Wall Street Oasis Exam Questions and Answers
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What is EBITDA - ✔✔EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and
Amortization. It is a good metric for evaluating a company's profitability. It is sometimes used as a proxy
for free cash flow because it will allow you to determine how much cash is available from operations to
pay interest, capital expenditures, etc.
EBITDA equation - ✔✔EBITDA = Revenues - Expenses (excluding interest, taxes, depreciation, and
amortization)
EV/EBITDA Multiple - ✔✔A very common valuation methodology is the EV/EBITDA multiple, which
estimates the Enterprise Value of a company using a multiple of its EBITDA. An EV/EBITDA multiple is
probably the most commonly used "quick and dirty" valuation multiple used by investment banks,
private equity firms, hedge funds, etc.
How could a company have positive EBITDA and still go bankrupt? - ✔✔Bankruptcy occurs when a
company can't make its interest or debt payments. Since EBITDA is Earnings BEFORE Interest, if a
required interest payment exceeds a company's EBITDA, then if they have insufficient cash on hand, they
would soon default on their debt and could eventually need bankruptcy protection.
What is Enterprise Value - ✔✔Enterprise Value = Equity Value + Debt + Non-controlling Interest +
Preferred Stock - Cash
What is net debt - ✔✔Net debt is a company's total debt minus the cash it has on the balance sheet. Net
debt assumes that a company pays off any debt it can with excess cash on the balance sheet.
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,Why do you subtract cash from Enterprise Value? - ✔✔One good reason is that cash has already been
accounted for within the market value of equity. You also subtract cash because it can be used either to
pay a dividend or to reduce debt, effectively reducing the purchase price of the company.
When looking at the acquisition of a company, do you look at Equity Value or Enterprise Value? -
✔✔Because the acquiring company must purchase both liabilities and equity in order to take over the
business, the buyer will need to assess the company's Enterprise Value, which includes both the debt and
the equity
Calculating Enterprise Value tip - ✔✔When calculating a company's Enterprise Value, you use the
market value of the equity because that represents the true supply-demand value of the company's equity
in the open market.
Could a company have a negative book Equity Value? - ✔✔Yes, a company could have a negative book
Equity Value if the owners are taking out large cash dividends or if the company has been operating for a
long time at a net loss, both of which reduce shareholders' equity.
What is the difference between public Equity Value and book value of equity? - ✔✔Public Equity Value is
the market value of a company's equity; while the book value is just an accounting number. A company
can have a negative book value of equity if it has been taking large cash dividends, or running at a net
loss; but it can never have a negative public Equity Value, because it cannot have negative shares or a
negative stock price.
What is Valuation - ✔✔The procedure of calculating the worth of an asset, security, company, etc.
Comparable analysis using EV/EBITDA multiple - ✔✔Most often an analyst will take the average
multiple from comparable companies (based on size, industry, etc) and use that multiple with the
operating metric of the company being valued o The most commonly used multiple is Enterprise
Value/EBITDA. PE can be used
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,Example using EV/EBITDA multiple - ✔✔Example: Comparable Company A is trading at an
EV/EBITDA multiple of 6.0x, and the company you are valuing has EBITDA of $100 million; your
company‖s EV would be valued at $600 million based on this valuation technique.
Precedent Transactions - ✔✔-A precedent transaction analysis is based on the idea that a company's
worth can be determined by looking at the prices paid for similar companies in similar situations in the
past
-This valuation technique results in the highest valuation due to the inclusion of a "control premium" the
buyer is willing to pay for the assumed "synergies" they hope will occur after the purchase
However, market conditions at the time of the prior deal may be significantly different from those
prevailing at the time of the current transaction. For example, multiples paid for a dot-com company
during the bubble in the early 2000‖s would be significantly higher than the multiples paid for a similar
company today. A good analyst will take this into account and discount the valuation accordingly.
LBO Valuation - ✔✔An LBO (leveraged buyout) is when a firm (usually a Private Equity firm) uses a
higher than normal amount of debt (known as leverage) to finance the purchase of a company. The PE
investors will purchase the company with a percentage (anywhere from 10% to 40%) of its own equity
capital, and the remainder will be financed with debt either through bank loans, bonds or a combination
of the two. The PE firm then uses the cash flows from the acquired company to pay off the debt over time.
Many times the PE Firm uses the assets of the company being acquired as collateral for the loan. When
the PE firm is ready to sell the company, ideally the debt has been partially or fully paid off and they can
collect most of the profits from the sale as the majority equity owners of the company.
Since a smaller equity check was needed up front due to the higher level of debt used to purchase the
company, this can result in higher returns to the original investors than if they had paid for the company
with entirely their own equity (i.e. without any debt).
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, Liquid Valuation - ✔✔This valuation technique uses the value of the company if they simply sold all its
assets. This might happen in a Chapter 7 bankruptcy. The company would sell off its PP&E, inventory,
etc. It may be sold at a discount to the value it is being held on the Balance Sheet because it is a forced sale
How to answer: How would you value a company - ✔✔There are a number of ways I can think of to
value a company, and I'm sure you know even more. The simplest is probably market valuation, which is
just the public Equity Value of a company based on the public markets. To get the Enterprise Value, you
add the net debt on its books, preferred stock, and any minority interest. A few other ways to value a
company include comparable company analysis, precedent transactions, discounted cash flow, leveraged
buyout valuation, and liquidation valuation.
Which of the valuation methodologies will result in the highest valuation? - ✔✔Precedent Transcation-
Includes control premiums for synergies.
DCF- Tends to be optimistic
Market Comps- Does not take into account control premiums.
Market valuation- Just equity
How to value a private company - ✔✔You cannot use a straight market valuation since the company is
not publicly traded.
A DCF can be complicated by the absence of an equity beta, which would make calculating WACC
difficult. In this case, you have to use the equity beta of a close comp in your WACC calculation.
Financial info for private companies is harder to find.
Comparables can be use but you will need a 10-15% discount as a 10-15% premium is paid for a public
company's relative liquidity
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