TRADING COMPS MODELING WALL
STREET CERTIFICATION EVALUATION
QUESTIONS AND SOLUTIONS STUDY GUIDE
●● What are the two types of intrinsic valuation
Answer: Discounted Cash Flow (more respected in academia and more
commonly used in IB) and Leveraged Buyout
●● What are the two types of relative valuation
Answer: 1. Compare similar transactions
2. compare similar companies
●● walk me through transaction comps
Answer: higher multiples
1. Determine universe of comparable transactions
2. Calculate multiples on LTM basis
3.Apply the calculated mean/median to target's corresponding operating
metrics to arrive at a value
●● walk me through Trading comp
Answer: 1. select comparable companies
2. Determine enterprise value of each
,3. Decide on a multiple that would provide the best model (EV/Sales,
EV/EBITDA, P/E)
4. Find the multiple for all of the comparable companies
5. Take median/avg multiple
6. multiply by EBITDA to find enterprise value
●● Problems with relative
Answer: Problem: company might not be similar structure, and a variety
of factors may explain why a similar company had a specific value at
any point in time
Ex: pharmaceutical w/ expiring patent, before or after 2008, etc.
●● High level: explain intrinsic
Answer: The value of a business equals the sum of all the cash flows it
will generate, discounted to the present value using a discount rate that
reflects the riskiness of the business.
●● High level: explain LBO (leveraged buyout) analyses
Answer: -Value to a financial sponsor
-Value based on debt repayment or return on investment
-provides a "floor" valuation for the company, and is useful in
determining what a financial sponsor can afford to pay for the target and
still realize an adequate return on its investment.
,●● High level: explain what an LBO deal is
Answer: -buyer invests a small amount of equity and uses leverage (debt
or other non-equity sources of financing) to acquire a company
●● Other than for a leveraged buyout, when do you use an LBO
Analysis as part of your Valuation?
Answer: -set a "floor" on a possible Valuation for the company you're
looking at
-used to establish how much a private equity firm could pay, which is
usually lower than what companies will pay.
●● Pros to LBO analysis
Answer: -good for finding LBO opportunities
-highlights effects of adding leverage to business
-shows what value any financial bidder will have to exceed
-estimates potential equity returns to the business, provides sensitivity of
returns
●● Cons to LBO
Answer: -Value obtained is sensitive to projections and how aggressive
assumptions were
-underestimate the sale value b/c it ignores synergies
, -Sponsors/financial buyers pay smaller premium than strategic b/c
they're in it for a shorter period
●● Walk me through an LBO
Answer: - Make purchase price assumptions on purchase price, debt
repayment, and
-Create sources to determine how the transaction will be financed and
the capital uses
-Find EBITDA and cash flow available for debt repayment over the
investment horizon (typically 3 to 7 years).
-Determine how much debt is repaid each year
-Adjust balance sheet for new debt and equity
-Estimate the multiple at which the sponsor is expected to exit the
investment (should generally be similar to the entry multiple).
-use the multiple to calculate exit value and subtract net debt for equity
value
-Calculate equity returns (IRRs) using excel with range of dates and
range of equity values)
-Solve for the price that can be paid to meet the above parameters
(alternatively, if the price is fixed, solve for achievable returns).
●● Good LBO candidate
Answer: -Srong, predictable operating cash flows with which the
leveraged company can service and pay down acquisition debt
STREET CERTIFICATION EVALUATION
QUESTIONS AND SOLUTIONS STUDY GUIDE
●● What are the two types of intrinsic valuation
Answer: Discounted Cash Flow (more respected in academia and more
commonly used in IB) and Leveraged Buyout
●● What are the two types of relative valuation
Answer: 1. Compare similar transactions
2. compare similar companies
●● walk me through transaction comps
Answer: higher multiples
1. Determine universe of comparable transactions
2. Calculate multiples on LTM basis
3.Apply the calculated mean/median to target's corresponding operating
metrics to arrive at a value
●● walk me through Trading comp
Answer: 1. select comparable companies
2. Determine enterprise value of each
,3. Decide on a multiple that would provide the best model (EV/Sales,
EV/EBITDA, P/E)
4. Find the multiple for all of the comparable companies
5. Take median/avg multiple
6. multiply by EBITDA to find enterprise value
●● Problems with relative
Answer: Problem: company might not be similar structure, and a variety
of factors may explain why a similar company had a specific value at
any point in time
Ex: pharmaceutical w/ expiring patent, before or after 2008, etc.
●● High level: explain intrinsic
Answer: The value of a business equals the sum of all the cash flows it
will generate, discounted to the present value using a discount rate that
reflects the riskiness of the business.
●● High level: explain LBO (leveraged buyout) analyses
Answer: -Value to a financial sponsor
-Value based on debt repayment or return on investment
-provides a "floor" valuation for the company, and is useful in
determining what a financial sponsor can afford to pay for the target and
still realize an adequate return on its investment.
,●● High level: explain what an LBO deal is
Answer: -buyer invests a small amount of equity and uses leverage (debt
or other non-equity sources of financing) to acquire a company
●● Other than for a leveraged buyout, when do you use an LBO
Analysis as part of your Valuation?
Answer: -set a "floor" on a possible Valuation for the company you're
looking at
-used to establish how much a private equity firm could pay, which is
usually lower than what companies will pay.
●● Pros to LBO analysis
Answer: -good for finding LBO opportunities
-highlights effects of adding leverage to business
-shows what value any financial bidder will have to exceed
-estimates potential equity returns to the business, provides sensitivity of
returns
●● Cons to LBO
Answer: -Value obtained is sensitive to projections and how aggressive
assumptions were
-underestimate the sale value b/c it ignores synergies
, -Sponsors/financial buyers pay smaller premium than strategic b/c
they're in it for a shorter period
●● Walk me through an LBO
Answer: - Make purchase price assumptions on purchase price, debt
repayment, and
-Create sources to determine how the transaction will be financed and
the capital uses
-Find EBITDA and cash flow available for debt repayment over the
investment horizon (typically 3 to 7 years).
-Determine how much debt is repaid each year
-Adjust balance sheet for new debt and equity
-Estimate the multiple at which the sponsor is expected to exit the
investment (should generally be similar to the entry multiple).
-use the multiple to calculate exit value and subtract net debt for equity
value
-Calculate equity returns (IRRs) using excel with range of dates and
range of equity values)
-Solve for the price that can be paid to meet the above parameters
(alternatively, if the price is fixed, solve for achievable returns).
●● Good LBO candidate
Answer: -Srong, predictable operating cash flows with which the
leveraged company can service and pay down acquisition debt
