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IB Interviews Trading Multiples and Comps/Precedent Transaction Valuation continued - from IBI lessons and supplemented with online modeling resources(Exam 100% Correct)$15.99
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IB Interviews Trading Multiples and Comps/Precedent Transaction Valuation continued - from IBI lessons and supplemented with online modeling resources(Exam 100% Correct)
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IB Interviews Trading Multiples
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IB Interviews Trading Multiples
IB Interviews Trading Multiples and Comps/Precedent Transaction Valuation continued - from IBI lessons and supplemented with online modeling resources(Exam 100% Correct)
IB Interviews Trading Multiples and
Comps/Precedent Transaction
Valuation continued - from IBI lessons
and supplemented with online
modeling resources(Exam 100%
Correct)
What is precedent transaction analysis? - ANSWERPrecedent Transaction Analysis (sometimes called
"historical transaction") is one of the major company valuation analyses done in investment banking
It's a HISTORICAL valuation method where you compare PAST transactions in order to gauge
CURRENT valuation of your company.
What characteristics do you use to create a universe of transactions? - ANSWERYou will never find a
perfect precedent transaction because no company is ever 100% similar but you will be able to
narrow down your search using the following characteristics for the target company:
1) Sector
2) Products & Services
3) Customer
4) Distribution Channel
5) Geography
What are the key financials needed in a precedent transaction analysis? - ANSWERNecessary
financials typically include:
1) Total deal amount paid by the acquirer --> this will be your EV!
2) Target Company Earnings per Share (EPS)
3) Target Company Market Capitalization (Deal Amount - Net Debt)
4) Target Company Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)
5) Target Company Total Revenue
, For example, if your company is predicting to have EBITDA of $200 million in 2010 and the precedent
transaction analysis is showing target companies were purchased for 10x EBITDA then your company
would be worth approximately $2 billion.
(EBITDA of $200m x 10x EV/EBITDA multiple = $2bn valuation!)
What are some similarities between company analysis and precedent transaction analysis? -
ANSWER1) Relative valuation methods
2) Both use multiples (EV/Revenue, EV/EBITDA)
3) Hard to find perfectly comparable companies
4) Shows what a presumably rational investor/acquirer willing to pay (observable)
What are some differences between company analysis and precedent transaction analysis? -
ANSWER1) Takeover premium (included in precedents, not in comps)
2) Timing (precedents quickly become old, comps are current)
3) Available information (difficult to find for precedents, readily available for comps)
If the valuation range is:
5x EV/EBITDA (low)
0x EV/EBITDA (high)
And the company in question has EBITDA of $150 million,
The valuation ranges for the business would be...? - ANSWER$675 million (low)
$900 million (high)
THIS MAKES ZERO SENSE FYI
How do you determine which multiple to use for your valuation range? - ANSWER+ EV/EBITDA
multiple is one of the best to use if you're comparing the target company with big companies.
+ For start-ups, one of the best multiples is EV/Revenue (aka EV/Sales)
+ P/E Ratio shouldn't be used at all. There are two reasons why...
1) First of all, P/E Ratio are mostly affected by the capital structure
2) There is no better source for this than public filings on sec.gov. This will take longer pulling
this information by hand vs. a database but it's the best way.
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