Questions and CORRECT Answers only
what is value - Correct Answer- what people are willing to pay for (what the buyer pays)
who said, "Value is what people are willing to pay for" - Correct Answer- John Naisbitt
2 primary types of valuation - Correct Answer- 1. relative valuation
2. intrinsic valuation
relative valuation refers to what - Correct Answer- methods that compare the price of a
company to the market value of similar assets
intrinsic value refers to what - Correct Answer- 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 - Correct Answer- transaction value
in an M&A context, what is equity value - Correct Answer- 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 - Correct Answer- -
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 - Correct Answer- 1. comparable company analysis
, 2. acquisition comparables analysis
comparable companies analyses (public trading comparables analyses) - Correct Answer- -
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 - Correct Answer- 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 - Correct Answer- - 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 - Correct Answer- 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 - Correct Answer- 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) - Correct Answer-
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 - Correct Answer- 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 - Correct Answer- DCF analysis
what is DCF analysis - Correct Answer- it is the process of projecting future cash flows and
discounting them to their PVs by using TVM