Adventis FMC Level 2 Exam Questions and Answers
what is value - -what people are willing to pay for (what the buyer pays)
-who said, "Value is what people are willing to pay for" - -John Naisbitt
-2 primary types of valuation - -1. relative valuation
2. intrinsic valuation
-relative valuation refers to what - -methods that compare the price of a company to the
market value of similar assets
-intrinsic value refers to what - -the value of a company through fundamental analysis
without reference to its market value but instead around its ability to generate cash flow
-in an M&A context, what is EV - -transaction value
-in an M&A context, what is equity value - -purchase price
-a company sold for $100M and the company being bought had $15M of debt and $2M of
cash, what happens and what is the transaction value and purchase price - -- the $2M
would be used by shareholders of the acquired company to pay down existing $15M in debt
to make $13M in debt now (15 - 2 = 13)
- the proceeds from the deal would then be used to pay down the remaining debt (EV = CS +
PS + Debt - Cash)
- Result is 100 - 13 = 87
- TV = $100M
- Purchase price = $87 (check to shareholders of acquired company)
-2 primary types of relative valuation - -1. comparable company analysis
2. acquisition comparables analysis
-comparable companies analyses (public trading comparables analyses) - -- most common
types of relative valuation
- these methods allow investors to compare valuation of similar companies by comparing
similar ratios
-most common public trading comparable ratios - -1. EV/EBITDA
2. EV/Revenue
3. Net income/Earnings (share price/earnings per share)
-assume a company has $5M of EBITDA and two public companies most similar to the
company trade at 6.0x and 7.0x EBITDA, what might you conclude - -- Ex: 7.0 = x/5 ; 6.0 =
x/5
- can conclude that EV for the company should be between 30-35 million
, -what happens when a company trades at a multiple that is a premium or a discount to the
industry average - -investors will dig in to understand the rationale
-assume that a company trades at 7.0x EBITDA but the average of comparable companies
is 9.0x, what can we conclude - -the company is being undervalued and the investor will
look to buy shares because he realizes that the share price will increase Wall St. begins to
value the company in-line with its peers
-acquisition comparables analysis (transaction comparables analysis) - -represent
comparable acquisitions that have taken place and have been publicly announced
-are multiples for acquisition comparables higher or lower than mulitples for comparable
companies - -higher because acquirers need to pay a premium to the current share price to
gain control of the company
-most common type of intrinsic valuation - -DCF analysis
-what is DCF analysis - -it is the process of projecting future cash flows and discounting
them to their PVs by using TVM
-steps for DCF - -1. project future cash flows
2. discount future cash flows to their PV's
3. Find the PV of all cash flows beyond the projection period (terminal value)
-cash flow metric used for DCF analysis - -unlevered FCF
-unlevered FCF - -- cash flow available to all stakeholders
- not affected by capital structure
- doesn't include interest expense
-why is tax-effected EBIT used rather than net income - -- the valuation should not depend
on capital structure
- applying the tax-rate directly to EBIT without subtracting interest expense eliminates the
impact of capital structure to cash flow
-cash flow is projected out in the projection period which is typically... - -5 years but could
be 10 years for startups
-the analyst should end the model with a financial year representative of a... - -steady state
to ensure the analysis does not over or understate total valuation
-first component of determining the present value of a company is - -calculate each
unlevered FCF's PV by discounting them using the discount rate (cost of capital)
-two methods for determining terminal value - -1. perpetuity method
what is value - -what people are willing to pay for (what the buyer pays)
-who said, "Value is what people are willing to pay for" - -John Naisbitt
-2 primary types of valuation - -1. relative valuation
2. intrinsic valuation
-relative valuation refers to what - -methods that compare the price of a company to the
market value of similar assets
-intrinsic value refers to what - -the value of a company through fundamental analysis
without reference to its market value but instead around its ability to generate cash flow
-in an M&A context, what is EV - -transaction value
-in an M&A context, what is equity value - -purchase price
-a company sold for $100M and the company being bought had $15M of debt and $2M of
cash, what happens and what is the transaction value and purchase price - -- the $2M
would be used by shareholders of the acquired company to pay down existing $15M in debt
to make $13M in debt now (15 - 2 = 13)
- the proceeds from the deal would then be used to pay down the remaining debt (EV = CS +
PS + Debt - Cash)
- Result is 100 - 13 = 87
- TV = $100M
- Purchase price = $87 (check to shareholders of acquired company)
-2 primary types of relative valuation - -1. comparable company analysis
2. acquisition comparables analysis
-comparable companies analyses (public trading comparables analyses) - -- most common
types of relative valuation
- these methods allow investors to compare valuation of similar companies by comparing
similar ratios
-most common public trading comparable ratios - -1. EV/EBITDA
2. EV/Revenue
3. Net income/Earnings (share price/earnings per share)
-assume a company has $5M of EBITDA and two public companies most similar to the
company trade at 6.0x and 7.0x EBITDA, what might you conclude - -- Ex: 7.0 = x/5 ; 6.0 =
x/5
- can conclude that EV for the company should be between 30-35 million
, -what happens when a company trades at a multiple that is a premium or a discount to the
industry average - -investors will dig in to understand the rationale
-assume that a company trades at 7.0x EBITDA but the average of comparable companies
is 9.0x, what can we conclude - -the company is being undervalued and the investor will
look to buy shares because he realizes that the share price will increase Wall St. begins to
value the company in-line with its peers
-acquisition comparables analysis (transaction comparables analysis) - -represent
comparable acquisitions that have taken place and have been publicly announced
-are multiples for acquisition comparables higher or lower than mulitples for comparable
companies - -higher because acquirers need to pay a premium to the current share price to
gain control of the company
-most common type of intrinsic valuation - -DCF analysis
-what is DCF analysis - -it is the process of projecting future cash flows and discounting
them to their PVs by using TVM
-steps for DCF - -1. project future cash flows
2. discount future cash flows to their PV's
3. Find the PV of all cash flows beyond the projection period (terminal value)
-cash flow metric used for DCF analysis - -unlevered FCF
-unlevered FCF - -- cash flow available to all stakeholders
- not affected by capital structure
- doesn't include interest expense
-why is tax-effected EBIT used rather than net income - -- the valuation should not depend
on capital structure
- applying the tax-rate directly to EBIT without subtracting interest expense eliminates the
impact of capital structure to cash flow
-cash flow is projected out in the projection period which is typically... - -5 years but could
be 10 years for startups
-the analyst should end the model with a financial year representative of a... - -steady state
to ensure the analysis does not over or understate total valuation
-first component of determining the present value of a company is - -calculate each
unlevered FCF's PV by discounting them using the discount rate (cost of capital)
-two methods for determining terminal value - -1. perpetuity method
