Valuation Basic Qs Flashcards
What are the 3 major valuation methodologies
Relative - public comps, precedent transactions
Intrinsic - DCF
Can you walk me through how you use Public Comps and Precedent Transactions?
- 1st, select companies and transactions based on criteria like industry, financial metrics and geography
- then, determine appropriate metrics and multiples fro each set
- next, calculate minimum, 25th percentile, median, 75th and maximum for each valuation multiple
- finally apply those numbers to the financial metrics for the company you’re analysing to estimate potential range for its valuation
How do you select Comparable Companies or Precedent Transactions?
- industry
- financial criteria
- geography
For precedent transactions, limit the set based on date and focus on transactions within past 1-2 years
Most important factor is industry, always used to screen for companies/ transactions.
For Public Comps, you calculate Equity Value and Enterprise Value for use in multiples based on companies’ share prices and share counts… but what about for Precedent Transactions? How do you calculate multiples there?
Should be based on the purchase price of the company at the time of the deal announcement
For example, a seller’s current share price is $40.00 and it has 10 million shares outstanding. The buyer announces that it will pay $50.00 per share for the seller.
The seller’s Equity Value in this case, in the context of the transaction, would be $50.00 * 10 million shares, or $500 million. And then you would calculate its Enterprise Value the normal way: subtract cash, add debt, and so on.
How would you value an apple tree
Look at what compare apple trees are worth, and the present value of the tree’s cash flows.
When is a DCF useful? When is it not so useful?
Best when company is large, mature and has stable and predictable cash flows
What other valuation methods are there?
- liquidation valuation
- LBO analysis
- Sum of the parts
- M&A premiums analysis
- future share price analysis
When is a liquidation valuation useful?
Most common in bankruptcy scenarios and used to see whether or not shareholders will receive anything after liabilities been paid off from selling all its assets
- often used to advise struggling businesses on whether it’s better to sell off assets separately or to sell 100% of the company
When would you use a sum of the parts valuation
Used when a company has completely different, unrelated divisions - a conglomerate like General Electric.
When do you use an LBO analysis as part of your valuation
Whenever you’re analysing a leveraged buyout, but used also to set a floor on the company’s value and see minimum amount a PE firm could pay to achieve its targeted returns.
- often seen when both strategics and financial sponsors are competing to buy same company, and you want to determine the potential price if a PE firm were to acquire the company.
How do you apply the valuation methods to value a company?
Present it all in a football field graph, calculate different percentiles for each set then multiply by relevant metrics for the company you’re analysing.
