Valuation Flashcards
(77 cards)
1
Q
3 main valuation methodologies
A
Comparable Companies, Precedent Transactions, Discounted Cash Flow Analysis
2
Q
Rank these three statements from highest to lowest values.
A
No general rule other than Prec. Transactions generally higher than Comparable Comps because of buyers’ premium.
3
Q
Other Valuation methodologies?
A
- Liquidation Valuation: Valuing assets, assuming they are sold and then subtracting liabilities
- Replacement Value: Company worth based on replacing all assets
- LBO: Determine how much a PE would pay to hit a target IRR
- Sum of the Parts: Valuing each division separately
- M&A Premiums Analysis: Analyzing M&A deals and figuring out premium that each buyer paid
- Future Share Price Analysis: Projecting share price based on P/E
- Economic Value Added (EVA)
- Adjsuted Present Value (APV)
- Dividend Yield
4
Q
When would you use Liquidation Valuation?
A
Most common in bankruptcy cases to see whether equity holders will receive capital after all debts have been paid off. Also possible as “floor” valuation.
5
Q
What is the APV method?
A
Adjusted Present Value values firm on 100% equity basis and debt effect to see both effects separately. (=unlevered value (discounted using COE) + PV of debt financing)
6
Q
Why would a Liquidation Valuation produce the highest value?
A
Highly unusual but if company had substantial assets but market was undervaluing it.
7
Q
When would you use LBO Analysis?
A
When doing an LBO or to find a floor for lowest possible valuation.
8
Q
Would LBO or DCF give higher valuation?
A
Technically either way but most of the time LBO will be lower, because of floor valuation (what do you have to pay to get x) and you do not get any value from the cash flows in an LBO until the end like in the DCF.
9
Q
How would you present valuations?
A
In a football field with a range of valuations for each methodology
10
Q
Which capital is more risky Equity or Debt?
A
Equity, as it gets CFs later.
11
Q
Is Equity or Debt more expensive?
A
Equity is more important but “risky” debt can get very close to equity cost.
12
Q
You look at two companies. One has 100% Equity; one has 100% Debt. Which one has lower WACC?
A
Debt. Generally, both should be the same, as 100% debt would be de-facto equity as there are no equity holders. However, debt also increases tax shield which would then reduce WACC.
13
Q
How is COE calculated?
A
rEquity = rRiskfree + β * (rMarket – rRiskfree)
14
Q
How high should market risk premium be?
A
Over very long horizon usually 4-5%. In times of low interest its more like 6-8%.
15
Q
Two identical companies but one has very volatile management. Which one has higher Cost of Equity?
A
According to CAPM, both have to be the same. Investors only receive return for systematic risk according to Markowitz. In practice, of course, its different.
16
Q
How is TV calculated?
A
Two possible ways:
- Multiple: (EBITDA * Multiple)/(1+WACC)^T
- Gordon Growth Model: FCFF * (1+g) / (WACC-g) / (1+WACC)^T
17
Q
Why is usage of multiple for TV problematc?
A
Very hard to estimate industry multiple development in five to ten years.
18
Q
How big can TV become?
A
Depends on two factors:
- How many years planning period is
- Is it a growth or value company
Usually 50-70%. Even >70% for high-growth companies
19
Q
Since TV is so large, why don’t we just prolong projection period?
A
Forecast beyond 5 years are very vague.
20
Q
Why do you multiply FCFF with (1+g) in TV formula?
A
Because we use last FCFF from projection period which still grows for one year before we discount it.
21
Q
How would you calculate TV for copper mine that is used until 2070?
A
Two possible ways:
- Negative g in GGM that approaches zero in 2070
- No TV at all and just continue degressive model until 2070
22
Q
What is Asset Beta?
A
Risk of all assets in Company. If 100% of company is equity, then Asset β = equity β
23
Q
Does debt have a β?
A
Usually, debt has β of zero as it is always paid regardless of market. For less solid companies that don’t pay all of their interest payments it can, however, vary.
