h 3.2 GRADE A Q&A
A group of comparable companies has a mean enterprise value-to-EBITDA trading
multiple of 7.0x. Given the income statement information in Exhibit 23, what is
TargetCo's implied enterprise valuation? - (correct answer)Given the income statement
information provided, EBITDA is calculated as $230mm EBIT + $45mm D&A + $20mm
restructuring charge (one time item) = $295mm As the target's comparable companies
are currently trading at 7.0x EV/EBITDA, that multiple applied to EBITDA of $295 million
provides an enterprise value of $2.065 billion ($295mm x 7.0).
One time charges - (correct answer)-restructuring
Noncontrolling Interest - (correct answer)significant but non-majority interest (<50%) in a
subsidiary company
Another entity's minority interest in a company's subsidiary
In 2009, Computers & Things, Inc. had a $5 million inventory write-down and a $15
million restructuring charge related to severance from closing a facility. Given the
income statement shown in Exhibit 11 and a 40% marginal tax rate, what is the
company's 2009 adjusted net income? (Exh 11) - (correct answer)$240 million
The add-back of the inventory write-down of $5 million decreases cost of goods sold,
and the elimination of the restructuring charge increases operating income, resulting in
a total $20 million increase in pre-tax income. The $20 million gain is then tax-effected
at the company's 40% marginal tax rate, for a net gain of $12 million to the bottom-line
(20mm x 60%).
Return on equity (ROE) - (correct answer)measures the return generated on the equity
provided to a company by its shareholders. As a result, ROE incorporates an earnings
metric net of interest expense, such as net income, in the numerator and average
shareholders' equity in the denominator. ROE is an important indicator of performance
as companies are intently focused on shareholder returns. As such, ROE is 10%,
calculated as net income of $50 million divided by shareholders equity of $500 million.
EBIT and net debt are not relevant for this calculation.
, All of the following are typically good sources for finding a given private company's
primary competitors - (correct answer)For private companies, public competitors' 10-Ks,
proxy statements, investor presentations, research reports, and broader industry reports
are often helpful sources for finding competitors. An additional source for locating
comparable companies (which tend to be competitors) is the proxy statement for a
relatively recent M&A transaction in the sector ("merger proxy"), as it contains excerpts
from a fairness opinion. Schedule 13D is an SEC filing that must be submitted to the US
Securities and Exchange Commission within 10 days, by anyone who acquires
beneficial ownership of 5% or more of any class of publicly-traded securities in a public
company.
A company has 40 million basic common shares outstanding and a current share price
of $9. It has "in-the-money" securities convertible into 5 million shares and "out of the
money" securities convertible into 8 million shares. What is its diluted equity value? -
(correct answer)Diluted Equity value ("market capitalization") is equal to the current
share price multiplied by diluted shares outstanding. Diluted shares outstanding = basic
shares outstanding + "in-the-money" exercisable stock options and warrants or
convertible securities. "Out-of-the-money" exercisable options, warrants or convertible
securities and excluded from the calculation. In this case, diluted shares outstanding =
40 million basic shares + 5 million shares represented by convertible in-the-money
securities = 45 million shares. Equity value = 45 million shares x $9 per share = $405
million.
Comparable companies analysis is used in which of the following transaction situations?
- (correct answer)Comparable companies has a broad range of applications, most
notably for various mergers & acquisitions (M&A) situations, initial public offerings
(IPOs), restructurings, and investment decisions.
Currently, while receiving a generous government subsidy, DFG Corp. has an interest
coverage ratio of 5. Recent legislation will cause the subsidy to phase out gradually
over a three-year period. By year 5 the subsidy will have sunset. Assuming all other
factors remain constant over time what statement is true with regard to DFG's interest
coverage ratio? - (correct answer)A government subsidy usually will allow a company to
have lower costs which would serve to increase a company's EBIT and EBITDA. Thus,
the subsidy would improve the company's ability to cover their interest expense. When
the subsidy ends (sunsets) the company's coverage ratios will be negatively impacted.
