Chapter 8 Flashcards
(20 cards)
Why is valuation important in M&A?
Because overpaying is a major reason acquisitions fail—valuation helps avoid this.
What does it mean to ‘think like an investor’ in valuation?
Focus on future cash flows, risks, and opportunity cost; ignore past earnings.
Why is intrinsic value unobservable?
Because it depends on expectations and assumptions—it can only be estimated.
When should a buyer proceed with an acquisition?
When the intrinsic value of the target is greater than the price paid.
Name three types of valuation methods.
Book value, liquidation value, market value, trading multiples, transaction multiples, DCF, etc.
What is book value?
The accounting value of a company’s net assets on its balance sheet.
What is liquidation value used for?
Mainly for distressed or ‘buy and bust’ acquisitions where firm may be liquidated.
What is replacement value?
The cost to replace a firm’s assets today; rarely used due to subjectivity.
Why is market value only a ‘floor’ in M&A?
It reflects only publicly available info and is unreliable if markets are inefficient.
What are trading multiples?
Valuing a firm by comparing it to others using ratios like EV/EBITDA or P/E.
What is the main limitation of using peer multiples?
Hard to find true peers and accounting differences can distort comparability.
What is the difference between trading and transaction multiples?
Transaction multiples use prices paid in past M&A deals, often include premiums.
What is the basic DCF formula?
DCF = Present value of all future free cash flows, discounted at the WACC.
How is cash flow calculated for DCF?
CF = EBIT – Taxes + Depreciation – Investment (CapEx & Working Capital).
What are the challenges of DCF?
Time-consuming, requires many assumptions (cash flows, discount rates).
What is WACC?
Weighted average cost of equity and debt, used as the discount rate in DCF.
Why do we unlever beta?
To remove the effect of capital structure and compare firm risk directly.
What is the VC/private equity valuation method?
Focuses on exit value, discounting back a projected terminal value at high discount rates.
What is option valuation?
A method that incorporates the value of flexibility and future strategic options.
What is triangulation in valuation?
Comparing estimates from different methods to define a range of reasonable values.
