Valuation Flashcards
Exhibit 55.
A privately held company intends to conduct a public offering in order expand its business. The company currently has debt of $48 MM and it wants to sell 45% of its shares in the offering. If the current IPO discount is 10%, what is the range of proceeds to the company?
$280.47 MM to $340.57 MM
$560.95 MM to $681.15 MM
$364.61 MM to $442.75 MM
$252.42 MM to $306.51 MM
In order to answer this question, the implied equity value range must be determined first using the forward P/E and the expected growth rate. Then, the implied equity value must be multiplied by the percentage the company wants to sell. The last step is to subtract the IPO discount of 10%. (Most IPOs are priced at a discount to their implied equity value.) The amount the company currently carries is not relevant since the question is not asking about the company’s enterprise value.
STEP 1:
The expected net income is $44.52 MM ($42 MM x 1.06).
STEP 2:
The implied equity value range is $623.28 MM ($44.52 x 14.00) to $756.84 MM ($44.52 x 17.00).
STEP 3:
45% of the implied equity value range is $280.47 MM to $340.57 MM.
STEP 4:
At the current IPO discount of 10%, the range is $252.42 MM to $306.51 MM.
Exhibit 12.
The Stanley Corporation has agreed to acquire BRM for $17,000,000. The terms of the acquisition are: $4,000,000 Stanley common stock (based on a market value of $20 per share); $3,000,000 of newly issued Stanley 7.0% debentures; $10,000,000 cash to BRM shareholders obtained from Stanley’s revolving credit line; and $10,000,000 in assumed debt of BRM. After the acquisition, Stanley’s common stock is trading for $22.25. What is the new EV of Stanley?
$91,350,000
$101,350,000
$111,350,000
$115,900,000
C: Step 1: Take the common shares outstanding and multiply by the current market price. Stanley’s 2.4 million shares plus 200,000 additional shares issued for the transaction ($4,000,000 divided by $20 per share).
Step 2: Take the debt from Stanley plus the debt from BRM and add the $3,000,000 of newly issued debt plus $10,000,000 of debt incurred from the use of the revolving credit line.
Step 3: Subtract the total cash and equivalents of Stanley and BRM: $16,500,000 and $5,000,000 totaling $21,500,000.
The following table illustrates the effects of the transaction.
Before Transaction Stanley BRM Common Shares Outstanding 2,400,000 2,000,000 Market Value $20.00 $7.00 Debt Outstanding $52,000,000 $10,000,000 Cash and Equivalents $16,500,000 $5,000,000 After Transaction Stanley Common Shares Outstanding 2,600,000 Market Value $22.25 Debt Outstanding $75,000,000 Cash and Equivalents $21,500,000 To Calculate EV: Market Cap $57,850,000 (2,600,000 x 22.25) Plus Total Debt $75,000,000 Less Cash $21,500,000 EV $111,350,000
Exhibit 25.
An investment banking client is interested in a possible purchase of Hostee Bakeries. What is the P/E of the company, based on use of the Gordon Growth Model?
5:1
8:1
15:1
There is insufficient information to derive a P/E
To determine the P/E ratio of Hostee Bakeries, it is first necessary to determine the company’s growth rate using the formula:
g = b x ROE
Where:
g = the dividend growth rate
b = the earnings retention rate (the complement of the dividend payout ratio)
ROE = the return on equity
g = 50% x 15% g = 7.5%
The value of the company can be determined by using the Gordon Growth Model.
P = d1 / (k - g)
Where: P = the value of the company d1 = the dividend in the next period k = the equity cost of capital g = the growth rate
P = $1.10 x 1.075 / (11% - 7.5%) P = $1.18 / 3.5% P = $33.71
Finally, the P/E ratio can be determined by dividing the projected price into the earnings per share.
P/E = $33.71 / $2.20 P/E = 15.3 which, in this example, has been rounded down to 15
[60615]
Company A has EBIT of $18 MM and depreciation and amortization of $5 MM. Your client is willing to pay 9.5x EBITDA, and the buyer can expect $3.5 million of synergies. The adjusted EBITDA multiple is:
- 1
- 2
- 5
- 2
B: Adjusted EBITDA may be used in a potential acquisition. In this example, first multiply EBITDA of 23 ($18 MM + $5 MM) by 9.5, which equals a transactional value of $218.5 MM. Next, add the $3.5 MM of synergies to the $23 MM to arrive at adjusted EBITDA of 26.5. Divide the transactional value by the adjusted EBITDA, which equals 8.2 (218.5 / 26.5 = 8.2).
