Superday Prep- IB
Comprehensive Questions and
Solutions Graded A+
What are the two ways to value a company? - Answer: Intrinsic and Relative (two within each
Transaction Comparables, Trading Comparables, DCF , LBO)
What are the two types of intrinsic valuation - Answer: Discounted Cash Flow (more respected
in academia and more commonly used in IB) and Leveraged Buyout
What are the two types of relative valuation - Answer: 1. Compare similar transactions
2. compare similar companies
walk me through transaction comps - Answer: higher multiples
1. Determine universe of comparable transactions
2. Calculate multiples on LTM basis
3.Apply the calculated mean/median to target's corresponding operating metrics to arrive at a
value
walk me through Trading comp - Answer: 1. select comparable companies
2. Determine enterprise value of each
3. Decide on a multiple that would provide the best model (EV/Sales, EV/EBITDA, P/E)
4. Find the multiple for all of the comparable companies
5. Take median/avg multiple
,6. multiply by EBITDA to find enterprise value
Problems with relative - Answer: Problem: company might not be similar structure, and a
variety of factors may explain why a similar company had a specific value at any point in time
Ex: pharmaceutical w/ expiring patent, before or after 2008, etc.
High level: explain intrinsic - Answer: The value of a business equals the sum of all the cash
flows it will generate, discounted to the present value using a discount rate that reflects the
riskiness of the business.
High level: explain LBO (leveraged buyout) analyses - Answer: -Value to a financial sponsor
-Value based on debt repayment or return on investment
-provides a "floor" valuation for the company, and is useful in determining what a financial
sponsor can afford to pay for the target and still realize an adequate return on its investment.
High level: explain what an LBO deal is - Answer: -buyer invests a small amount of equity and
uses leverage (debt or other non-equity sources of financing) to acquire a company
Other than for a leveraged buyout, when do you use an LBO Analysis as part of your Valuation? -
Answer: -set a "floor" on a possible Valuation for the company you're looking at
-used to establish how much a private equity firm could pay, which is usually lower than what
companies will pay.
Pros to LBO analysis - Answer: -good for finding LBO opportunities
-highlights effects of adding leverage to business
-shows what value any financial bidder will have to exceed
,-estimates potential equity returns to the business, provides sensitivity of returns
Cons to LBO - Answer: -Value obtained is sensitive to projections and how aggressive
assumptions were
-underestimate the sale value b/c it ignores synergies
-Sponsors/financial buyers pay smaller premium than strategic b/c they're in it for a shorter
period
Walk me through an LBO - Answer: - Make purchase price assumptions on purchase price, debt
repayment, and
-Create sources to determine how the transaction will be financed and the capital uses
-Find EBITDA and cash flow available for debt repayment over the investment horizon (typically
3 to 7 years).
-Determine how much debt is repaid each year
-Adjust balance sheet for new debt and equity
-Estimate the multiple at which the sponsor is expected to exit the investment (should generally
be similar to the entry multiple).
-use the multiple to calculate exit value and subtract net debt for equity value
-Calculate equity returns (IRRs) using excel with range of dates and range of equity values)
-Solve for the price that can be paid to meet the above parameters (alternatively, if the price is
fixed, solve for achievable returns).
Good LBO candidate - Answer: -Srong, predictable operating cash flows with which the
leveraged company can service and pay down acquisition debt
-Well-established business and products and leading industry position
-Moderate CapEx and product development (R&D) requirements so that cash flows are not
diverted from the principle goal of debt repayment
-Limited working capital requirements
-Undervalued or out-of-favor
, -Strong management team
-Viable exit strategy
Why would you use leverage when buying a company? - Answer: -To boost your return.
-Any debt you use in an LBO is not "your money" - so
it's easier to earn a high return on $2 billion of your own money and $3 billion borrowed from
elsewhere vs. $3 billion of your own money and $2 billion of borrowed money.
-A secondary benefit is that the firm also has more capital available to purchase other
companies because they've used leverage.
What variables impact an LBO model the most? - Answer: 1. Purchase and exit multiples have
the biggest impact on the returns of a model.
2. The amount of leverage (debt) used also has a significant impact
3. Operational characteristics- revenue growth and EBITDA margins.
Can you explain how the Balance Sheet is adjusted in an LBO model? - Answer: 1. Liabilities
adjusted - the new debt is added on.
2. Shareholders' Equity is "wiped out" and replaced by however much equity the private equity
firm is contributing.
3. Assets side, Cash is adjusted for any cash used to finance the transaction, and then Goodwill
& Intangibles are used to make the Balance Sheet balance.
Depending on the transaction, there could be other effects
as well - such as capitalized financing fees added to the Assets side.
