Valuation Special Cases Flashcards
How do you value a private company?
Public comps, PTs and DCFs, but:
- might add more discount to public company comparable multiples because private comp not liquid like public comps
- cant use premiums or future share price analysis
- valuation shows enterprise value rather than implied per share price
- DCF gets tricky as doesn’t have market cap, prob estimate WACC based on public comps’ WACC rather than trying to calculate yourself.
we’re valuing a private company. Why might we discount the public company comparable multiples but not the precedent transaction multiples?
Public company comparable multiples are typically discounted to account for differences in liquidity, size, etc.
PT multiples already incorporate factors relevant to private market valuations, so no need to discount.
Can you use private companies as part of your valuation?
Only in the context of precedent transactions, would make no sense to include them for public company comparables or as part of WAVV calculation in a DCF because they are not public and thus have no values for market cap.
Walk me through an IPO valuation for a company that’s about to go public.
- Only care about public company comparables.
- After picking public company comparables, decide on most relevant multiples to use and then estimate company’s Enterprise value based on that
- Once we have Enterprise value, work backwards to calculate EV, account for IPO proceeds in here by adding them, as we’re working backwards
- Then divide by total number of shares to get per-share price.
How do you value banks and financial institutions differently from other companies?
RV
Relative valuation: methods are the same, but metrics and multiples different:
- financial criteria = assets, loans or deposits
- look at metrics like ROE, ROA, book value and tangible book value
- use multiples like P/E, P/BV and P/TTBV
How do you value banks and financial institutions differently from other companies?
IV
- in a dividend discount model, sum up the present value of a bank’s dividends in future years, then add it to present value of the bank’s terminal value, usually basing that on a P/BV or P/TBV multiple
- in a residual income model, you take the bank’s current book value, and simply add the present value of the excess returns to that book value to value it.
The “excess return” each year is (ROE * Book Value) – (Cost of Equity * Book Value) – basically by how much the returns exceed your expectations.
Why use these methodologies and multiples for banks
You need to use these methodologies and multiples because Interest is a critical component of a bank’s revenue and because Debt is a “raw material” rather than just a financing source; also, banks’ Book Values are usually very close to their Market Caps.
Walk me through how we might value an oil & gas company and how it’s different from a “standard” company.
Public comps and PTs are similar, but:
- might screen based on metrics like proved reserves or daily production
- would look at the above metrics as well as other industry specific ones.
You could use a standard Unlevered DCF to value an oil and gas company as well, but
More common to see a NAV where you take the company’s Proved Reserves, assume they produce revenue until depletion, assign a cost to the production in each year, and take the present value of those cash flows to value the company.
Walk me through how you would value a REIT (Real Estate Investment Trust) and how it differs from a “normal” company.
Like energy, real-estate is asset-intensive and a company’s value depends on how much cash flow specific properties generate.
A Net Asset Value (NAV) model is the most common intrinsic valuation methodology; you assign a Cap Rate to the company’s projected NOI and multiply to get the value of its real estate, adjust and add its other assets, subtract liabilities and divide by its share count to get NAV per Share, and then compare that to its current share price.
