Maximum Ellis
How do you calculate terminal value? (Both Methods)
Exit Multiple Method: Final year EBITDA*(EV/EBITDA)
Perpetuity Growth Method: Final year FCF * (1+PGR) / (discount rate - PGR)
Kilroy's has an EV/Revenue of 2x and an EV/EBITDA of 10x, what is its EBITDA margin?
20% EBITDA Margin
Walk me through $40 of depreciation on all 3 financial statements with a 20% tax rate
IS: $40(1-.2), Net income down $32
CF: NI -32
DA +40
Net change in cash: +$8
BS: Cash up $8
PP&E -$40
NI -$32 balances with SE-$32
What is the largest announced deal of 2024?
(Companies, Deal Size, Advisors)
Capital One buying Discover
$35.3 Billion, CVP & PJT/MS
What are the four primary valuation methodologies? Provide a brief explanation of each.
Precedent Transactions: Valuation based on similar closed transactions
DCF: Intrinsic valuation based on cash flows and projections
Comparable Companies: Valuation based on how similar firms are trading
LBO: "Floor" valuation, often used by financial sponsors, often involves a large amount of debt.
What is EBITDA a proxy for? EBIT?
EBITDA is a proxy for free cash flow. EBIT is a proxy for operating income
Calculate levered Beta for a private company with a target capital structure comprised of $200M in mezzanine debt and $800M in equity based on the following peers, their asset betas, and a tax rate of 40%
Company A: 3.4, Company B: 2.5, Company C: 2.1, Company D: 4.0
3.45 Levered Beta
Peer average: Unlevered beta of 3
Re-lever at 25% target D/E
3*(1+(1-0.4)*(0.25)=3.45 Levered Beta
Talk me through a football field analysis, how we create it, what it tells us?
The football field analysis provides insight on the proper value of a given entity through various valuation methods (comps, precedent transactions, dcf...). These are typically used as guiding indicators in determining a final transaction valuation.
Current Federal Funds Rate (Nearest 0.1%)
5.33%
Answer and explain the following in the context of an intrinsic valuation:
All else equal, an increase in the constant (perpetuity) growth rate would ________ firm value.
All else equal, an increase in days of sales outstanding would ______ firm value.
All else equal, an increase in (COGS/Sales) would _______ firm value.
Increase
Decrease
Decrease
What is a deferred tax asset? A deferred tax liability?
A deferred tax asset is a future benefit that typically results from negative net income (GAAP tax expense>Tax payable under IRS cash accounting)
A deferred tax liability is a future tax expense typically arising from accelerated depreciation under IRS cash accounting and slower depreciation on GAAP books (GAAP tax expense<IRS tax payable)
Calculate LFCF and UFCF:
EBITDA: 150 EBIT:100 Capital Expenditures: 25
Interest Expense: 25, Non-controlling interest:200, Cash on hand:15
Prior Period NWC: 10 Current Period NWC:15
Tax Rate:40%
UFCF:EBIT(1-T)+DA-capex-increase in NWC
100*(1-.4)+50-25-5=$80
UFCF-$25*(1-.4) =$65 LFCF
Assuming a 30% tax rate, walk me through how all 3 financial statements are affected by a $20 decrease in Deferred Revenue
IS: $20*(1-.3)=$14 increase to net income
CF: NI + $14
D/R -$20
Net Change in Cash - $6
BS: Cash down $6
Deferred revenue (Liability) account -$20
Net change of +$14 balances with increase in SE of $14
What is an "inverted yield curve"?
What does it signify?
Is the "yield curve" currently inverted?
An inverted yield curve is when interest rates on long-term bonds fall lower than those of short-term bonds.
It is viewed as an indicator of recession.
Still inverted moving closer to "normal"
BRUH corp earned $3.71 per share over the last 12 months and is expected to earn $4.22 over the next 12 months. The most comparable firm has a price of $142 and is expected to earn $26.79 over the next 12 months. BRUH has 2,719 shares of common stock outstanding. Given this information, what is your best estimate of the value of BRUH's common equity to the nearest $1?
$60,819 (See Excel)
A company with a P/E of 23 uses 100% equity to buy a company with a P/E of 18. Is this accretive or dilutive?