24
Q
What is Unlevered and Levered Beta?
A
Unlevered β is β of company that is only financed using equity. With increasing debt, smaller part of equity has to bear all risk, β therefore increases. This is levered β.
25
How do you get β of private company?
You use regression for public companies; for private ones you have to estimate it using public comps. Because of different cap structures, you have to unlever β first and then relever β using your company’s cap structure.
beta_u = beta_l / (1 + (1-Tax) * Debt / Equity)
beta_l = beta_u * (1 + (1-Tax) * Debt/Equity)
26
What is Adjusted β?
Usually weighted average of 2/3 “raw” β (historical) and 1/3 a β of 1 (mean reversion):
beta_a = 2/3 * beta_raw + 1/3
27
Which timespan would you consider to find β?
Too short is very volatile/too long is not relevant. One or two years is best
28
Can you rank βs of Commerzbank, VW, Nestle and a goldmine?
Commerzbank and VW β>1 but hard to say which one is higher. Nestle produces food which is always in need and therefore has a β<1. Goldmine is hard as well as a lot of depends on economy but also gold is in high demand during bear markets so probably between Nestle and others.
29
Why does β increase with more debt?
Because debt has β of zero and with increasing debt, constantly smaller equity has to bear all of the company’s risk.
30
Which influence do fixed costs have on β of a company’s stock?
High fixed costs means a lot profits once revenue increases (as fixed costs remain) but also a lot less profits once revenue decreases (as fixed costs remain again). So high fixed costs would mean high β.
31
Which β does a small cap company with low volumes regarding their stock trading compared to international company in same industry have?
You could assume high β as small caps are more risky but due to low trading volumes, β is probably smaller. However, in this case the small cap β does of course not reflect all of the risk associated with the company.
32
What is levered and unlevered Cash Flow?
Unlevered CF is another name for FCF to Firm. Called unlevered because it looks at FCF without any impact of capital structure that is therefore available to all investors. Levered CF is FCF to Equity, so CF that is available to equity investors after all other investors are paid.
33
How do you calculate UFCF in a DCF and what’s the difference to LFCF in an LBO?
UFCF is a fictional CF that assumes a company is only financed using Equity. You ignore interest and subtract taxes from EBIT (*(1-t)). LFCF as used in an LBO, however, is how CF really flows in reality.
34
Are taxes in DCF higher, lower or the same as the real taxes?
Higher or at least as high as you subtract them from EBIT instead of EBT.
35
What is NOPLAT?
Same as NOPAT. Fictional P&L metric used in DCF after subtracting taxes from EBIT.
36
Why do we assume taxes on entire EBIT for DCF?
Central point in DCF to value company on basis of UFCF assuming 100% equity financing.
37
Why is tax shield effect included in WACC formula?
Because tax benefits are not reflected in FCF in DCF and it therefore has to be included in WACC and therefore reduces the interest costs.
38
Assuming you had to calculate a quick DCF but don’t know the tax rate. What would you do?
30% good (Germany: 15% Körperschaftssteuer + 14-17.5% Gewerbesteuersatz)
39
How would you calculate Cost of Debt?
- Riskfree plus Credit Spread according to creditworthiness of company (=CDS for big companies)
- Peer group comparison
- Return of issued bonds
40
A company has two issued bonds. One has a remaining life of 1 year, the other of 10 years. Which one would you use to calculate COD?
The 10 year one as it should better reflect long-term plans of company. Additionally, if you were to issue a new bond now, it probably would only be for one year.
41
How would you calculate the Riskfree rate?
- Swap-Rate (rate that company pays for Swap besides interest in a loan; very liquid; not much higher than govt. bonds)
- Return on Government Bonds
42
How would you determine market risk premium in a DCF?
- From academic papers and other research
| - Identify broad market index for long time horizon and subtract Riskfree (Swap-Rate)
43
Assume constantly changing capital structure for coming years. Would you use DCF in this case?
No, because WACC is static. You can’t change it because if you change it, COE and COD change and therefore WACC changes again etc. Alternative would be APV method.
