Valuation Flashcards
3 main valuation methodologies
Comparable Companies, Precedent Transactions, Discounted Cash Flow Analysis
Rank these three statements from highest to lowest values.
No general rule other than Prec. Transactions generally higher than Comparable Comps because of buyers’ premium.
Other Valuation methodologies?
- Liquidation Valuation: Valuing assets, assuming they are sold and then subtracting liabilities
- Replacement Value: Company worth based on replacing all assets
- LBO: Determine how much a PE would pay to hit a target IRR
- Sum of the Parts: Valuing each division separately
- M&A Premiums Analysis: Analyzing M&A deals and figuring out premium that each buyer paid
- Future Share Price Analysis: Projecting share price based on P/E
- Economic Value Added (EVA)
- Adjsuted Present Value (APV)
- Dividend Yield
When would you use Liquidation Valuation?
Most common in bankruptcy cases to see whether equity holders will receive capital after all debts have been paid off. Also possible as “floor” valuation.
What is the APV method?
Adjusted Present Value values firm on 100% equity basis and debt effect to see both effects separately. (=unlevered value (discounted using COE) + PV of debt financing)
Why would a Liquidation Valuation produce the highest value?
Highly unusual but if company had substantial assets but market was undervaluing it.
When would you use LBO Analysis?
When doing an LBO or to find a floor for lowest possible valuation.
Would LBO or DCF give higher valuation?
Technically either way but most of the time LBO will be lower, because of floor valuation (what do you have to pay to get x) and you do not get any value from the cash flows in an LBO until the end like in the DCF.
How would you present valuations?
In a football field with a range of valuations for each methodology
Which capital is more risky Equity or Debt?
Equity, as it gets CFs later.
Is Equity or Debt more expensive?
Equity is more important but “risky” debt can get very close to equity cost.
You look at two companies. One has 100% Equity; one has 100% Debt. Which one has lower WACC?
Debt. Generally, both should be the same, as 100% debt would be de-facto equity as there are no equity holders. However, debt also increases tax shield which would then reduce WACC.
How is COE calculated?
rEquity = rRiskfree + β * (rMarket – rRiskfree)
How high should market risk premium be?
Over very long horizon usually 4-5%. In times of low interest its more like 6-8%.
Two identical companies but one has very volatile management. Which one has higher Cost of Equity?
According to CAPM, both have to be the same. Investors only receive return for systematic risk according to Markowitz. In practice, of course, its different.
How is TV calculated?
Two possible ways:
- Multiple: (EBITDA * Multiple)/(1+WACC)^T
- Gordon Growth Model: FCFF * (1+g) / (WACC-g) / (1+WACC)^T
Why is usage of multiple for TV problematc?
Very hard to estimate industry multiple development in five to ten years.
How big can TV become?
Depends on two factors:
- How many years planning period is
- Is it a growth or value company
Usually 50-70%. Even >70% for high-growth companies
Since TV is so large, why don’t we just prolong projection period?
Forecast beyond 5 years are very vague.
Why do you multiply FCFF with (1+g) in TV formula?
Because we use last FCFF from projection period which still grows for one year before we discount it.
How would you calculate TV for copper mine that is used until 2070?
Two possible ways:
- Negative g in GGM that approaches zero in 2070
- No TV at all and just continue degressive model until 2070
What is Asset Beta?
Risk of all assets in Company. If 100% of company is equity, then Asset β = equity β
Does debt have a β?
Usually, debt has β of zero as it is always paid regardless of market. For less solid companies that don’t pay all of their interest payments it can, however, vary.
What is Unlevered and Levered Beta?
Unlevered β is β of company that is only financed using equity. With increasing debt, smaller part of equity has to bear all risk, β therefore increases. This is levered β.
How do you get β of private company?
You use regression for public companies; for private ones you have to estimate it using public comps. Because of different cap structures, you have to unlever β first and then relever β using your company’s cap structure.
beta_u = beta_l / (1 + (1-Tax) * Debt / Equity)
beta_l = beta_u * (1 + (1-Tax) * Debt/Equity)
What is Adjusted β?
Usually weighted average of 2/3 “raw” β (historical) and 1/3 a β of 1 (mean reversion):
beta_a = 2/3 * beta_raw + 1/3
Which timespan would you consider to find β?
Too short is very volatile/too long is not relevant. One or two years is best
Can you rank βs of Commerzbank, VW, Nestle and a goldmine?
Commerzbank and VW β>1 but hard to say which one is higher. Nestle produces food which is always in need and therefore has a β<1. Goldmine is hard as well as a lot of depends on economy but also gold is in high demand during bear markets so probably between Nestle and others.
Why does β increase with more debt?
Because debt has β of zero and with increasing debt, constantly smaller equity has to bear all of the company’s risk.
Which influence do fixed costs have on β of a company’s stock?
High fixed costs means a lot profits once revenue increases (as fixed costs remain) but also a lot less profits once revenue decreases (as fixed costs remain again). So high fixed costs would mean high β.