Which of the following statements is TRUE regarding FCFF and FCFE?
FCFF is used to evaluate leveraged companies while FCFE is used to evaluate companies without debt
There is no difference in an unleveraged company
FCFF is used for companies with low capital expenditures while FCFE is used for companies with high depreciation
Only FCFE is adjusted for depreciation, capital expenditures, and changes to working capital accounts
B: Free cash flow for the firm (FCFF) is used to evaluate the profitability of an entire business, rather than shareholder equity. The starting point for FCFF is EBIT multiplied by (1 - tax rate) and then adding depreciation and amortization, subtracting capital expenditures, and factoring in changes to working capital (WC). Increases in WC reduce FCFF; decreases in WC increase FCFF. It is also useful when evaluating companies with little or no debt. FCFE describes the funds available to owners of a company. Rather than beginning with EBIT, FCFE begins with net income. The adjustments made for depreciation and amortization, capital expenditures, and working capital are the same as described for FCFF. Therefore, if a firm has no debt, FCFF and FCFE are the same. [60609]
The annual report of Acme Corporation indicates quarterly earnings per share over the past year of $1.20, $1.26, $1.22, and $1.15. However, in the fourth quarter, the company took an extraordinary charge against earnings of $0.06 per share due to a change in inventory valuation. The stock is currently selling for 12.2 times its earnings. The market price of the common stock is: $44.90 $58.19 $58.92 $59.66
D: When calculating the trailing current price to earnings, the earnings per share figure for the prior fiscal year is totaled and the market price of the stock is divided by the total in order to calculate the P/E ratio.
Reported Earnings = $1.20 + $1.26 + $1.22 + $1.15 = $4.83
The P/E ratio is based on earnings before extraordinary charges are added to reported earnings. In this example, $4.83 + .06 = $4.89 in earnings multiplied by the P/E ratio of 12.2, or $59.66.
Exhibit 50.
Determine the adjusted enterprise value for Hart Industries if a potential acquirer offers $25.00 a share.
$819,500,000
$818,159,000
$645,175,000
$696,800,000
In order to determine the adjusted enterprise value, the first step is to calculate the revised enterprise value or implied offer value using a market price per share of $25. The expected exercise of employee stock options is limited to those that have intrinsic value (the market value exceeds the strike price). The options that have a strike price of $22.00 would be exercised. Using the treasury method, the options with a strike price of $26.00 would not be exercised. Therefore, the exercised options would generate proceeds to the company of $9,900,000 (450,000 x $22.00). This would permit the company to repurchase 396,000 shares from the market ($9,900,000 / $25.00). The differential between the number of shares repurchased, and the number of shares granted through the exercise of the options, totals 54,000 shares (450,000 - 396,000). The additional shares would be issued from the company’s treasury stock account, bringing the number of shares outstanding to 31,504,000 (31,450,000 previously outstanding + 54,000 shares from treasury stock).
Enterprise value includes the market capitalization of equity value. For the common stock, this totals $787,600,000 (31,504,000 x $25.00). The number of shares outstanding may be found on the cover page on the Form 10-K. Enterprise value also includes long- and short-term debt, less cash and equivalents.
Market capitalization of common $787,600,000
+ Short-term debt outstanding $60,800,000
+ Long-term bond obligations $93,800,000
- Cash $122,700,000
Enterprise value $819,500,000
Exhibit 6.
What is Hamilton Golf Industries’ EPS?
$4.49
$4.72
$4.89
$5.06
In this exhibit, numerous labels were omitted. The omitted items are indicated in bold italic typeface.
Hamilton Golf Industries Income Statement ($ millions) Sales 198 Cost of Goods Sold 104 Gross Profit 94 Operating Expenses 61 Operating Income 33 Interest Expense 12 Taxes 6.3 Net Income 14.7 Preferred Dividend 0.525 Earnings Available to Common 14.175 Common Dividend 1 .16 Addition to Retained Earnings 13.015 Shareholder Information Preferred Stock ($50 par) 7.5 Common Stock ($1.00 par) 3 Additional Paid-in Capital 57 Treasury Stock (100,000 shares) -2.5 Retained Earnings 126 .55 The formula for earnings per share is (Net Income - Preferred Dividends) / Number of Shares of Common Outstanding. Earnings available to Common (14.175 million) equals the Net Income - Preferred Dividends. This is divided by the number of shares of common stock outstanding.
