Key Rule #1

Question 1

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

Answer 1

DR and CFGR don’t stay the same forever

Question 2

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

Answer 2

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

Question 3

What type of value does DCF give?

Answer 3

implied value

Question 4

What type of valuation is DCF?

Answer 4

Intrinsic valuation

Question 5

How accurate is DCF’s valuation?

Answer 5

most theoretically correct way to value co

Question 6

What kind of valuation is the multiples method?

Answer 6

relative valuation

Question 7

What kind of value does the relative valuation give?

Answer 7

current value

Question 8

What’s the point of valuation?

Answer 8

Determine its implied value aka according to your views

Question 9

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

Answer 9

• can invest and make $ if value changes
• tell client company what price it might get if it sells (diff from current value)

Question 10

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

Answer 10

• market cap and share price reflect current value- market might be wrong
• value co to check market’s views

Question 11

What are the pros of public comps valuation?

Answer 11

• 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

Question 12

What are the cons of public comps valuation?

Answer 12

• may not be truly comparable
• less accurate for volatile/ thinly traded cos

Question 13

Pros of precedent transactions?

Answer 13

better reflect market mood and perceptors round such transactions

Question 14

Cons of precedent transactions?

Answer 14

• data spotty
• may not be truly comparable
• mults could be distorted by acq premiums and specific deal terms

Question 15

Pros of DCF?

Answer 15

• less influenced by market perception and moods
• detailed analysis of value drivers -> lest indiv components of biz to be valued separately

Question 16

Cons of DCF?

Answer 16

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

Question 17

1 statement to value company and why

Answer 17

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

Question 18

Pick 2 FS to value and why?

Answer 18

BS and IS b/c can build CFS from them

Question 19

3 most common ways to value co?

Answer 19

• comparable companies
• precedent transactions
• DCF

Question 20

which valuation method for what type of situation?

Answer 20

• 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

Question 21

When to use comparable companies?

Answer 21

-ve current earnings

Question 22

When to use DCF?

Answer 22

+ve current earnings

Question 23

When to use transaction analysis?

Answer 23

if value deal similar to those that have occurred

Question 24

Which valuation technique results in highest value?

Answer 24

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

Question 25

How high can precedent transaction values be?

Answer 25

Highest- b/c of control premium and synergies

Question 26

How high can DCF values be?

Answer 26

can give high values if assumptions allow

Question 27

Which should be higher, EBIT or EBITDA?

Answer 27

EBITDA is higher than EBIT so EBIT mults should be higher

Question 28

How to find peer group for a private company?

Answer 28

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

Question 29

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

Answer 29

- 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

Question 30

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

Answer 30

- 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

Question 31

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

Answer 31

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

Question 32

How do you value an apple tree?

Answer 32

- 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

Question 33

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

Answer 33

- 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