Valuation

Question 1

Three main valuation methodologies, ranked from highest to lowest expected value

Answer 1

Comparable companies, precedent transaction and DCF

No ranking always holds. IN general PTA will be higher than comps du to control premium built into acquisitions

DCF can go either way as its very precise but highly variable

Question 2

When do you not use a DCF

Answer 2

Unstable or unpredictable CF (tech, start up) or when debt and working capital serve a fundamentally different role (financial institutions)

Question 3

When would you use LBO

Answer 3

When looking at a leveraged buyout, or to establish how much a PE company may pay which is lower than a strategic investor. Used to set a floor of valuation

Question 4

Most common multiples

Answer 4

EV over…
Rev
EBITDA
EBIT

P over…
Earnings
Book value

Question 5

Industry specific multiples

Answer 5

Tech

EV over Unique visitors or page views

In industry specific multiples, use EV because the things in the multiple are available to all investors

Question 6

LBO or DCF to give higher valuation

Answer 6

Could go either way. LBO is usually on the low side, but DCF is highly assumption dependent and wide range of values

Question 7

How to present valuation methodologies

Answer 7

You rank them based on their valuation range implied by each methodology

Question 8

How to value an apple tree

Answer 8

By looking at comparable apple trees for relative valuation and valuing apple trees cash flow for intrinsic valuation

Question 9

Why cannot use MV over EBITDA

Answer 9

EBITDA is attributable to all investors in the company rather than just equity holders

MV does nto reflect capital structure, only part available to equity investors

Question 10

How to value a start up with no profit or revenue

Answer 10

Use CCA or PTA, or use creative and industry multiples.

Do not use DCF as you cannot reasonably predict the CF

Question 11

What to use with FCF multiples, EV or MV

Answer 11

Unlevered (excludes interest and thus represents money for all investors) FCF use EV

Levered FCF (includes interest payments and thus is money for equity investors as debt investors have been paid) use MV

Question 12

How to select comparable companies or precedent transactins

Answer 12

Industry (most important)
Financial similarities, revenue EBITDA
Geography

EX for comparable screen
OIl an gas producers with market caps over 5b

Question 13

How do you actually get a value for the company

Answer 13

Take median multiple of a set of companies or transactions and then multiply by relevant metric (EBITDA)

Football field you take 25th and 75th percentile

Question 14

What do you use the valuation for

Answer 14

You use it for pitch books and in client presentations when providing updates

Negociations

Question 15

Why would a comparable company be valued at a premium

Answer 15

Just reported above average earnings
Competitive advantage not reflected in financials
Marketleader and larger MS than competition

Question 16

What are comparable companie flaws

Answer 16

Never 100% match
Stock market is emotional, mutliples may be dramatically higher or lower bc of market movements
Thin

Question 17

How to take a company’s competitive advantage into account

Answer 17

Take 75th percentile rather than median
Add premium to multiples
or use more aggressive projection

Question 18

Why use mediam 1

Answer 18

Not a real rule, use judgeemnt. If company is in distress, use 25th percentile.

Question 19

What are PTA flaws

Answer 19

Rarely 100% match
Data is hard to find, especially for small private firms

Question 20

Same financial profile but one EBITDA multiple is double the others

Answer 20

Reasons

Bad news or depressent MV so acquired at a discount

One process was more competitive and had more bidders

Question 21

Why prefer EBIT to EBITDA

Answer 21

Because EBITDA excludes often siyeable CAPEX, may hide how much cas the company is using to finance their oeprations

Gap can be large where it is capital intensive

Question 22

Difference bewteen EV over EBIT, EBITDA and P over E

Answer 22

All measure profitability

P over E depends on capital structure whereas EV are capital structure neutral

Use P over E for banks and financial isntitutions

EBIT includes D and A, so use where D and A is large and where CAPEX and fixed assets are impoartant (manufacturing)

EBITDA where D and A is smaller (software)

Question 23

Vending machine Q

Answer 23

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Question 24

How to value private company

Answer 24

Use same 3 methods but with differences

Discount 10 to 15% as not as liquid
DCF is tricky without beta, estimate WADD based on public comps wacc

Question 25

Why not discount 10 15 % for PTA multuples for private company

Answer 25

PTA you acquire entire company. Once the company is acquired, it becomes illiquid

Question 26

Can you use private companies as part of your valuation

Answer 26

Only for PTA.

Doesnt make sense for CCA or DCF as CoC is not public so no values for MV or beta