Adventis FMC Level 2|Questions With Correct
Answers|Verified
what is value - ✅what people are willing to pay for (what the buyer pays)
who said, "Value is what people are willing to pay for" - ✅John Naisbitt
2 primary types of valuation - ✅1. relative valuation
2. intrinsic valuation
relative valuation refers to what - ✅methods that compare the price of a company to the
market value of similar assets
intrinsic value refers to what - ✅the value of a company through fundamental analysis
without reference to its market value but instead around its ability to generate cash flow
in an M&A context, what is EV - ✅transaction value
in an M&A context, what is equity value - ✅purchase price
a company sold for $100M and the company being bought had $15M of debt and $2M
of cash, what happens and what is the transaction value and purchase price - ✅- the
$2M would be used by shareholders of the acquired company to pay down existing
$15M in debt to make $13M in debt now (15 - 2 = 13)
- the proceeds from the deal would then be used to pay down the remaining debt (EV =
CS + PS + Debt - Cash)
- Result is 100 - 13 = 87
- TV = $100M
- Purchase price = $87 (check to shareholders of acquired company)
2 primary types of relative valuation - ✅1. comparable company analysis
2. acquisition comparables analysis
comparable companies analyses (public trading comparables analyses) - ✅- most
common types of relative valuation
- these methods allow investors to compare valuation of similar companies by
comparing similar ratios
most common public trading comparable ratios - ✅1. EV/EBITDA
2. EV/Revenue
3. Net income/Earnings (share price/earnings per share)
assume a company has $5M of EBITDA and two public companies most similar to the
company trade at 6.0x and 7.0x EBITDA, what might you conclude - ✅- Ex: 7.0 = x/5 ;
6.0 = x/5
, - can conclude that EV for the company should be between 30-35 million
what happens when a company trades at a multiple that is a premium or a discount to
the industry average - ✅investors will dig in to understand the rationale
assume that a company trades at 7.0x EBITDA but the average of comparable
companies is 9.0x, what can we conclude - ✅the company is being undervalued and
the investor will look to buy shares because he realizes that the share price will increase
Wall St. begins to value the company in-line with its peers
acquisition comparables analysis (transaction comparables analysis) - ✅represent
comparable acquisitions that have taken place and have been publicly announced
are multiples for acquisition comparables higher or lower than mulitples for comparable
companies - ✅higher because acquirers need to pay a premium to the current share
price to gain control of the company
most common type of intrinsic valuation - ✅DCF analysis
what is DCF analysis - ✅it is the process of projecting future cash flows and discounting
them to their PVs by using TVM
steps for DCF - ✅1. project future cash flows
2. discount future cash flows to their PV's
3. Find the PV of all cash flows beyond the projection period (terminal value)
cash flow metric used for DCF analysis - ✅unlevered FCF
unlevered FCF - ✅- cash flow available to all stakeholders
- not affected by capital structure
- doesn't include interest expense
why is tax-effected EBIT used rather than net income - ✅- the valuation should not
depend on capital structure
- applying the tax-rate directly to EBIT without subtracting interest expense eliminates
the impact of capital structure to cash flow
cash flow is projected out in the projection period which is typically... - ✅5 years but
could be 10 years for startups
the analyst should end the model with a financial year representative of a... - ✅steady
state to ensure the analysis does not over or understate total valuation
Answers|Verified
what is value - ✅what people are willing to pay for (what the buyer pays)
who said, "Value is what people are willing to pay for" - ✅John Naisbitt
2 primary types of valuation - ✅1. relative valuation
2. intrinsic valuation
relative valuation refers to what - ✅methods that compare the price of a company to the
market value of similar assets
intrinsic value refers to what - ✅the value of a company through fundamental analysis
without reference to its market value but instead around its ability to generate cash flow
in an M&A context, what is EV - ✅transaction value
in an M&A context, what is equity value - ✅purchase price
a company sold for $100M and the company being bought had $15M of debt and $2M
of cash, what happens and what is the transaction value and purchase price - ✅- the
$2M would be used by shareholders of the acquired company to pay down existing
$15M in debt to make $13M in debt now (15 - 2 = 13)
- the proceeds from the deal would then be used to pay down the remaining debt (EV =
CS + PS + Debt - Cash)
- Result is 100 - 13 = 87
- TV = $100M
- Purchase price = $87 (check to shareholders of acquired company)
2 primary types of relative valuation - ✅1. comparable company analysis
2. acquisition comparables analysis
comparable companies analyses (public trading comparables analyses) - ✅- most
common types of relative valuation
- these methods allow investors to compare valuation of similar companies by
comparing similar ratios
most common public trading comparable ratios - ✅1. EV/EBITDA
2. EV/Revenue
3. Net income/Earnings (share price/earnings per share)
assume a company has $5M of EBITDA and two public companies most similar to the
company trade at 6.0x and 7.0x EBITDA, what might you conclude - ✅- Ex: 7.0 = x/5 ;
6.0 = x/5
, - can conclude that EV for the company should be between 30-35 million
what happens when a company trades at a multiple that is a premium or a discount to
the industry average - ✅investors will dig in to understand the rationale
assume that a company trades at 7.0x EBITDA but the average of comparable
companies is 9.0x, what can we conclude - ✅the company is being undervalued and
the investor will look to buy shares because he realizes that the share price will increase
Wall St. begins to value the company in-line with its peers
acquisition comparables analysis (transaction comparables analysis) - ✅represent
comparable acquisitions that have taken place and have been publicly announced
are multiples for acquisition comparables higher or lower than mulitples for comparable
companies - ✅higher because acquirers need to pay a premium to the current share
price to gain control of the company
most common type of intrinsic valuation - ✅DCF analysis
what is DCF analysis - ✅it is the process of projecting future cash flows and discounting
them to their PVs by using TVM
steps for DCF - ✅1. project future cash flows
2. discount future cash flows to their PV's
3. Find the PV of all cash flows beyond the projection period (terminal value)
cash flow metric used for DCF analysis - ✅unlevered FCF
unlevered FCF - ✅- cash flow available to all stakeholders
- not affected by capital structure
- doesn't include interest expense
why is tax-effected EBIT used rather than net income - ✅- the valuation should not
depend on capital structure
- applying the tax-rate directly to EBIT without subtracting interest expense eliminates
the impact of capital structure to cash flow
cash flow is projected out in the projection period which is typically... - ✅5 years but
could be 10 years for startups
the analyst should end the model with a financial year representative of a... - ✅steady
state to ensure the analysis does not over or understate total valuation
