Are there any rules about filtering out deals for less than 100% of companies or about stock vs. cash deals in Precedent Transactions? - answer-- precedent Transactions will include ONLY 100% acquisition deals
- may need to include majority stake deals: ones where the acquirer buys more than 50% b...
BIWS DCF QUESTIONS
Are there any rules about filtering out deals for less than 100% of companies or
about stock vs. cash deals in Precedent Transactions? - answer-- precedent
Transactions will include ONLY 100% acquisition deals
- may need to include majority stake deals: ones where the acquirer buys more than
50% but less than 100% of another company
- do NOT include minority stake deals: less than 50%
- include all deals REGARDLESS of stock vs. cash consideration
Are there any screens you should AVOID when selecting comparable companies and
precedent transactions? - answer-- avoid screening BOTH financial metrics and
equity/enterprise value
- do NOT use this screen - companies with revenue below $1B and enterprise values
above $2B
- artificially constraining the multiples
But public companies already have market caps and share prices. Why bother
valuing them? - answer-- market cap and share price reflect CURRENT value
according to market
- market might be wrong
- value company to see if market's views are correct
Can you walk me through how to use Public Comps and Precedent Transactions in a
valuation? - answer-- step 1: select the companies and transactions based on
criteria such as geography, industry, size, and time of transaction (GIST)
- step 2: determine the appropriate metrics and multiples for each set (revenue,
revenue growth, EBITDA, EBITDA margins), calculate them for all the companies and
transactions
- step 3: calculate the minimum, 25th percentile, median, 75th percentile, and
maximum for each valuation multiple in the set
- step 4: apply these numbers to the metrics of the company you're analyzing to
estimate its implied value
Can you walk me through the process of finding market and financial information for
the Public Comps? - answer-1) find the acquired company's filing from JUST BEFORE
the deal was announced and calculate the LTM financial metrics
2) calculate the company's transaction equity value and enterprise value
3) use the purchase price the acquirer paid
4) move from equity value to enterprise value using the company's most recent
balance sheet as of the announcement date
5) calculate all the valuation multiples in the same way
,Continuing the same example, how would the terminal value and PV of terminal
value change with this April 30 valuation? - answer-- depends on valuation method
MULTIPLES METHOD:
- terminal value stays the same since it's based on the EBITDA in the final projected
year * other multiple
- stub period affects the discount period
- mid-year convention does NOT because terminal value is as of the END of the last
projected year
if the valuation date is April 30, and there are 10 years in the projection period, use
9.67 for the discount period
GORDON GROWTH METHOD:
- in a mid-year convention, adjust the terminal value
- adjust with terminal value * (1+discount rate)^0.5
- moves back the terminal value to year 10 instead
- use 9.67 for the discount period (only stub period affects the terminal value)
Could beta ever be negative? - answer-- YES, beta can be negative
- quite rare though
- company's stock price must move in the OPPOSITE direction of the entire market
then
- gold can have a negative beta
- gold performs better when the market declines (a hedge against recessions)
Do you still unlever and relever beta even when you're using unlevered FCF? -
answer-- YES, you still unlever and relever beta
- unlevering and relevering beta has NOTHING to do with unlevered and levered
DCF
Does a DCF ever make sense for a company with negative cash flows? - answer--
YES, a DCF can make sense
- DCF is based on company's expected future cash flows
- even if cash flow is negative now, it can become positive in future
- can NOT do DCF if no path to positive cash flow however
How can you check whether or not your terminal value estimate is reasonable? -
answer-- enter a range of assumptions for the terminal multiple or terminal FCF
growth rate
- cross check your assumptions by calculating the growth rates or multiple they
imply
- if assumptions are wrong, adjust the range of terminal multiples or terminal FCF
growth rates for more reasonable results
EXAMPLE:
- 10X EV/EBITDA for the terminal multiple
- 12% discount rate
- multiple implies a terminal FCF growth rate of 5% (too high)
- reduce it to 6X EV/EBITDA
, - implied terminal FCF growth rate is 1% (too low)
- guess 8X EV/EBITDA
- implies a terminal FCF growth rate of 2.3%
- reasonable - above inflation and below GDP
How can you determine which assumptions to analyze in sensitivity tables for a
DCF? - answer-- discount rate
- terminal FCF growth rate
- terminal multiple
- revenue growth
- margin figures
How do convertible bonds factor into the WACC calculation? - answer-IF THE
COMPANY'S CURRENT SHARE PRICE > CONVERSION PRICE ON BONDS:
- count bonds as equity
- factor bonds in by using higher diluted share count
- higher equity value for the company
- greater equity weighting in the WACC formula
IF THE COMPANY'S CURRENT SHARE PRICE < CONVERSION PRICE ON BONDS
(BONDS ARE NOT CONVERTIBLE YET):
- count the bonds as debt
-u se the coupon rate/YTM to calculate their cost
- convertible bonds offer LOWER coupon rates than standard corporate bonds
- convertible bonds reduce WACC when they count as debt
- cost of debt < cost of equity
How do net operating losses (NOLs) factor into FCF? - answer-- set up NOL schedule
- apply NOLs to reduce cash taxes
- add NOLs as a non-core business asset at end when backing from implied
enterprise value to implied equity value
How do the cost of equity, cost of debt, and WACC change as a company uses more
debt? - answer-- cost of equity and cost of debt INCREASES
- more debt increases the risk of bankruptcy, affecting all investors
- as the company goes from no debt to some debt,
WACC decreases at first because debt is cheaper than equity
- then, WACC increases at higher levels
- more debt increases risk of bankruptcy, outweighing the reward of lower debt cost
How do the levered DCF and adjusted present value (APV) analysis differ from the
unlevered DCF? - answer-LEVERED DCF:
- use levered FCF for cash flows
- use cost of equity for discount rate
- calculate terminal value using equity multiples like P/E
- do NOT back into implied equity value at end
APV analysis
- similar to unlevered DCF
- value company's interest tax shield separately
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