Topic II. Valuation by Multiples Flashcards Preview

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Flashcards in Topic II. Valuation by Multiples Deck (38)
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1

What are some reasons for doing valuation by multiples

  • Quick, Convenient to calculate
  • Use readily available data
  • Simple, intuitive interpretations
  • Easily-digestible

 

2

What is the physical interpretation of a price-to-earnings (P/E) ratio

It's the amount you pay for $1.00 of earnings

3

What is the physical interpretation of an

Enterprise Value / Total Asset ratio? 

It's the amount you paid much you pay for a $1.00 of assets - if you were an unlevered firm

4

What are the steps required to complete a valuation by multiples analysis

  1. Choose comparable firms
  2. Choose bases for multiple
  3. Choose: average/median across industries
  4. Determine the base for the firm being valued
  5. Value the firm (convert to price per share)

5

What is the single most important step in the valuation by multiples analysis process?

1. Choosing comparable firms

6

What is the formula for enterprise value

 

Enterprise Value =MC +Total Debt− C

where:

MC=Market capitalization; equal to the current stockprice multiplied by the number of outstanding stock shares

Total debt=Equal to the sum of short-term andlong-term debt

C=Cash and cash equivalents; the liquid assets ofa company, but may not include marketable securities​

7

True/False: The vast majority of corporate debt is traded. 

False: The vast majority of corporate debt is not traded. 

8

How do we value a company's debt?

we use the book value of a company's debt

9

A valuation multiple consists of a _________ and a _________. 

A valuation multiple consists of a numerator and a denominator

10

What metrics can we use for the denominator

Choose the denominator (base) from either:

  • Balance Sheet
  • Income Statement

 

11

What does the left side of the balance sheet represent?

Balance Sheet

-----------------------------------------

Total Assets |  Total Debts

                                     |  Shareholders Equity

|

|

The left side of the balance sheet represents enterprise value.

12

What does the right side of the balance sheet represent?

Balance Sheet

-----------------------------------------

Total Assets |  Total Debts

                                     |  Shareholders Equity

|

|

Those who have contributed funds to get that firm up and running. 

13

Draw the simplest form of an income statement

14

15

Is the following an acceptible ratio

[Enterprise Value]

-----------------------------

[Total Assets]

Yes, because Enterprise Value and Total Assets both represent all shareholders. 

16

Is the following is an acceptible ratio

 

[Enterprise Value]

-----------------------------------

[Stockholders Equity]

No!

EV represents ALL shareholders whereas, whereas stockholders equity only represents stockholders

17

Is the following is an acceptible ratio? 

 

[Equity Value]

-----------------------------------

[Net Income]

Yes

Because Equity Value represents stockholders and Net Income represents stockholders

18

What is the trick for knowing if an income statment metric represents all stakeholders (enterprise value) or just shareholders (equity value)?

Income Statement

+ REV

- COGS

- SGA

  EBIT     all stakeholders (Enterprise Value)

- Taxes    governments

- Interest  debt holders, shareholders

  Net Income  all shareholders (Equity Value)

19

What are two acceptible Equity Value ratios?

[Market Value of Equity] / [Balance Sheet Shareholders Equity]

[Market Value of Equity] / [Net Income] == P/E

20

What are four acceptible "Enterprise Ratio" metrics?

  • EV / Total Assets
  • EV / Revenue
  • EV / EBITDA
  • EV / EBIT

21

What is, historically, the most accurate ratio

Enterprise Value / Total Assets

22

What is, historically, the least accurate ratio? 

[Market Value] / [Net Income]

(P/E Ratio)

23

What are the three ratios recommended by Craig Lewis?

  1. Enterprise Value / Total Assets
  2. Market Value of Equity / Book Value of Equity
  3. Enterprise Value / EBITDA

24

If given the following metrics, how would you calculate enterprise value?

  • Average(EV/TA)
  • TA

EV = Average(EV/TA) * TA

25

How do you select comparable firms?

​Go down the line and filter based on the following (starting from the top):

  1. Industry Classification
  2. Technology
  3. Clientele
  4. Size
  5. Leverage
  6. Profitibility

26

Explain the regression-based approach to valuting by multiples?

1.Use every company in an industry 

2.Choose metrics which are pertinent (EV/EBITDA, Revenue, Size)

3.Metrics become 'x' (independent) variables

4.Company value becomes 'y' (dependent) variable.

5.Calculate a linear regression equation. 

6.Use 'company of interests' variables in the regression equation. 

27

What is the MAIN IDEA behind valuation by multiples?

“The basic idea behind using multiples for valuation is that similar assets should sell for similar prices, whether they are houses or shares of stock.”

 

28

What is the issue of using P/E ratio as a multiple?

Although the P/E is widely used, it is distorted by capital structure and nonoperating gains and losses.

29

When you are building multiples, the denominator should be a ______ (forecast, historical) of profits, preferably normalized for unusual items, rather than ________ (forecasted, historical) profits.

When you are building multiples, the denominator should be a forecast of profits, preferably normalized for unusual items, rather than historical profits.

30

Why are forward-looking metrics used when completing a valuation by multiples?

Forward-looking multiples generally have lower variation across peer companies.