Comprehensive Questions and
Solutions Graded A+
What are the two ways to value a company? - Answer: Intrinsic and Relative (two within each
Transaction Comparables, Trading Comparables, DCF , LBO)
What are the two types of intrinsic valuation - Answer: Discounted Cash Flow (more respected
in academia and more commonly used in IB) and Leveraged Buyout
What are the two types of relative valuation - Answer: 1. Compare similar transactions
2. compare similar companies
walk me through transaction comps - Answer: higher multiples
1. Determine universe of comparable transactions
2. Calculate multiples on LTM basis
3.Apply the calculated mean/median to target's corresponding operating metrics to arrive at a
value
walk me through Trading comp - Answer: 1. select comparable companies
2. Determine enterprise value of each
3. Decide on a multiple that would provide the best model (EV/Sales, EV/EBITDA, P/E)
4. Find the multiple for all of the comparable companies
5. Take median/avg multiple
,6. multiply by EBITDA to find enterprise value
Problems with relative - Answer: Problem: company might not be similar structure, and a
variety of factors may explain why a similar company had a specific value at any point in time
Ex: pharmaceutical w/ expiring patent, before or after 2008, etc.
High level: explain intrinsic - Answer: The value of a business equals the sum of all the cash
flows it will generate, discounted to the present value using a discount rate that reflects the
riskiness of the business.
High level: explain LBO (leveraged buyout) analyses - Answer: -Value to a financial sponsor
-Value based on debt repayment or return on investment
-provides a "floor" valuation for the company, and is useful in determining what a financial
sponsor can afford to pay for the target and still realize an adequate return on its investment.
High level: explain what an LBO deal is - Answer: -buyer invests a small amount of equity and
uses leverage (debt or other non-equity sources of financing) to acquire a company
Other than for a leveraged buyout, when do you use an LBO Analysis as part of your Valuation? -
Answer: -set a "floor" on a possible Valuation for the company you're looking at
-used to establish how much a private equity firm could pay, which is usually lower than what
companies will pay.
Pros to LBO analysis - Answer: -good for finding LBO opportunities
-highlights effects of adding leverage to business
-shows what value any financial bidder will have to exceed
,-estimates potential equity returns to the business, provides sensitivity of returns
Cons to LBO - Answer: -Value obtained is sensitive to projections and how aggressive
assumptions were
-underestimate the sale value b/c it ignores synergies
-Sponsors/financial buyers pay smaller premium than strategic b/c they're in it for a shorter
period
Walk me through an LBO - Answer: - Make purchase price assumptions on purchase price, debt
repayment, and
-Create sources to determine how the transaction will be financed and the capital uses
-Find EBITDA and cash flow available for debt repayment over the investment horizon (typically
3 to 7 years).
-Determine how much debt is repaid each year
-Adjust balance sheet for new debt and equity
-Estimate the multiple at which the sponsor is expected to exit the investment (should generally
be similar to the entry multiple).
-use the multiple to calculate exit value and subtract net debt for equity value
-Calculate equity returns (IRRs) using excel with range of dates and range of equity values)
-Solve for the price that can be paid to meet the above parameters (alternatively, if the price is
fixed, solve for achievable returns).
Good LBO candidate - Answer: -Srong, predictable operating cash flows with which the
leveraged company can service and pay down acquisition debt
-Well-established business and products and leading industry position
-Moderate CapEx and product development (R&D) requirements so that cash flows are not
diverted from the principle goal of debt repayment
-Limited working capital requirements
-Undervalued or out-of-favor
, -Strong management team
-Viable exit strategy
Why would you use leverage when buying a company? - Answer: -To boost your return.
-Any debt you use in an LBO is not "your money" - so
it's easier to earn a high return on $2 billion of your own money and $3 billion borrowed from
elsewhere vs. $3 billion of your own money and $2 billion of borrowed money.
-A secondary benefit is that the firm also has more capital available to purchase other
companies because they've used leverage.
What variables impact an LBO model the most? - Answer: 1. Purchase and exit multiples have
the biggest impact on the returns of a model.
2. The amount of leverage (debt) used also has a significant impact
3. Operational characteristics- revenue growth and EBITDA margins.
Can you explain how the Balance Sheet is adjusted in an LBO model? - Answer: 1. Liabilities
adjusted - the new debt is added on.
2. Shareholders' Equity is "wiped out" and replaced by however much equity the private equity
firm is contributing.
3. Assets side, Cash is adjusted for any cash used to finance the transaction, and then Goodwill
& Intangibles are used to make the Balance Sheet balance.
Depending on the transaction, there could be other effects
as well - such as capitalized financing fees added to the Assets side.