Accretive; the acquirer is essentially paying less for each dollar of earnings than the market values its own earnings and will therefore be able to issue proportionally fewer shares to finance the transaction.
Earnings will increase proportionally more than share count, resulting in EPS accretion.
Calculate Equity Value given the following:
EV/EBITDA from comparable universe: 4X
Target EBITDA: 2,000,000 Total Debt: 2,000,000 NCI: 500,000
Cash: 1,000,000 Investments in liquid securities: 700,000
$7.2M
Sibley’s Spaghetti is buying $100 worth of new pasta-making equipment with debt. Walk me through how all 3 financial statements are affected:
*Assume no principal is paid off, an interest rate of 10%, and the equipment depreciates at a rate of 10% per year.
Tax rate= 40%
At the start of Year 1 before anything else happens?
At the start of Year 2 ?
Beginning of year 1: No change on IS,
CF: +100 financing inflow, -100 investing outflow (PPE) - No net change in cash
BS: $100 increase in PP&E, $100 increase in notes payable (liability)
Start of year 2:
IS -$10 interest expense -$10 depreciation expenses
-$20*(1-.4) = Net income down $12
CF: NI -12
DA +10
Change in Cash: -$2
BS: PPE -$10
Cash $-2
-$12 balances with change in Stockholders’ Equity -$12
What company recently posted earnings and sky rocketed in stock price?
Nvidia
It is January 1, 2020. Over the next 12 months, IBS Corp is expected to generate free cash flows of $3,060. For 2 years, this free cash flow is expected to grow at a rate of 8%, beyond which point growth is expected to slow to 3% per year in perpetuity. IBS Corp has a wacc of 9% and a 26% tax rate. IBS Corp has $2,366 excess cash, $4,513 debt, $1,627 of preferred stock, and 2,147 shares of common stock outstanding. Assuming cash flows occur at the end of the year, what should be the price per share of IBS Corp stock today to the nearest cent? DO NOT ROUND INTERMEDIATE CALCULATIONS
$24.17 (see Excel)
Determine if the following transactions is accretive or dilutive, and by how much.
Company A is acquiring Company B
Company A: Share Price $30 2,000,000 shares out.
NI: $5,000,000
Company B:250,000 shares out.
NI:$375,000
Transaction info: 60% Equity 30% Debt 10% cash
Price: $15/share $600,000 after-tax hard synergies
Pre-tax cost of debt:4%
Interest on cash reserves:2% Tax rate 20%
Accretive by ~$0.36, $2.86 Pro Forma EPS vs. $2.50 standalone EPS
Calculate pro forma goodwill created from the following acquisition:
Market Cap: 1000 Purchase Premium:30%
Book Value of Equity: $1000 Existing Goodwill: $500
10% tangible asset write-up
5% intangible asset write-up
Tax Rate 20%
$704 of Goodwill Created
Equity Purchase Price: $1300
Book Value-Existing Goodwill= $500 net identifiable assets
1300-500=$800 allocable premium
800*.1=80 tangible asset WU
800*.5=40 intangible WU
120*.2= 24 DTL
800-80-40+24=$704 of goodwill created
Walk me through two ways the three financial statements are linked.
Various Approaches:
Net income on income statement to statement of cash flow to cash on balance sheet and SE.
Through an account: Depreciation flows from (reduction to) PP&E on balance sheet, expressed as an expense on IS, added back to NI to calculate cash flow from operations on statement of cash flows.
What is Jerome Powell's take on interest rate hikes?
Inflation expectations hopefully 2%, fewer rate hikes, rate between 5.2%-5.5%
Hoosier Hotels has 10,000 shares outstanding currently trading at $20 per share.
There are 100 options with an exercise price of $10
50 vested RSUs
100 bonds convertible at price of $10 with a par value of $100.
Calculate equity value using fully diluted shares outstanding if share price remains constant.
11,100*$20=$222,000
Options: are in the money, 100 new shares less ($1000/20)=50 shares repurchased, net change + 50 shares out.
Vested RSUs + 50 shares out
Convertibles:($100/10)*100= +1,000 shares out
Fully Diluted Shares out. = 1,100+10,000 =11,100