Valuation - IB Textbook Flashcards
4 Valuations
Comparable Comps
Precedent Transactions
DCF
LBO
Comparable Companies Valuation
trading comps”, or simply “comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time.
Comps is designed to reflect “current” valuation based on prevailing market conditions and sentiment. As such, it is often more relevant than intrinsic valuation techniques, such as the DCF (see Chapter 3).
Comps Steps
Step I. Select the Universe of Comparable Companies
Step II. Locate the Necessary Financial Information
Step III. Spread Key Statistics, Ratios, and Trading Multiples
Step IV. Benchmark the Comparable Companies
Step V. Determine Valuation
Key Items on IS
Sales
Gross Profit
EBITDA(a)
EBIT
Net Income / EPS
Key Items on BS
Cash
Debt
Shareholders Equity
Key items on SCF
CFO, CFI, CFF
Depreciation & Amortization
Capex
How is Equity Value Calculated?
It is calculated by multiplying a company’s current share price32 by its fully diluted shares outstanding
How is Equity Value Calculated
How to calculate dilutive effects using Treasury Stock Method
The TSM assumes that all tranches of in-the-money options and warrants are exercised at their weighted average strike price with the resulting option proceeds used to repurchase outstanding shares of stock at the company’s current share price
How to Calculate using if converted method
How to calculate dilutive shares using net shares settlement
How to calc enterprise Value
Enterprise Value = Equity Value + Total Debt + Preferred Sotck + Non Controlling Interest - Cash Equivalents
EBITDA
Earnings before INTEREST, TAXES, DEPRECIATION, AMORTIZATION
EBIT
EARNINGS BEFORE INTEREST AND TAXES
Gross Profit Margin
Measure of sales remaining after deducting cogs
XYZ Margin
XYZ / Sales
So if it’s gross profit Margin: Gross Profit / Sales
EBITDA Margin: EBITDA / Sales
EBIT Margin: EBIT / Sales
Why is Price / Earnings the Same Thing as Equity Value to Net Income
Price / Earnings = Price Per Share / Diluted Earnings Per Share
-Multiple Numator and denominator by Diluted Share Count to get Equity Value (Price Per Share x Diluted Share Count) / Net Income (Diluted Earnings Per Share x Diluted Shares = Earnings)
Precedent Transaction Steps
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Spread Key Statistics, Ratios, and Transaction Multiples
Step IV. Benchmark the Comparable Acquisitions
Step V. Determine Valuation
Discounted Cash Flow Steps
Step I. Study the Target and Determine Key Performance Drivers
Step II. Project Free Cash Flow
Step III. Calculate Weighted Average Cost of
Capital Step IV. Determine Terminal Value
Step V. Calculate Present Value and Determine Valuation
What does WACC Represent
“weighted average” of the required return on the invested capital (customarily debt and equity) in a given company.
Free Cash Flow Calculation
EBIT - Taxes + Depreciation + Amortization - Capital Expenditures - Increase In Net Working Capital
