Valuation Methods Questions and Answers

Valuation Methods Questions and Answers Public Comps Relative Valuation Method; Compare multiples to companies of a similar industry, finance, and geography Precedent Transactions Relative Valuation; Compare multiples at the time of purchase to companies of similar industry, finance, geography, and TIME. ALways higher b/c companies purchased at a higher price DCF Project FCF, discount to present value, sum FCF, add to discounted TV= Enterprise Value LBO Determine how much PE firm could pay for company based on internal rate of return. Typically lower value b/c u dont get any value from the cash flows from year between year .1 and final year, you only get value out of the final year Liquidation Valuation Asset-Liabilities= Owner's Equity. Essentially valuing a company based on owner's equity. Always a lower price. Typically used when a company is in bankruptcy and to tell if a shareholder will receive anything after the company's liabilities have been paid off with the proceeds from selling all of its Assets Future Share Price Analysis Projecting a company's share price based on the P/E multiples of the public comps and then discounting it to present value 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 Unlevered FCF EBIAT + non-cash expenses - change in operating assets and liabilities - CapEx Levered FCF Net income + Non-cash changes - Change in operating assets and liabilities -CapEx-Mandatory Debt Repayments Sum of the Parts Analysis Taking different divisions of a company, comparing their multiples to other companies, value each division separately, add up the values to find the Total Value When you're looking at an industry-specific multiple like EV / Proved Reserves or EV / Subscribers (for telecom companies, for example), why do you use Enterprise Value rather than Equity Value? You use Enterprise Value because those Proved Reserves or Subscribers are "available" to all the investors (both debt and equity) in a company. This is almost always the case unless the metric already includes interest income and expense (FFO and AFFO above). The EV / EBIT, EV / EBITDA, and P / E multiples all measure a company's profitability. What's the difference between them, and when do you use each one? P / E depends on the company's capital structure, whereas EV / EBIT and EV / EBITDA are capital structure-neutral. Therefore, you use P / E for banks, insurance firms, and other companies where interest is critical and where capital structures tend to be similar. What are some problems with EBITDA and EBITDA multiple? And if there are so many problems, why do we still use it? First, it hides the amount of debt principal and interest that a company is paying each year, which can be very large and may make the company cash flow- negative; as mentioned above, it also hides CapEx spending, which can also be huge. EBITDA also ignores working capital requirements (e.g. Accounts Receivable, Inventory, Accounts Payable), which can be very large for some companies. WHY WE USE: CONVENIENCE