Valuation Flashcards
What are the three most commonly used valuation techniques?
Discounted Cash Flow Analysis, Comparable companies’ multiples method, comparable transactions method
How would you value an oil and gas company?
Price mulitples (EV/EBITDAX, EV/proven reserves), DCF using net asset value
What is EBITDAX?
Earnings before interest, taxes, depreciation, depletion, amortization, and exploration
Why is EBITDAX used?
Used because exploration expenses vary widely from firm to firm as does depletion and EBITDAX will give a better comparison than EBITDA
Which of the valuation techniques will give you the highest value of a company? Lowest value?
Highest: comparable transactions method because of strategic value, synergies, and the control premium
Lowest: multiples method
What are attributes of similar companies?
Same industry Same time in industry Same capital structure Similar size Similar region Similar cost structure
Which valuation technique in the most theoretically correct?
Discounted cash flow but minute changes will have drastic impacts
What are some examples of intrinsic vs relative valuation methods?
Intrinsic valuation: DCF, dividend discount model, net asset value
Relative valuation: price multiples, comparable transactions
What are some common valuation metrics?
EV/EBITDA *unlevered* EV/Sales *unlevered* EV/EBIT *unlevered* Equity Value/ Net income *levered* Equity Value/ Levered Cash Flow *levered* Price/Book Value *levered*
What are some reasonable ranges of common multiples?
Total market cap/Revenue 1-3x Total market cap/EBIT 6-20x Total market cap/Net Income 15-20x *EV/EBITDA 7-10x* Total market cap/Book value 1-2x
Why would one company have a higher PE multiple than another company in the same industry?
Growth prospects Quality of management Quality of customers Transparency of cash flows Steady cash flows Lower CAPEX Size of company
Why do you use EBITDA?
It’s a proxy for free cash flow. It’s basically your cash operating income.
It doesn’t include CAPEX
It’s unlevered
Compare companies easier
What’s the difference between EV and equity value?
Equity value is value attributed to the equity owners of the business
EV includes all other sources of capital utilized by the company, represents the value of a business before accounting for any obligations to creditors
What’s the equation relating EV and equity value?
EV=Equity value+Net debt(debt-cash+minority interest+preferred stock)
Why do you subtract cash in the formula for EV?
Cash is subtracted because it is considered a non-operating asset and because Equity Value implicitly accounts for it.
It’s not always accurate because you should only be subtracting excess cash.
What is minority interest?
The portion of the sub company’s net income that the parent is not entitled to and the sub’s equity that it doesn’t own.
We must add minority interest to EV in order to compare apples to apples when we use EV/EBITDA or other metric.
Why can’t you use EV/Earnings or Price/EBITDA as valuation metrics?
You must compare levered to levered or unlevered to unlevered (apples to apples)
What does EV tell you
How much you would pay to acquire another company.
How would you value a company with no revenues?
You could determine a liquidation value by valuing the assets and subtracting the value of the liabilities
You could look at comparable transactions with similar companies
You could make projections for revenues and expenses to deter is free cash flow and then discount it back to today
True or false: A company has EV/EBITDA of 20x and EV/EBIT of 10x
False. EV/EBIT can never be less than EV/EBITDA
Which valuation method would you focus on more for an IPO?
Comparable company multiples
Which valuation method would you focus on more for an acquisition?
Precedent transaction
What would make one company riskier than another operationally? Financially?
Operational risk is business risk, so anything cyclical like restaurants and alcohol
Financial risk is correlated with leverage and high levels of debt
Can shareholders equity be negative?
Yes but rare
LBO situation where dividend recapitalization takes place
Consistent negative earnings
High amounts of unrealized loses on available for sale or mark to market securities, currency hedges or pension obligations
Can equity value be negative?
No
Equity value=(# shares outstanding)(price of shares)
Is goodwill amortized?
No. Although goodwill is an intangible asset and most intangible assets are amortized, it is actually checked and tested for impairment
What decreases shareholders equity?
Share buybacks, dividends, negative earnings
