Valuation Questions and Answers.

Valuation Questions and Answers. liquidation valuation valuing a company's assets, assuming they are sold off and then subtracting liabilities to determine how much capital, if any, equity investors receive replacement value valuing a company based on the costs of replacing its assets LBO analysis Valuing a company by assuming the acquisition of the company via a leveraged buyout, which uses a significant amount of borrowed funds to fund the purchase, and assuming a required rate of return for the purchasing entity. Sum of the parts valuing each division of a company separately and adding them together at the end M & A premiums analysis analyzing M&A deals and figuring out the premium that each buyer paid, and using this to establish what your company is worth future share price analysis projecting a company's share price based on the P/E multiples of the public company comparables, then discounting it back to present value comparable company analysis a process used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry precedent transaction analysis a valuation method in which the price paid for similar companies int he past is considered an indicator of a company's value, creates an estimate of what share a stock would be worse in case of acquisition discounted cash flow a valuation method used to estimate the attractiveness of an investment, uses future free cash flow projections and discounts them to arrive at a present value estimate when looking at an industry-specific multiple, why use enterprise value rather than equity? b/c those scientists or subscribers are available to all investors in a company...same logic does not apply to everything would an LBO or DCF give a higher valuation? it could go either way, but in most cases the LBO will give you a lower valuation how do you present these valuation methodologies to a company or its investors? football field chart where you show the valuation range implied by each methodology, always show a range rather than a specific number how would you value an apple tree? same way as company....by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree's cash flows (intrinsic valuation) why can't you use Equity Value / EBITDA? EBITDA is available to all investors in the company- rather than just equity holders, enterprise value is also available to all shareholders so it makes sense to pair them when would liquidation valuation produce the highest value? if a company had substantial hard assets but the market was severely undervaluing it for a specific reason (earnings miss or cyclicality) let's go back to 2004 and look at FB had no profit and revenue? How would you value it? NOT use DCF b/c you cannot reasonably predict cash flows for a company that is not making money yet Unlevered Free Cash Flow excludes Interest and thus represents money available to all investors levered free cash flow already includes interest and the money is therefore only available to equity investors how do you select comparable companies/ precedent transactions? 1. industry classification, 2. financial criteria, 3. geography how do you apply the 3 valuation methodologies to actually get a value for the company you're looking at? you take the median multiple of a set of companies or transactions and then multiply it by the relevant metric from the company you're valuing what do you actually use a valuation for? pitch books and in client presentations when you're providing updates and telling them what they should expect how do you take into account a company's competitive advantage in a valuation? look at the 75th percentile or higher, add in a premium, use more aggressive projections you mentioned that precedent transactions usually produce a higher value than comparable companies, can you think of a situation where this is not the case? sometimes this happens when there is a substantial mismatch between the M&A market and the public market what are some flaws with precedent transactions? data on precedent transactions is generally more difficult to find than it is for public company comparables, especially for acquisitions of small private companies why does Buffett prefer EBIT multiples to EBITDA multiples? he dislikes EBITDA b/c is excludes the sizable capital expenditures companies make and hides how much cash they are actually using to finance their operations