wouldn’t be as useful unless you can project CFs far into the future

Question 28

If a company has no revenue, what are some multiples we could use?

Answer 28

Alternative metrics and multiples
EV/Unique Visitors or EV/Registered users

Question 29

What is an advantage of leasing buildings rather than owning them?

Answer 29

When leasing a building, the rental expense shows up as an operating expense lowering EBITDA. When analyzing profitability ratios such as EV/EBITDA, the multiple would be higher for the firm leasing the buildings.

Question 30

Why would an investor prefer analyzing EBIT multiples to EBITDA multiples?

Answer 30

EBITDA hides the CapEx companies make and disguises how much cash they require to finance their operations.
Capital-Intensive and Asset-Heavy businesses will show a large disparity

Question 31

What are some problems with EBITDA and EBITDA multiple?

Answer 31

It hides the amount of debt principal and interest a company is paying each year

Ignores working capital requirements (AR, Inventory, AP) which can be very large

Companies like to add back many charges and expenses to EBITDA so you never really know that it represents unless you dig deep

Question 32

Can EV/EBITDA be higher than EV/EBIT?

Answer 32

No, by definition, EBITDA must be greater than or equal to EBIT (can’t have a negative depreciation amount)

Question 33

Does an LBO give you a specific valuation?

Answer 33

No, an LBO gives you a target IRR and then you back solve for how much you can pay for the company

Question 34

What are some of the flaws with public comparable companies

Answer 34

No stock is 100% comparable
The stock market is “emotional” and ,multiples might be dramatically higher or lower depending on the market’s movements
Share prices for small and thinly traded companies may not reflect their true value

Question 35

What is a fairness opinion?

Answer 35

Right before the deal closes with a public seller, a financial advisor will create a “fairness opinion” justifying the acquisition price and directly estimate the company’s valuation

Question 36

Why would a company with similar growth and profitability be valued at a premium relative to its comparable companies?

Answer 36

Recent good news
Significant IP or competitive advantage not reflected in financials
Could’ve won a major lawsuit

Question 37

Two companies have the 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 for the other transaction - how could this happen?

Answer 37

One of the processes was much more competitive
Recent technical development in the space that increases the value
Once company may have had recent bad news that depressed its stock price
Different accounting standards

Question 38

How would you value a company with no profit and no revenue?

Answer 38

Use comparable companies and precedent transactions but use more “creative multiples” like EV/Unique Visitors”

Question 39

P/E Multiple of 20x
$1m in earnings
What is the company worth?

Answer 39

Not $20m. Give a range ($15 - $25m). Maybe give higher or lower range depending on whether the company is overperforming or underperforming relative to its peers

Question 40

$20/shr
20x P/E
$1.00 EPS
10m shares outstanding
If company does a 2-for-1 tock split. How do P/E multiple and valuation change?

Answer 40

They don’t change –> 10m shares outstanding to 20m shares outstanding
EPS and Share Price both fall so P/E is still 20x

Question 41

M&A Premiums Analysis Walkthrough

Answer 41

1) Select Precedent Transactions (based on industry, date, and size)
2) For each transaction, get the seller’s share price (typically 1month before deal was announced)
3) Calculate the 1 month premium (per share purchase price/share price 1 month ago)
4) Get the median and then apply to the company you’re valuing

Question 42

Future Share Price Analysis Walkthrough

Answer 42

Project a company’s share price 1-2 years from now and then discount back to present value
1) Find median historical (TTM P/E of public comparable)
2) Apply this P/E multiple to company’s 1-year and 2-year forward projected EPS to get implied future share price
3) Discount back to present value by using discount rate that is in-line with the company’s cost of equity