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