FMC Level 2 Certification Exam Questions With Correct Answers

2 Types of Valuation - Answer relative and intrinsic Relative Valuation - Answer methods that compare the price of a company to the market value of similar assets Intrinsic Valuation - Answer refers to the value of a company through fundamental analysis around its ability to generate cash flow; most common types is a discounted cash flow (DCF) analysis Enterprise value - Answer The total market value of a firm's equity and debt, less the value of its cash and marketable securities. It measures the value of the firm's underlying business. Equity value - Answer The value of the company to the owners (value of shares outstanding) Enterprise value = _____ - Answer transaction value Equity value = _____ - Answer purchase price 2 types of relative valuation - Answer comparable company analysis and acquisition comparables analysis Comparable company analysis (public trading comparables analyses) - Answer - most common relative valuation used - allow investors to compare the valuation of similar companies by comparing similar ratios - common ratios: Enterprise Value / EBITDA, Enterprise Value / Revenue and Equity Value / Earnings (often calculated as Share Price / Earnings per Share) Acquisition comparables analysis - Answer - represent comparable acquisitions that have taken place and been publicly announced. In a given industry - typically larger multiples than multiples for comparable companies, because acquirers typically need to pay a premium to the current share price to gain control of the company Discounted cash flow (DCF) analysis - Answer discounts all projected future cash flow of a company to the present by using the concept of the time value of money DCF cash flow projections - Answer USES: - unlevered free cash flow (add adjustments for depreciation and amortization, change in working capital and capital expenditures to tax-effected EBIT) - Tax-effected EBIT instead of net income b/c the valuation of a company should not be dependent on capital structure. Interest expense is subtracted from EBIT to arrive at net income on the income statement, applying a corporate tax rate directly to EBIT without subtracting interest expense eliminates the impact of capital structure to cash flow - cash flow projected out into the projection period (normally 5 years) - high growth business or start-up could use 10 year period - end the model with a financial year representative of a "steady state" to ensure the analysis does not over- or understate total valuation Unlevered free cash flow - Answer represents the cash flow available to all stakeholders in the business (i.e. it is not affected by capital structure and, accordingly, does not include interest expense) Present value of the projection period - Answer to determine the present value of a company FIRST calculate the present value of each year's unlevered free cash flow (discount each year's cash flow to the present value using a discount rate) Discount rate - Answer - reflects the cost of capital from the perspective of the stakeholder who is analyzing a company - for a DCF analysis it is the cost of capital for the business valued - Weighted average cost of capital (WACC) is used to find the discount rate or a range of rates - companies may add a premium to the WACC to determine a "hurdle rate" and be used as the discount rate