44
What is an APV valuation?
The Adjusted Present Value valuation. Like DCF but looks isolated at value drivers from capital structure. In DCF we include cap structure in WACC. APV valued (fictionally) debt-free company by discounting FCF to Firm with COE (assuming 100% equity). Effects of tax shield are separately reflected and added to unlevered company value.
45
What are pros and cons of APV?
Same as DCF but beyond that, APV reflects changes in capital structure. Con of APV that it is rarely used in practice.
46
When you do an APV valuation, would you discount tax shield with COE or COD?
It depends. One could assume COD as tax shield results directly form debt. However, it not only depends on debt. If a company operates at a loss, it doesn’t pay taxes, so tax shield is eliminated. Therefore, tax shield is dependent on EBT and would be discounted with COE. In practice you would look at how stable profits are and decide form there.
47
Would you use Book or Market Values for Equity and Debt in WACC formula?
Always market value. BV is irrelevant, which is especially noticeable for equity where FMV can be substantially higher than BV.
48
How would you calculate WACC for conglomerates operating in multiple sectors?
As usual, COE from β and COD from actual costs. You can also do sum-of-parts calculation and calculate WACC for each subsidiary (considering individual capital structures).
49
Two companies are identical, but one has market cap of €10b and other of €100m. Are COE for both the same?
No, €10b company’s COE should be lower. (Bigger companies are less volatile, i.e. less risky)
50
Why is company value using DCF or Multiples for a healthy company substantially higher than liquidation value?
Substantial part is how the assets are used to create value; intellectual know-how (customer relationships, bargaining power, etc.)
51
Why would a company with similar growth and profitability to Comps be valued at a premium?
- Earnings well-above expectations and stock price has risen
- Competitive advantage not reflected in financials (e.g. key patent)
- Just won major lawsuit
- Market leader in an industry
52
Two companies have exact financials and are bought by same acquirer but one for twice the multiple – how can this happen?
- More competitive process
- Recent bad news or depressed stock price
- Different industries with different multiples
53
How do you value banks differently from other companies?
Same except for following points because interest is a critical component of a bank
- You look at P/E or P/BV multiple rather than EV/Revenue, EV/EBITDA since banks have unique capital structures
- Pay more attention to bank specifics like NAV and screen precedents on these metrics
- Rather than DCF you use a Dividend Discount Model (DDM); same but on dividends instead of FCFs
54
Walk me through IPO valuation
- Unlike normal valuations you only care about public comparables
- After picking public comps we decide on most relevant comps and estimate EV
- Work from EV to Equity and subtract IPO proceeds as they are new cash
- Divide by number of shares
You can also calculate with Equity multiples directly to get to Equity Value
55
Walk me through an M&A premiums analysis.
Purpose of analysis is to look at similar transactions and see what premiums have been paid.
- Select precedent transactions based on industry, recency and size
- For each transaction get sellers’ share price 1 day, 20 days and 60 days before the transaction was announced
- Calculate 1 day, 20 day and 60 day premium
- Get the medians for each set and apply them to your current company
Note: You only use this for public companies; you can use the same comps as in precedent transaction but can also select a broader set
56
Walk me through a future share price analysis
Find out what shares will be worth in one or two years from now and discount it to today
- Get median historical P/E of your public comps
- Apply this P/E to your company’s 1-year or 2-year forward projected EPS to get implied share price
- Discount back with your company’s Cost of Equity. You usually look at a range of COEs and range of P/Es
57
Both M&A premiums analysis and precedent transactions involve looking at previous M&A transactions. What’s the difference in how you select them?
- All sellers in premium analysis must be public
| - Usually broader set for premium analysis
58
Walk me through a Sum-of-the-Parts analysis
Value each division separately using own comparables and transactions.
59
How do you value Net Operating Losses and take them into account in a valuation?
You value them based on what they’ll save the company in taxes in the future. Two ways:
- Assume company can use NOLs until they run out
- Use Section 382 (long-term tax exempt rate) and multiply the adj. long-term rate by the equity purchase price of the seller to determine the max. allowed NOL usage in each year. Then use that to figure out the offset to taxable income.
