Investment banking Technicals - Valuation
Questions
What are the 3 major valuation methodologies?
Comparable Companies, Precedent Transactions and Discounted Cash Flow
Analysis.
Rank the 3 valuation methodologies from highest to lowest expected value.
There is no consistent ranking, but in general, 1. Precedent 2. Comparable
Companies and DCF could go either way based on the assumptions.
When would you not use a DCF in a Valuation?
You do not use a DCF if the company has unstable or unpredictable cash flows or
when debt and working capital serve a fundamentally different role (ie. banks).
What other valuation methods are there?
Liquidation valuation, replacement value, LBO analysis, SUM of parts, M&A
premiums analysis, Future Share price analysis
When would you use a Liquidation Valuation?
This is most common in bankruptcy scenarios and is used to see whether equity
shareholders will receive any capital after the company's debts have been paid
off. It is often used to advise struggling businesses on whether it's better to sell
off assets separately or to try and sell the entire company.
When would you use Sum of the Parts?
This is most common is when a company has a whole other division that is
unrelated to the other parts. You would value each part and add them together.
When do you use a LBO as a part of your analysis?
, Whenever you are looking at an LBO, but also used to establish how much a PE
firm would pay. For banks, it may be used as a floor on a possible valuation.
What are the most common valuation multiples used?
EV/Revenue, EV/EBIT, P/E, and P/BV
What are some examples of industry-specific multiples?
Tech: EV/Unique visitors, EV/Pageviews
Retail / air lines: EV/EBITDAR
REIT: price/FFO, price/AFFO
When you're looking at an industry-specific mutiple like EV / Scientist or EV /
Subs, why do you look at Enterprise value rather than equity value?
You use enterprise value because those scientist or subs are available to
investors and creditors.
Would an LBO or DCF give a higher valuation?
It could go either way, but in most cases, the LBO will give you a lower valuation.
How would you present these Valuation methodologies to a company or its
investors?
you would use a football field chart where you show the valuation range implied
by each method. You always show a range.
How would you value an apple tree?
The same way you would value a company: by looking at what comparable apple
trees are worth (relative valuation) and the value of the apple tree's cash flows
(intrinsic valuation).
Why can't you use Equity Value / EBITDA as a multiple rather than Enterprise
Value / EBITDA?
Questions
What are the 3 major valuation methodologies?
Comparable Companies, Precedent Transactions and Discounted Cash Flow
Analysis.
Rank the 3 valuation methodologies from highest to lowest expected value.
There is no consistent ranking, but in general, 1. Precedent 2. Comparable
Companies and DCF could go either way based on the assumptions.
When would you not use a DCF in a Valuation?
You do not use a DCF if the company has unstable or unpredictable cash flows or
when debt and working capital serve a fundamentally different role (ie. banks).
What other valuation methods are there?
Liquidation valuation, replacement value, LBO analysis, SUM of parts, M&A
premiums analysis, Future Share price analysis
When would you use a Liquidation Valuation?
This is most common in bankruptcy scenarios and is used to see whether equity
shareholders will receive any capital after the company's debts have been paid
off. It is often used to advise struggling businesses on whether it's better to sell
off assets separately or to try and sell the entire company.
When would you use Sum of the Parts?
This is most common is when a company has a whole other division that is
unrelated to the other parts. You would value each part and add them together.
When do you use a LBO as a part of your analysis?
, Whenever you are looking at an LBO, but also used to establish how much a PE
firm would pay. For banks, it may be used as a floor on a possible valuation.
What are the most common valuation multiples used?
EV/Revenue, EV/EBIT, P/E, and P/BV
What are some examples of industry-specific multiples?
Tech: EV/Unique visitors, EV/Pageviews
Retail / air lines: EV/EBITDAR
REIT: price/FFO, price/AFFO
When you're looking at an industry-specific mutiple like EV / Scientist or EV /
Subs, why do you look at Enterprise value rather than equity value?
You use enterprise value because those scientist or subs are available to
investors and creditors.
Would an LBO or DCF give a higher valuation?
It could go either way, but in most cases, the LBO will give you a lower valuation.
How would you present these Valuation methodologies to a company or its
investors?
you would use a football field chart where you show the valuation range implied
by each method. You always show a range.
How would you value an apple tree?
The same way you would value a company: by looking at what comparable apple
trees are worth (relative valuation) and the value of the apple tree's cash flows
(intrinsic valuation).
Why can't you use Equity Value / EBITDA as a multiple rather than Enterprise
Value / EBITDA?
