FIN 461 EXAM 1 WITH 100% CORRECT
ANSWERS
What's so special about EV/EBITDA? - Answer- •Allows for an "apples-to-apples"
comparison of firms that differ along important dimensions (i.e., capital structure, taxes,
and investment policy).
•Numerator (EV): sum of equity value plus net debt (total debt minus cash).
-EV is typically used in M&A.
•Denominator (EBITDA): earnings before interest, taxes, depreciation and amortization.
-Proxy for operating cash flow (although not as good for capital intensive industries).
-Provides a clearer picture of financial performance because it strips out debt costs,
taxes, and accounting measures like depreciation.
Comps Step 1 - Answer- Select universe of comparable companies
•First step, understand the target!
•Similar business and financial characteristics
•Start with target's public competitors
•Start broad, refine later
Comps Step 2 - Answer- Locate necessary financial information
•SEC filings (10-K, 10-Q, 8-K)
•Consensus research estimates
•Equity research reports
•Data providers (e.g., Yahoo Finance, FactSet, Bloomberg)
Comps Step 3 - Answer- "Spread" key statistics, ratios, and trading multiples
•Calculate market valuation measures (e.g., enterprise value, equity value)
•Calculate key financial statistics (e.g., EBITDA, net income)
•Other key measures: fully diluted shares outstanding, profitability, growth, returns,
credit strength
Comps Step 4 - Answer- Benchmark comparable companies
•Lay out data for target and comparables side-by-side
•Determine relative strength of comparable companies
•Remove outliers and/or tier comparables
Comps Step 5 - Answer- Determine valuation
•Use mean and medians as the basis for extrapolating a valuation for the target
•High and low values serve as ceiling and floor, respectively
•Rely on closest comparables (often only a few comparables)
, Comparables Issues - Answer- 1.Calculation of LTM financial data
2.Calendarization of financial data
3.Adjustments for non-recurring items
Calculation of LTM financial data issue - Answer- in the middle of a fiscal year, it is often
necessary to calculate LTM (last twelve months) financial information
Calendarization of financial data issue - Answer- •most (but not all) firms have a fiscal
year that aligns with the calendar year (Jan-Dec). How do we compare firms when their
fiscal years do not align?
Adjustments for non-recurring items issue - Answer- extraordinary events often affect a
firm's financial metrics. We want to value a firm on a "normalized" basis.
-Technique: "scrub" or "sanitize" the financials using information from the MD&A section
and footnotes.
•Search for terms such as "non-recurring" "extraordinary" "unusual" "one-time"
"adjusted"
Precedent Transactions Analysis Premise - Answer- Multiples paid for similar
companies in prior M&A transactions provide a relevant reference point for valuing a
target.
Designed to reflect firm's value to a potential acquirer based on prevailing M&A market
conditions.
Precedents Pros - Answer- •Market based
•Current
•Relativity
•Simplicity
•Objectivity
Precedents Cons - Answer- •Market based
•Time lag
•Absence of comparable acquisitions
•Availability of information
•Acquirer's basis for valuation
Precedent Step 1 - Answer- Locate the universe of comparable acquisitions
•Search M&A databases (FactSet, Capital IQ, Bloomberg)
•Examine M&A history of target and comparable companies
•Review merger proxies of comparable companies
•Equity and fixed income research reports
•Learn circumstances and deal dynamics of each transaction
Precedent Step 2 - Answer- Locate the necessary deal-related and financial information
•SEC disclosures:
ANSWERS
What's so special about EV/EBITDA? - Answer- •Allows for an "apples-to-apples"
comparison of firms that differ along important dimensions (i.e., capital structure, taxes,
and investment policy).
•Numerator (EV): sum of equity value plus net debt (total debt minus cash).
-EV is typically used in M&A.
•Denominator (EBITDA): earnings before interest, taxes, depreciation and amortization.
-Proxy for operating cash flow (although not as good for capital intensive industries).
-Provides a clearer picture of financial performance because it strips out debt costs,
taxes, and accounting measures like depreciation.
Comps Step 1 - Answer- Select universe of comparable companies
•First step, understand the target!
•Similar business and financial characteristics
•Start with target's public competitors
•Start broad, refine later
Comps Step 2 - Answer- Locate necessary financial information
•SEC filings (10-K, 10-Q, 8-K)
•Consensus research estimates
•Equity research reports
•Data providers (e.g., Yahoo Finance, FactSet, Bloomberg)
Comps Step 3 - Answer- "Spread" key statistics, ratios, and trading multiples
•Calculate market valuation measures (e.g., enterprise value, equity value)
•Calculate key financial statistics (e.g., EBITDA, net income)
•Other key measures: fully diluted shares outstanding, profitability, growth, returns,
credit strength
Comps Step 4 - Answer- Benchmark comparable companies
•Lay out data for target and comparables side-by-side
•Determine relative strength of comparable companies
•Remove outliers and/or tier comparables
Comps Step 5 - Answer- Determine valuation
•Use mean and medians as the basis for extrapolating a valuation for the target
•High and low values serve as ceiling and floor, respectively
•Rely on closest comparables (often only a few comparables)
, Comparables Issues - Answer- 1.Calculation of LTM financial data
2.Calendarization of financial data
3.Adjustments for non-recurring items
Calculation of LTM financial data issue - Answer- in the middle of a fiscal year, it is often
necessary to calculate LTM (last twelve months) financial information
Calendarization of financial data issue - Answer- •most (but not all) firms have a fiscal
year that aligns with the calendar year (Jan-Dec). How do we compare firms when their
fiscal years do not align?
Adjustments for non-recurring items issue - Answer- extraordinary events often affect a
firm's financial metrics. We want to value a firm on a "normalized" basis.
-Technique: "scrub" or "sanitize" the financials using information from the MD&A section
and footnotes.
•Search for terms such as "non-recurring" "extraordinary" "unusual" "one-time"
"adjusted"
Precedent Transactions Analysis Premise - Answer- Multiples paid for similar
companies in prior M&A transactions provide a relevant reference point for valuing a
target.
Designed to reflect firm's value to a potential acquirer based on prevailing M&A market
conditions.
Precedents Pros - Answer- •Market based
•Current
•Relativity
•Simplicity
•Objectivity
Precedents Cons - Answer- •Market based
•Time lag
•Absence of comparable acquisitions
•Availability of information
•Acquirer's basis for valuation
Precedent Step 1 - Answer- Locate the universe of comparable acquisitions
•Search M&A databases (FactSet, Capital IQ, Bloomberg)
•Examine M&A history of target and comparable companies
•Review merger proxies of comparable companies
•Equity and fixed income research reports
•Learn circumstances and deal dynamics of each transaction
Precedent Step 2 - Answer- Locate the necessary deal-related and financial information
•SEC disclosures:
