Accounting
A company’s financial health is summarized by three statements that show its profitability, assets, and cash flow.
What are the Income Statement, Balance Sheet, and Cash Flow Statement?
This represents the total value of a company available to all investors, not just shareholders.
What is Enterprise Value
Rank the Four Valuation Methods from Highest to Lowest Valuation Yielded
What are Precedents, Comps or DCF, LBO
This is the formula for unlevered free cash flow.
What is EBIT × (1 – Tax Rate) + D&A – CapEx – ΔNWC?
These are the three characteristics that make a company a strong LBO candidate.
What are stable cash flows, low CapEx needs, and strong asset base?
This is the accounting principle that ensures revenue and related expenses are recorded in the same period, even if cash hasn’t changed hands.
What is the Matching Principle
This method accounts for in-the-money options when calculating fully diluted shares.
What is the Treasury Stock Method?
This valuation approach uses observable market inputs but is still considered relative rather than intrinsic.
What are Comps
What are the two ways to calculate Terminal Value
This variable has the biggest impact on PE returns.
What is the Exit Multiple (or Exit Value)?
When this non-cash expense increases by $10, Net Income falls by $8 (assuming 20% tax), but cash increases by $2.
What is depreciation
When convertible debt is in the money, how does it affect enterprise value?
What is it increases equity value via dilution but does not change enterprise value, since conversion replaces debt with equity?
When valuing a company with negative EBITDA, bankers often rely on this multiple instead.
What are Revenue Multiples
This happens to a company’s WACC when it increases its leverage.
What is it decreases initially (cheaper debt) but then rises as equity risk increases?
How does increasing leverage affect both IRR and MOIC, assuming constant exit multiple and timing?
What is higher IRR (faster equity payback) but unchanged MOIC (same total value)?
If deferred revenue increases by $10 and the company’s tax rate is 25%, what is the true cash tax impact and why?
What is a $0 cash tax impact because revenue isn’t yet taxable until earned?
In an M&A deal, why could equity value increase while enterprise value decreases?
What is if the company raises equity to pay down debt, reducing EV even as market cap rises?
Why might two companies with identical growth, margins, and risk profiles trade at different EV/EBITDA multiples?
What is differing ROIC, reinvestment needs, or quality of earnings (cash conversion and accounting policies)?
Why, and how do you unlever and relever beta when estimating cost of equity?
What is, to adjust for your capital structure
What is unlever: βU = βL / [1 + (1–T)(D/E)]; relever: βL = βU × [1 + (1–T)(D/E)]?
Why do sponsors prefer debt paydown to multiple expansion when targeting returns?
What is because deleveraging is controllable while exit multiples are market-driven?
If a company reclassifies operating leases under ASC 842, which key ratios and valuation metrics are distorted if not adjusted?
What are EV/EBITDA (EBITDA increases) and leverage ratios (debt rises)?
If a company holds a large minority stake in another firm, under what conditions would you subtract or add that stake when calculating enterprise value?
What is subtracting for non-consolidated affiliates (treated as investments) and adding for consolidated ones with majority control?
If a company’s EV/EBITDA is below peers but its P/E is above, what might explain the divergence?
What is higher leverage or lower interest expense (capital structure effects)?
Name Three ways Increasing the Tax Rate Affects a DCF
1. Lowers FCF--> decreases valuation
2. Lowers cost of debt --> decreases WACC
3. Lowers cost of equity through levered Beta --> decreases WACC
If exit multiple contracts by 1x, how can the PE firm maintain the same IRR?
What is by operationally improving EBITDA or accelerating debt repayment?