The common stock account indicates $3 million (at $1.00 par); however, the treasury stock account indicates 100,000 shares. This would mean 2.9 million shares were outstanding. 14.175 / 2.9 = $4.89 EPS.
An investment banking representative is assisting in the preparation of an M&A transaction and is given the following information on Caker Hugs Inc. Current stock price: $41.10 Outstanding shares: 309,890,000 EBITDA: $1.96 billion Cash: $1.95 billion Debt: $1.75 billion
If the appropriate transaction multiple is 9 times EBITDA and the target is offered this value, which of the following statements is TRUE?
The company’s current EV/EBITDA is higher than the implied offer price
An offer of a 20% premium above the current stock price may be too high
An offer of a 16% premium above the current stock price may be too low
An offer at the current stock price would be appropriate based on the transaction multiple
C: The enterprise value, or implied value based on the transactional multiple, is $17.64 billion ($1.96 billion x 9). To find the equity value of the transaction, subtract the company’s debt and add its cash. The equity value is $17.84 billion ($17.64 billion - $1.75 billion + $1.95 billion). The implied offer price is $57.57 ($17.84 billion / 309.89 million). An offer at a 16% premium above the current price of $41.10 may be too low ($41.10 x 1.16 = $47.68), since the appropriate transactional multiple or implied price is $57.57.
A managing director has asked you to produce a pro forma valuation of a target through a leveraged buyout analysis. A company has $680 million of EBITDA. The transaction purchase price is 11.5 times EBITDA. The company has existing debt of $2.45 billion, and the equity contribution is 20%. If the transaction is completed, what will be the debt to EBITDA ratio?
- 2 times
- 1 times
- 15 times
- 8 times
D: The purchase price for the transaction (buying the equity) is equal to $7.82 billion (11.5 x $680 million) and is being financed with 80% debt or $6.256 billion ($7.82 billion x .80). The new debt would be added to the existing debt of $2.45 billion for a total of $8.706 billion. The debt to EBITDA ratio would become 12.8 times ($8.706 billion / $680 million). Please note that the question is not referring to the enterprise value of the transaction, but the purchase price. [61173]
You are an investment banking representative working in the M&A department. A managing director has asked you to prepare a valuation model for a food company that has had recent operating losses, but positive cash flow, if depreciation is added. Other characteristics include volatility of earnings, reduced product demand, flat revenue, and low profit margins. The valuation metric LEAST likely to be used is the: Price/Earnings ratio Enterprise Value/Revenue Enterprise Value/EBITDA Discounted cash flow analysis
A: Since the company has had operating losses and volatile earnings, the price to earnings ratio would not be a good valuation metric. The company has positive EBITDA; therefore, EV/EBITDA can be used, as well as a DCF valuation using EBITDA to project the company’s free cash flow. [61160]
Exhibit 11.
What is the free cash flow per share for common stockholders in 2014?
($.05)
($.80)
$.70
$1.95
C: To calculate free cash flow to common stockholders, depreciation is added to net income (or earnings available to common if the company has preferred stock in its capital structure). Capital expenditures for the year are then deducted. To account for changes in working capital, if working capital has increased, free cash flow is reduced by the amount of the increase. If working capital has declined, free cash flow will be increased by the amount of the decline. Working capital (current assets minus current liabilities) was $175,000,000 in 2013. Working capital declined to $160,000,000 in 2014. The decline of $15,000,000 in 2014 would be an addition to free cash flow.
2014
Net Income $ 68,000,000
+ Depreciation and Amortization $ 46,000,000
- Capital Expenditures $ 115,000,000
+ Changes in Working Capital $ 15,000,000
= Free Cash Flow to Equity $ 14,000,000
The free cash flow to equity would be divided by the number of shares of common stock outstanding. The common stock account is $40,000,000 for each year. Since the par value is $2.00 per share, there are 20,000,000 shares of common stock outstanding. $14,000,000 / 20,000,000 = $.70 free cash flow per share.