You might value NOLs in a valuation but rarely add them in as they would be similar to cash and would handle them like that in the EV – Equity Bridge.
60
You have a set of public comps and get projections from equity research. How do I select which report to use?
- Pick report with most detailed info
| - Pick report with numbers in the middle of the range
61
How far back and forward do we usually go for public comps and precedent transactions?
Usually TTM (trailing 12 months) period for both sets and then look forward either 1 or 2 years and then you look forward 1 or 2 years. This range is usually bigger for public comps and smaller for precedent transactions
62
How would we value an oil & gas company?
Same methodologies except for:
- Industry specific multiples like P/MCFE and P/NAV in addition to more standard ones
- Project prices of commodities like oil and natural gas and also company’s reserves to determine future CFs
- Rather than a DCF you use a NAV model – similar but everything flows from company reserves rather than revenue growth/EBITDA projections
63
How would we value a REIT?
Similar to energy as it’s very asset-intensive:
- Price/FFO, Price/AFFO multiples (AFFO = adj. funds from operations – add back depr. and subtract gains from property sales
- NAV is also important
- You value properties by dividing Net Operating Income (NOI = Gross Income – Operating Expenses) by the capitalization rate (based on market data)
- Replacement Valuation is more common because you can value cost of buying new lang and building new properties more easily
64
What’s the difference between IRR and CAGR?
Nothing!
65
What’s the difference between COE and IRR?
COE gives you what equity investors expect from an investment. IRR is what is used to get an NPV of 0. Investment with 20% IRR and 22% COE is still bad as investor expectation is not fulfilled.
66
Why do you have to pay EV instead of Equity in transaction?
In transaction usually all debt is eliminated and recapitalized. All debt has therefore to be taken on as well. Even if you wouldn’t have to pay debt, you would just get as much debt as you would have more in cash so would end up with the same amount.
67
Why do you sometimes need to calendarize data in valuation and what does it mean?
If year does not end on 31.12 for a company we need to adjust it, to compare it to peer group.
68
How is it possible that a company with same growth and same profitability as competitor trades at a premium on the market?
Probably same growth and profitability but for less risk (existing entry barriers etc.)
69
How would you have valued company like FB or eBay at beginning?
DCF and Multiples not useful as cashflows are not predictable and companies operate at a loss available. Possibility would be specific multiple like EV/Clicks per Day etc.
70
How do you value a company after all valuation methods are different and all results are contradicting?
Very normal as assumptions for each method are different. Create football field and see the range of valuations.
71
What is a conglomerate’s discount?
Fact that conglomerates are usually undervalued on the market compared to each separate company. This happens for two main reasons:
- Negative synergies through admin etc. because companies don’t have anything in common
- Investors avoid conglomerates as they prefer investments in single companies, with clear business rationale etc.
72
Which influence do dividends have on market movements?
Theoretically none (doesn’t matter if dividend is paid or stock appreciates). In practice, dividend continuity can be very important.
73
What is the EVA method and how is it calculated?
EVA (Economic Value Added) calculates the value of a company above a required return rate (WACC)
EVA = NOPAT – WACC * CE (where CE = Total Assets – Short-term liabilities – Cash)
74
How do you calculate the residual value in an EVA valuation?
EVAResidual = (NOPATT+1 – WACC * CE) / (WACC * (1+WACC)T)
75
What is the company value according to the EVA valuation?
EV = IC + ∑ EVAt / (1 + WACC)t + EVAResidual
| Where IC = NWC + PP&E + Goodwill & Intangibles
76
How do you calculate the firm value using the APV method?
Unlevered Value + Value of Debt
| = - Initial Investment + Return / COE + Debt * Interest Rate * Tax rate / (1- 1/(1+COD))
77
How do you decide if you take global β or local β?
You look at the investors’ portfolio, if the portfolios are more globally oriented, you take global β, otherwise you take local β.
