Adventis FMC Level 2 Test Questions With Correct Answers

what is value - Answer what people are willing to pay for (what the buyer pays) who said, "Value is what people are willing to pay for" - Answer John Naisbitt 2 primary types of valuation - Answer 1. relative valuation 2. intrinsic valuation relative valuation refers to what - Answer methods that compare the price of a company to the market value of similar assets intrinsic value refers to what - Answer 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 - Answer transaction value in an M&A context, what is equity value - Answer 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 - Answer - 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 - Answer 1. comparable company analysis 2. acquisition comparables analysis comparable companies analyses (public trading comparables analyses) - Answer - 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 - Answer 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 - Answer - 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 - Answer 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 - Answer 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) - Answer 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 - Answer 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 - Answer DCF analysis what is DCF analysis - Answer it is the process of projecting future cash flows and discounting them to their PVs by using TVM steps for DCF - Answer 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 - Answer unlevered FCF unlevered FCF - Answer - cash flow available to all stakeholders - not affected by capital structure - doesn't include interest expense