TRADING COMPS EXAM QUESTIONS AND NSWERS

Why we use trading comps to value companies - Answer-The purpose of a trading comps analysis is to determine what is the "appropriate" value of a company, based on the market values of operationally similar companies. When you try to gauge the fair value of your house by comparing to the values of houses nearby, you're doing a comps analysis. How are comps analyzed? - Answer-We don't compare absolute values but rather multiples to account for differences in a company. Non-operational differences that shuld be taqken into account so as to not distort the comparison - Answer-• Financial leverage differences • Accounting differences (depreciation method, useful life assumptions) • Temporary distortions (nonrecurring items) • Other accounting differences (lease classification, LIFO vs. FIFO) • Business life cycle differences What are examples of measures independent of leverage1 - Answer-EV, Revenue, EBITDA, EBIT, Unlevered free cash flow Nonrecurring items in historical profits - Answer-must be taken out of profits in order to exclude the distortion What to do when companies are in different stages in their life cyucle - Answer-Multiples like pEG standardize against different long-term growth rates Ev/revenue facilitate comparisons for early stage companies generating loses. PE ratio defn and description - Answer-share price/EPS Equity Value/ Net income EPS is used as a proxy for economic equity value Issues with P/E - Answer-EPS is a measure of accounting profit only during a particular period Accounting profits can be misleading because they include noncash and nonrecurring items, and accounting assumptions , and can be manipulated