Valuation

Question 1

What are the three most commonly used valuation techniques?

Answer 1

Discounted Cash Flow Analysis, Comparable companies’ multiples method, comparable transactions method

Question 2

How would you value an oil and gas company?

Answer 2

Price mulitples (EV/EBITDAX, EV/proven reserves), DCF using net asset value

Question 3

What is EBITDAX?

Answer 3

Earnings before interest, taxes, depreciation, depletion, amortization, and exploration

Question 4

Why is EBITDAX used?

Answer 4

Used because exploration expenses vary widely from firm to firm as does depletion and EBITDAX will give a better comparison than EBITDA

Question 5

Which of the valuation techniques will give you the highest value of a company? Lowest value?

Answer 5

Highest: comparable transactions method because of strategic value, synergies, and the control premium

Lowest: multiples method

Question 6

What are attributes of similar companies?

Answer 6

Same industry
Same time in industry
Same capital structure
Similar size
Similar region
Similar cost structure

Question 7

Which valuation technique in the most theoretically correct?

Answer 7

Discounted cash flow but minute changes will have drastic impacts

Question 8

What are some examples of intrinsic vs relative valuation methods?

Answer 8

Intrinsic valuation: DCF, dividend discount model, net asset value

Relative valuation: price multiples, comparable transactions

Question 9

What are some common valuation metrics?

Answer 9

EV/EBITDA *unlevered*
EV/Sales *unlevered*
EV/EBIT *unlevered*
Equity Value/ Net income *levered*
Equity Value/ Levered Cash Flow *levered*
Price/Book Value *levered*

Question 10

What are some reasonable ranges of common multiples?

Answer 10

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

Question 11

Why would one company have a higher PE multiple than another company in the same industry?

Answer 11

Growth prospects 
Quality of management 
Quality of customers
Transparency of cash flows
Steady cash flows
Lower CAPEX
Size of company

Question 12

Why do you use EBITDA?

Answer 12

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

Question 13

What’s the difference between EV and equity value?

Answer 13

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

Question 14

What’s the equation relating EV and equity value?

Answer 14

EV=Equity value+Net debt(debt-cash+minority interest+preferred stock)

Question 15

Why do you subtract cash in the formula for EV?

Answer 15

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.

Question 16

What is minority interest?

Answer 16

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.

Question 17

Why can’t you use EV/Earnings or Price/EBITDA as valuation metrics?

Answer 17

You must compare levered to levered or unlevered to unlevered (apples to apples)

Question 18

What does EV tell you

Answer 18

How much you would pay to acquire another company.

Question 19

How would you value a company with no revenues?

Answer 19

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

Question 20

True or false: A company has EV/EBITDA of 20x and EV/EBIT of 10x

Answer 20

False. EV/EBIT can never be less than EV/EBITDA

Question 21

Which valuation method would you focus on more for an IPO?

Answer 21

Comparable company multiples

Question 22

Which valuation method would you focus on more for an acquisition?

Answer 22

Precedent transaction

Question 23

What would make one company riskier than another operationally? Financially?

Answer 23

Operational risk is business risk, so anything cyclical like restaurants and alcohol

Financial risk is correlated with leverage and high levels of debt

Question 24

Can shareholders equity be negative?

Answer 24

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

Question 25

Can equity value be negative?

Answer 25

No

Equity value=(# shares outstanding)(price of shares)

Question 26

Is goodwill amortized?

Answer 26

No. Although goodwill is an intangible asset and most intangible assets are amortized, it is actually checked and tested for impairment

Question 27

What decreases shareholders equity?

Answer 27

Share buybacks, dividends, negative earnings