Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

DCF > Key Rule #1 > Flashcards

Key Rule #1 Flashcards

1
Q

Why is the “formula” way of valuing co inaccurate?

A

DR and CFGR don’t stay the same forever

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why don’t DR and CFGR stay the same forever?

A

co may grow quickly in early days
growth rate falls when gets mature
DR might drop

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What type of value does DCF give?

A

implied value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What type of valuation is DCF?

A

Intrinsic valuation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How accurate is DCF’s valuation?

A

most theoretically correct way to value co

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What kind of valuation is the multiples method?

A

relative valuation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What kind of value does the relative valuation give?

A

current value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What’s the point of valuation?

A

Determine its implied value aka according to your views

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

So what if the implied value is different from current value?

A
  • can invest and make $ if value changes
  • tell client company what price it might get if it sells (diff from current value)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

But public companies already have Market Caps and Share Prices. Why bother valuing
them?

A
  • market cap and share price reflect current value- market might be wrong
  • value co to check market’s views
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the pros of public comps valuation?

A
  • quick, easy
  • accounts for current market perceptions (useful for IPO)
  • good measure of relative value
  • less distorted by overly optimistic financial projections

Quirky Cute Rioting Lemurs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the cons of public comps valuation?

A
  • may not be truly comparable
  • less accurate for volatile/ thinly traded cos
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Pros of precedent transactions?

A

better reflect market mood and perceptors round such transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Cons of precedent transactions?

A
  • data spotty
  • may not be truly comparable
  • mults could be distorted by acq premiums and specific deal terms
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Pros of DCF?

A
  • less influenced by market perception and moods
  • detailed analysis of value drivers -> lest indiv components of biz to be valued separately
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Cons of DCF?

A
  • v dependent on assumptions
  • if TV rep significant poriton of vol, TV assumptions rather than operating assumptions dictate overall value
17
Q

1 statement to value company and why

A
  • CFS
  • only FS that can construct FCFE DCF on standalone basis
18
Q

Pick 2 FS to value and why?

A

BS and IS b/c can build CFS from them

19
Q

3 most common ways to value co?

A
  • comparable companies
  • precedent transactions
  • DCF
20
Q

which valuation method for what type of situation?

A
  • to properly value co, use all 3 methods and triangulate appropriate range of values based on results
  • -ve current earnings: comarable analysis
  • +ve current earnings: DCF
  • if value deal similar to those that have occurred- precedent transaction
21
Q

When to use comparable companies?

A

-ve current earnings

22
Q

When to use DCF?

A

+ve current earnings

23
Q

When to use transaction analysis?

A

if value deal similar to those that have occurred

24
Q

Which valuation technique results in highest value?

A
  • precedent transactions b/c of control premium and synergies
  • DCF: can also give highest values IF assumptions allow
  • comparable companie-s the least
25
Q

How high can precedent transaction values be?

A

Highest- b/c of control premium and synergies

26
Q

How high can DCF values be?

A

can give high values if assumptions allow

27
Q

Which should be higher, EBIT or EBITDA?

A

EBITDA is higher than EBIT so EBIT mults should be higher

28
Q

How to find peer group for a private company?

A
  • companies w similar traits
    eg. same line of biz,
    similar size/ market cap ,
    similar growth stage (eg. startup, mature, growth, decline),
    similar management structures
29
Q

When is a DCF more useful than public comps/ precedent transaction?

A
  • always build DCF b/c it is valuation, others are supplemental
  • esp. useful when
    co is mature w stable, predictable cash flows,
    esp when lack good public comps and public transactions
30
Q

When are public comps and precedent transactions more useful than DCF?

A
  • if co is
  • early stage & can’t determine future cash flows
  • no path to positive cash flows
  • problems w DCF eg. can’t estimate DR
31
Q

Which one should be worth more: a $500 million EBITDA healthcare company or a $500 million EBITDA industrials company?
Assume the growth rates and margins are the same

A
  • healthcare co worth more b/c healthcare is a less asset-intensive industry
  • capex and WC lower -> FCF closer to EBITDA
32
Q

How do you value an apple tree?

A
  • DCF it
  • look at how much similar apple trees have sold for -> calc expected future cash flows from this tree
  • discount cash flows to present value, discount Terminal Value to PV
  • add everything to get tree’s implied value
  • DR based on opportunity cost- what I can earn each year by investing in similar apple trees
33
Q

People say that the DCF is intrinsic valuation, while Public Comps and Precedent Transactions are relative valuation. Is that correct?

A
  • not quite
  • DCF is intrinsic valuation b/c based on expected future cash flows and your views
  • but also depends on market, though less than the others
  • eg. use multiples to calc TV -> mults linked to peer companies

DCF (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions