Comparable and Valuation Fundamentals Flashcards
(51 cards)
Which valuation approach is also called relative valuation?
The market approach.
Name the two main relative valuation techniques discussed in the course.
Comparable Trading Analysis and Precedent Transaction Analysis.
State the primary intrinsic valuation technique contrasted with relative valuation.
Discounted Cash Flow (DCF) analysis.
Write the enterprise value (EV) formula used for comparable analysis, listing all components.
EV = Common Equity + Preferred Equity + Net Debt + Non‑Controlling Interest (NCI) – Investments in Affiliates.
Define net debt in one sentence.
Net debt is the amount of debt remaining if all available cash and cash equivalents were used to repay debt.
List at least four items typically included in total debt for EV calculations.
- Long‑term debt,
- current portion of long‑term debt,
- revolving credit facilities,
- commercial paper,
- notes/bonds/loans/borrowings.
Give three examples of cash or cash equivalents to include in total cash.
- Cash on hand,
- marketable securities,
- highly liquid securities that can be quickly converted to cash with minimal discount.
Why is non‑controlling interest (NCI) added to enterprise value in comparable analysis?
Because consolidated EBITDA includes 100 % of the subsidiary’s earnings while equity value reflects only the parent’s ownership, adding NCI eliminates numerator‑denominator mismatch.
Why are investments in unconsolidated affiliates subtracted from enterprise value?
Because EBITDA normally excludes earnings of unconsolidated affiliates while equity value already includes the ownership stake, subtracting avoids double counting.
What timing mismatch exists within the EV/EBITDA multiple?
EV is a point‑in‑time market value, whereas EBITDA represents performance over the last twelve months.
Which EBITDA period is preferred for denominator of EV/EBITDA, and why?
Last Twelve Months (LTM) EBITDA, because it is certain, audited, and captures seasonality.
Provide the simple LTM EBITDA calculation formula using fiscal‑year and year‑to‑date data.
LTM EBITDA = Prior Fiscal‑Year EBITDA + Current YTD EBITDA – Prior YTD EBITDA.
Name two ways to derive EBITDA from the income statement.
Start from net income and add back interest, taxes, depreciation, and amortization, or start from revenue and subtract COGS, SG&A, and add back D&A.
State one major advantage of relative valuation over DCF.
It is simpler and uses market‑observed data, making it harder to manipulate with over‑precise assumptions.
Give one disadvantage of relative valuation.
No two companies are truly identical, so finding perfect peers and up‑to‑date data can be challenging.
List four common sources for gathering information about a target company.
- Annual & quarterly reports,
- investor presentations,
- equity/credit research, and
- earnings call transcripts.
Identify three key business characteristics used to screen peer companies.
- Industry/sub‑sector,
- geography, and
- products/services (also customers or distribution networks).
Identify three key financial characteristics used in peer screening.
- Size,
- growth,
- margins,
- seasonality/cyclicality,
- leverage or credit rating.
If no direct peers exist in the target sector, what should an analyst do?
Look outside the sector for companies with similar risk factors and economic drivers.
Explain why scaling by EV/EBITDA is analogous to scaling house prices by price per square foot.
Because it removes size differences, allowing valuation comparisons on a like‑for‑like basis.
Name the three basic consideration structures in M&A transactions.
All‑cash, all‑stock, and mixed (cash + stock) offers.
Write the formula for total consideration in an all‑cash offer for a public target.
Total consideration = Offer price per share × Target’s share count.
What is the exchange ratio in an all‑stock deal?
The number of acquirer shares issued for each target share acquired.
Why do buyers pay a premium in acquisitions?
To gain control; without a premium, shareholders would lack incentive to sell.
