Adventis FMC Level 2 with Complete Solutions | Already Passed| Verified

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 rationaleassume 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 anno