Valuation - IB Textbook

Question 1

4 Valuations

Answer 1

Comparable Comps

Precedent Transactions

DCF

LBO

Question 2

Comparable Companies Valuation

Answer 2

trading comps”, or simply “comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time.

Comps is designed to reflect “current” valuation based on prevailing market conditions and sentiment. As such, it is often more relevant than intrinsic valuation techniques, such as the DCF (see Chapter 3).

Question 3

Comps Steps

Answer 3

Step I. Select the Universe of Comparable Companies

Step II. Locate the Necessary Financial Information

Step III. Spread Key Statistics, Ratios, and Trading Multiples

Step IV. Benchmark the Comparable Companies

Step V. Determine Valuation

Question 4

Key Items on IS

Answer 4

Sales

Gross Profit

EBITDA(a)

EBIT

Net Income / EPS

Question 5

Key Items on BS

Answer 5

Cash

Debt

Shareholders Equity

Question 6

Key items on SCF

Answer 6

CFO, CFI, CFF

Depreciation & Amortization

Capex

Question 7

How is Equity Value Calculated?

Answer 7

It is calculated by multiplying a company’s current share price32 by its fully diluted shares outstanding

Question 8

How is Equity Value Calculated

Answer 8

Question 9

How to calculate dilutive effects using Treasury Stock Method

Answer 9

The TSM assumes that all tranches of in-the-money options and warrants are exercised at their weighted average strike price with the resulting option proceeds used to repurchase outstanding shares of stock at the company’s current share price

Question 10

How to Calculate using if converted method

Answer 10

Question 11

How to calculate dilutive shares using net shares settlement

Answer 11

Question 12

How to calc enterprise Value

Answer 12

Enterprise Value = Equity Value + Total Debt + Preferred Sotck + Non Controlling Interest - Cash Equivalents

Question 13

EBITDA

Answer 13

Earnings before INTEREST, TAXES, DEPRECIATION, AMORTIZATION

Question 14

EBIT

Answer 14

EARNINGS BEFORE INTEREST AND TAXES

Question 15

Gross Profit Margin

Answer 15

Measure of sales remaining after deducting cogs

Question 16

XYZ Margin

Answer 16

XYZ / Sales

So if it’s gross profit Margin: Gross Profit / Sales

EBITDA Margin: EBITDA / Sales

EBIT Margin: EBIT / Sales

Question 17

Why is Price / Earnings the Same Thing as Equity Value to Net Income

Answer 17

Price / Earnings = Price Per Share / Diluted Earnings Per Share

-Multiple Numator and denominator by Diluted Share Count to get Equity Value (Price Per Share x Diluted Share Count) / Net Income (Diluted Earnings Per Share x Diluted Shares = Earnings)

Question 18

Precedent Transaction Steps

Answer 18

Step I. Select the Universe of Comparable Acquisitions

Step II. Locate the Necessary Deal-Related and Financial Information

Step III. Spread Key Statistics, Ratios, and Transaction Multiples

Step IV. Benchmark the Comparable Acquisitions

Step V. Determine Valuation

Question 19

Discounted Cash Flow Steps

Answer 19

Step I. Study the Target and Determine Key Performance Drivers

Step II. Project Free Cash Flow

Step III. Calculate Weighted Average Cost of

Capital Step IV. Determine Terminal Value

Step V. Calculate Present Value and Determine Valuation

Question 20

What does WACC Represent

Answer 20

“weighted average” of the required return on the invested capital (customarily debt and equity) in a given company.

Question 21

Free Cash Flow Calculation

Answer 21

EBIT - Taxes + Depreciation + Amortization - Capital Expenditures - Increase In Net Working Capital