Investment Banking Valuation Questions and Answers

Investment Banking Valuation Questions and Answers What are the 3 ways to value a company The 3 ways to are comparable companies, Precedent transactions, an discounted cash flow analysis Comparable companies and precedent transactions are relative valuations based on the trading multiples of companies and transactions of similar size in similar industries A DCF on the orter hand is an intrinsic valuaion based on the present value of a company's projected free cash flow Are there any other ways to value a company? Yes some other valuation methods would be Replacement Valuation Liquidation Valuation Future Share Price Analysis LBO Analysis M&A Premium analysis Sum of the Parts analysis When would you not use a DCF in a Valuation? You wouldn't use a DCF for a company that has unstable or unpredictable cash flows (tech or start up) What are the criteria you would you look at when determining precendent transactions You want to look at transactions with companies in similar industries and of similar size within the last 2-3 years What if there are no comparable in the industry? What are some qualitative components that might drive your set of comparables Look at companies that share similar end markets, distribution channels Why would precendent transactions give you a higher multiple than comparable companies? ( In general precedent transactions will be higher than comparables due to a control premium (opportunity to control business decisions) What are three factors that drive the valuation for 1. The first thing you'll look at is whether the buyer was a strategic buyer or a financial sponsor. A strategic may pay higher purchase price because of the opportunity to realize synergies 2. Next thing is the sale process of the deal. if it is an auction where the target is presented to multiple buyers the competitive dynamics will push up the price 3. Stock vs cash can change valuaiton. Traditionally, using stock tends to result in a lower valuation because with a stock transaction the equity holders now expect to get a share in the upside Would all stock or all cash deal drive a lower valuation? an all stock deal will more than likely have a lower valuation because equity holders expect to share in the upside Why would shareholders prefer cash (over stock? Some shareholders may prefer cash over stock due to its guaranteed value What is an LBO model? walk me through one an LBO model is used in the case of a leveraged buyout to determine how much a sponsor would have to pay to achieve a target IRR; sometimes called a floor valuation because PE firms almost always pay less for a company than strategic acquirers would 1. make assumptions about the purchase price, d/e and the interest rate on debt 2. Next you'll have to create a sources and uses section to show how the transaction will be financed; how much equity contirbution 3. After this you will adjust the balance sheet to account for the new capital structure and use goodwill to act as the plug to make sure both sides balance 4. Once you've done this you'll project out a company's financials, and determine how much debt can be paid down based on the available cash flow 5. the last thing is make assumptions about the exit multiple, and calculate the return based on how much equity is returned to the firm Why would you use leverage when buying a company? (2) you would use leverage because it will boost your return as an equityt investor because any debt you use is not really your moneyu also by using debt the sponsor might have more capital/equity available to purchase other companies what's an ideal candidate for an LBO (1 main; 2 side) the number one thing is going to be stable and predictable cash flow lenders like software businesses because of their highly recurring revenue two other things you might look at is low capex and a large asset base to act as collateral