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Adventis FMC Level 2 with Complete Solutions |
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what is value - ✔✔what people are willing to pay for (what the buyer pays)
who said, "Value is what people are willing to pay for" - ✔✔John Naisbitt
2 primary types of valuation - ✔✔1. relative valuation
- intrinsic valuation
relative valuation refers to what - ✔✔methods that compare the price of a company to the market value of similar assets
intrinsic value refers to what - ✔✔the value of a company through fundamental analysis without reference to its market value but instead around its ability to generate cash flow
in an M&A context, what is EV - ✔✔transaction value
in an M&A context, what is equity value - ✔✔purchase price
a company sold for $100M and the company being bought had $15M of debt and $2M of cash, what happens and what is the transaction value and purchase price - ✔✔- the $2M would be used by shareholders of the acquired company to pay down existing $15M in debt to make $13M in debt now (15 - 2 = 13)
- the proceeds from the deal would then be used to pay down the remaining debt (EV = CS + PS + Debt - Cash)
- Result is 100 - 13 = 87
- TV = $100M
- Purchase price = $87 (check to shareholders of acquired company)
2 primary types of relative valuation - ✔✔1. comparable company analysis
- acquisition comparables analysis
comparable companies analyses (public trading comparables analyses) - ✔✔- most common types of relative valuation
- these methods allow investors to compare valuation of similar companies by comparing similar ratios
most common public trading comparable ratios - ✔✔1. EV/EBITDA
- EV/Revenue
- Net income/Earnings (share price/earnings per share)
assume a company has $5M of EBITDA and two public companies most similar to the company trade at 6.0x and 7.0x EBITDA, what might you conclude - ✔✔- Ex: 7.0 = x/5 ; 6.0 = x/
- can conclude that EV for the company should be between 30-35 million
what happens when a company trades at a multiple that is a premium or a discount to the industry average - ✔✔investors will dig in to understand the rationale
- not affected by capital structure
- doesn't include interest expense
why is tax-effected EBIT used rather than net income - ✔✔- the valuation should not depend on capital structure
- applying the tax-rate directly to EBIT without subtracting interest expense eliminates the impact of capital structure to cash flow
cash flow is projected out in the projection period which is typically... - ✔✔5 years but could be 10 years for startups
the analyst should end the model with a financial year representative of a... - ✔✔steady state to ensure the analysis does not over or understate total valuation
first component of determining the present value of a company is - ✔✔calculate each unlevered FCF's PV by discounting them using the discount rate (cost of capital)
two methods for determining terminal value - ✔✔1. perpetuity method
- EBITDA exit multiple method
perpetuity method assumes that the
FCF in the last year of the projection period... - ✔✔will grow into perpetuity at an annual rate of growth (2-3%)
in practice, you would typically expect to see perpetuity growth do what when a company matures - ✔✔decline
to calculate the terminal value under the perpetuity growth method, what model is used - ✔✔Gordon- Growth Model
the Gordon-Growth Model rests on the assumption that... - ✔✔CF of the last period will stabilize and continue at the same rate of growth forever
perpetuity growth rate represents - ✔✔an average growth rate
perpetuity growth rate can't exceed what - ✔✔local inflation rate because that would signify that the company would eventually grow to be larger than the entire domestic economy
EBITDA exit multiple assumes... - ✔✔that the company is sold in the last year of the projection period at a multiple of EBITDA
what will investors do with these two methods - ✔✔use one method and back into an implied value for the other method as a check
if a 12.0x EBITDA exit multiple implies a 5% perpetuity growth rate, what can be said - ✔✔the exit multiple could be considered unrealistic
formula for PV of projection period - ✔✔PV = FV/(1+r)^N
1. E
2. D
3. V
4. E/V
5. D/V
- Re
- Rd
- T - ✔✔1. market value of equity
- market value of debt
- total enterprise value (E+D)
- % of financing that is equity
- % of financing that is debt
- cost of equity
- cost of debt
- corporate tax rate
Capital assets pricing model (CAPM) - ✔✔- used to calculate cost of equity
- rate of return equity owners expect
CAPM formula - ✔✔Re = Rf + B (Rm - Rf)
Rf - ✔✔risk free rate (10 year bond)
B - ✔✔Beta (how volatile the stock is in comparison to the market)
Rm-Rf - ✔✔market risk premium (expected return on the market - risk free rate)
what does a leveraged buyout analysis tell you - ✔✔how much a private equity firm could afford to pay for a business
private equity firms target a higher or lower return? - ✔✔higher which means they use higher leverage
for publicly traded companies, the purchase price assumes what? - ✔✔a premium to the stock price to incent a change in ownership
premium typically ranges between... - ✔✔20-40%
transaction value determined by... - ✔✔adding net debt to the purchase price
transaction value represents... - ✔✔total value that must be financed to acquire the company
sources and uses reflect what - ✔✔sources and uses of capital to finance the acquisition
sources include - ✔✔1. debt
- equity
senior debt - ✔✔- has first claim in bankruptcy
- amortized (paid back) over the life of the loan causing it to have lower interest rates
subordinated debt - ✔✔- requires interest payments only with the ability to voluntarily pay down principal with any excess cash flow
- higher interest rates due to additional default risk
typical debt/EBITDA - ✔✔2.0x-4.0x
typical total debt/EBITDA - ✔✔4.0x-6.0x
the financial sponsor's equity investment makes up - ✔✔- any remaining capital needed to finance the transaction value
most commonly used measures of return - ✔✔1. cash-on-cash return
- internal rate of return (IRR)
both measures take into account - ✔✔the relationship of capital invested by the financial sponsor vs. capital returned over the life of the investment
the IRR unlike the cash-on-cash take into account - ✔✔- TVM
- produces annualized rate or return
target IRR's range from - ✔✔20-30%
IRR - ✔✔annualized effective compounded return rate that makes NPV = 0
IRR formula - ✔✔IRR = (cash returned to sponsor/initial equity invested)^1/N - 1
if an investor receives a 15% IRR over the life of an investment... - ✔✔investment increased on avg 15% per year
cash-on-cash multiple - ✔✔how much an investor receives in proceeds upon exiting the investment compared to its initial investment (doesn't matter when the exit actually occurs)
cash-on-cash formula - ✔✔cash returned to sponsor/initial equity invested
if an investor gets a cash-on-cash multiple of 2.5x... - ✔✔they received $2.50 for every $1 invested
