Fundamentals of Corporate Valuation

Offer Value calculation?

(Total Potential Shares*offer price)- option proceeds

Assume that equity value for a company is 100 million, debt is 10 million and cash and equivalent 10 is 10 million. Which of the following would be enterprise value?

100 million

Bank loans are typically ____, while high yield bonds are typically___

Amortized, bullet maturities

Net tagible assets of the rarget company are calculated as?

Asset- Taret existing goodwill-liabilities

Implied enterprise value calc

Assumed LTM EBITDA multiple *LTM EBITDA

Discounted Cash Flow (DCF)

Based on projections of free cash flow of a company, this provides teh intrinsic value

Total Premium Shares Calc

Basic shares + In the Money Option

When Deriving enterprise value from equity value which of the following balance sheet line items should be included

Cash and equivalent, total debt, preferred stock, and minority interest

Assume that company A has a WACC of 10% and company B has a WACC of 8%. Both companies have a projected year 5 terminal year EBITDA of 100 million but comany A exit multiple is 10x and company Bs exit multiple is 8.0x. Who has a higher present value of the terminal value.

Company A

In calculating a terminal value using the perpetuity growth rate method you initially assume that the required rate of reture (r) is 10% and teh prepetuity growth rate (g) assumptionis 4.0. after research you decide to lower the assumed long-term growth rate to 3.5% and the discount rate to 9.5% what will happen to the DCF terminal value?

Decrease- (r-g)

The CEO of a company is comtemplating acquiring another company. THE CEO will only consider an accretive transaction. You run the merger anlaysis and find teh deal is currently dilutive by .05 before the impact of synergies. Here are some assumptions. Pro Forma Shares= 300 million, tax rate= 40%. The CEO also says he thinks he can reasonable achieve 20 million of pre-tax cost synergies. What should the CEO do?

Don't do the deal

True or False: Since valuation means ultimately getting to a quantitative figure, valuation practitioners tend to focus solely on calculations, analytics and formulas

False

True/False: Financial Sponsers returns in an LBO Transaction are assessed by calculating the net present value (NPV) of future cash flows

False

True/False: The Treasury Stock Method (TSM) is a method of accounting for the number of shares that are currently held as Treasury stock by the company

False

True/False: selecting a higher levered betwa will increase the value of my DCF analysis

False

True/Fase: if the aquirer P/E is lower than the offer P/E the deal will dilutive because the aqcuirer iwill issue fewer shares due to teh relative strength of the aquirer's stock vs what is paid

False

When performing a DCF analysis and deriving an equity value per share one should calculate a precise single value

False

Implied equity value

Implied enterprise value- Net debt

Option Proceeds

Int he money options outstanding*average option exercise price

Your boss asked you to put together a due dilligence list to help determine whether or not the company she will be visiting is good LBO candidate. Which of the following questions is probably most important when assessing whether or not a company is a good LBO candidate?

Is the companies cash flow stable?

what is the relationship between normalized EBIT verse reported EBIT when normalizing an income statement for a gain on the sale of division

Normalized EBIT would be lower than reported ebit

How do you calculate Normalized EBIT

Normalized EBIT= reported EBIT +/- any non recurring item adjustments

How do you calculate EBITDA

Operating income+depreciation+amortization

What are recurring items?

Restructuring Charge, Gain/ (loss) on sale of divisions, legal settlement

How do you calculate enterprise value

Share price*shares outstanding

Assume that you are comparing two different M&A deals each with 100% stock consideration. In transaction A the aquirer's stock price is 50, the target price is 75, and the offered premium on the targets price is 25%. In transaction B, the aquirer's stock price is 5, the targets price is 10 and the offereed premium on the targets price is 10%. which of the following statements is true about the two exchange ratios

Transaction B has a higher exchange ratio

True/False: high yield bonds typically have longer maturities than bank loans

True

True/False: In an accretive deal, the pro forma EPS is always greater than the aquirers stand alone EPS

True- accretion is defined as occuring when a deal's proforma eps is greater than the aquierer's stand alone EPS

what are three things that describe public comparables analysis

Utilizes multiples in its analysis, utilizes peer groups, is anlalyzed at a specific point in time

Is TSM Hypothetical?

Yes

Assume an aquiring company is thinking about funding an aquisition with a mix of cash and stock. they would like to keep their debt/ebita ratio below 3. the offer is 30 per share for the target , which has an eps of 2. the target has 100 million diluted shares outstanding. the pro forma ebita is estimated to be 1500 mil. which statement is most correct

You don't have enough information to know exact affordability to aquierer

Using WACC framework, suppose a companys current cost of equity(ke) is 10% and the company's tax rate is 38%. All else being equal, if the company cost of debt suddenly increased by 2 percentage points (increased from 6 to 8%) what is the most reasonable statement about what happen to teh company weighted average cost of capital

You need to know the capital structure to get a better idea

Suppose a company cost of equity is 1% the company's cost of debt is 7% and teh company's debt/total capitalization is 30%. What is the company's weighted average cost of capital (WACC)

can't be determined, you need tax rate

What is the following best reasons for calculating the lastest 12 months

controls for seasonality, allows for comparability across companies, includes the most recent financial results

Merger Consequences Analysis

examines the impact of a possible transaction on the financial position of a potential buyer. This determines what buyer can afford to pay for a target company

Leveraged Buyout Analysis (LBO)

examines what a private equity firm can afford to pay for a target in an aquisition funded primarily with debt

True/False: the primary difference between an aquisitions comparable multiple and a public comparable multiple is?

factors in a control preminum

what is correct about P/E analysis

gives a sense of how much is paid verses the value of the aquier's aquisition currency, can be done for 100% stock transaction, would be accretive if the aquierers P/E is greater than offered P/E

Implied offer price

implied equity value/ diluted shares

What does not deduct from EBITDA when calculating unlevered free cash flow for the purpose of DCF valuation

interest expense

What is needed to calculate the prepetuity growth rate method

long term growth rate of unlevered free cash flows, unlevered free cash flow in the terminal year, discount rate

Comparable Analysis

specifically public comparable and acquisition comparable see how a company compares to others in the industry

state 3 incentive that encourage management to operate a post incentive that encourage management to operate a post LBO Company Effectively

stock options, lack of public shareholder scrutiny, fewer apearances on the news network

When calculating goodwill under purchase accounting, which one of the following adjustments should not be made to the offer value of equity

subtract interest expense from targets EBIT