A group of comparable companies has a mean enterprise value-to-EBITDA trading
multiple of 7.0x. Given the income statement information in Exhibit 23, what is
TargetCo's implied enterprise valuation? - (correct answer)Given the income statement
information provided, EBITDA is calculated as $230mm EBIT + $45mm D&A + $20mm
restructuring charge (one time item) = $295mm As the target's comparable companies
are currently trading at 7.0x EV/EBITDA, that multiple applied to EBITDA of $295 million
provides an enterprise value of $2.065 billion ($295mm x 7.0).
One time charges - (correct answer)-restructuring
Noncontrolling Interest - (correct answer)significant but non-majority interest (<50%) in a
subsidiary company
Another entity's minority interest in a company's subsidiary
In 2009, Computers & Things, Inc. had a $5 million inventory write-down and a $15
million restructuring charge related to severance from closing a facility. Given the
income statement shown in Exhibit 11 and a 40% marginal tax rate, what is the
company's 2009 adjusted net income? (Exh 11) - (correct answer)$240 million
The add-back of the inventory write-down of $5 million decreases cost of goods sold,
and the elimination of the restructuring charge increases operating income, resulting in
a total $20 million increase in pre-tax income. The $20 million gain is then tax-effected
at the company's 40% marginal tax rate, for a net gain of $12 million to the bottom-line
(20mm x 60%).
Return on equity (ROE) - (correct answer)measures the return generated on the equity
provided to a company by its shareholders. As a result, ROE incorporates an earnings
metric net of interest expense, such as net income, in the numerator and average
shareholders' equity in the denominator. ROE is an important indicator of performance
as companies are intently focused on shareholder returns. As such, ROE is 10%,
calculated as net income of $50 million divided by shareholders equity of $500 million.
EBIT and net debt are not relevant for this calculation.
, All of the following are typically good sources for finding a given private company's
primary competitors - (correct answer)For private companies, public competitors' 10-Ks,
proxy statements, investor presentations, research reports, and broader industry reports
are often helpful sources for finding competitors. An additional source for locating
comparable companies (which tend to be competitors) is the proxy statement for a
relatively recent M&A transaction in the sector ("merger proxy"), as it contains excerpts
from a fairness opinion. Schedule 13D is an SEC filing that must be submitted to the US
Securities and Exchange Commission within 10 days, by anyone who acquires
beneficial ownership of 5% or more of any class of publicly-traded securities in a public
company.
A company has 40 million basic common shares outstanding and a current share price
of $9. It has "in-the-money" securities convertible into 5 million shares and "out of the
money" securities convertible into 8 million shares. What is its diluted equity value? -
(correct answer)Diluted Equity value ("market capitalization") is equal to the current
share price multiplied by diluted shares outstanding. Diluted shares outstanding = basic
shares outstanding + "in-the-money" exercisable stock options and warrants or
convertible securities. "Out-of-the-money" exercisable options, warrants or convertible
securities and excluded from the calculation. In this case, diluted shares outstanding =
40 million basic shares + 5 million shares represented by convertible in-the-money
securities = 45 million shares. Equity value = 45 million shares x $9 per share = $405
million.
Comparable companies analysis is used in which of the following transaction situations?
- (correct answer)Comparable companies has a broad range of applications, most
notably for various mergers & acquisitions (M&A) situations, initial public offerings
(IPOs), restructurings, and investment decisions.
Currently, while receiving a generous government subsidy, DFG Corp. has an interest
coverage ratio of 5. Recent legislation will cause the subsidy to phase out gradually
over a three-year period. By year 5 the subsidy will have sunset. Assuming all other
factors remain constant over time what statement is true with regard to DFG's interest
coverage ratio? - (correct answer)A government subsidy usually will allow a company to
have lower costs which would serve to increase a company's EBIT and EBITDA. Thus,
the subsidy would improve the company's ability to cover their interest expense. When
the subsidy ends (sunsets) the company's coverage ratios will be negatively impacted.
