Accounting
What is Net Working Capital?
Current Assets-Current Liabilities
Why do we look at both Enterprise Value and Equity Value?
Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders (equity investors). You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value.
What are the 3 major valuation methodologies?
Comparable Companies, Precedent Transactions and Discounted Cash Flow Analysis.
Walk me through a DCF.
Ill explain.
Walk me through the 3 financial statements.
I can explain
When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?
Enterprise Value, because that’s how much an acquirer really “pays” and includes the often mandatory debt repayment.
When would you not use a DCF in a Valuation?
You do not use a DCF if the company has unstable or unpredictable cash flows (tech or bio-tech startup) or when debt and working capital serve a fundamentally different role. For example, banks and financial institutions do not re-invest debt and working capital is a huge part of their Balance Sheets – so you wouldn’t use a DCF for such companies.
Walk me through how you get from Revenue to Free Cash Flow in the projections.
Revenue-COGS-Operating expenses -d and a to get to EBIT
EBIT(1-tax rate) -change in net working capital- capital expenditures + depreciation
How do the 3 statements link together?
“To tie the statements together, Net Income from the Income Statement flows into Shareholders’ Equity on the Balance Sheet, and into the top line of the Cash Flow Statement. Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt and Shareholders’ Equity. The Cash and Shareholders’ Equity items on the Balance Sheet act as “plugs,” with Cash flowing in from the final line on the Cash Flow Statement.”
What’s the formula for Enterprise Value?
Equity+Debt+Preferred shares + non-controlling interest - cash
What are the most common multiples used in Valuation?
The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price / Earnings per Share), and P/BV (Share Price / Book Value per Share).
How do you calculate WACC?
Cost of Equity * Equity% + Cost of Debt * Debt% * (1-tax rate)
Walk me through how Depreciation going up by $10 would affect the statements.
IS: -6 net income after taxes
CF: -6 net income, +10 depreciation, +4 change in cash
BS: +4 cash on the assets, -10 PPE, -6 Revenue on shareholders equity side
Could a company have a negative Enterprise Value? What would that mean?
Yes. It means that the company has an extremely large cash balance, or an extremely low market capitalization (or both). You see it with: 1. Companies on the brink of bankruptcy. 2. Financial institutions, such as banks, that have large cash balances – but Enterprise Value is not even used for commercial banks in the first place so this doesn’t matter much.
How would you value an apple tree?
The same way you would value a company: by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree’s cash flows (intrinsic valuation). Yes, you could do a DCF for anything – even an apple tree.
How do you calculate the Terminal Value?
You can either apply an exit multiple to the company’s Year 5 EBITDA, EBIT or Free Cash Flow (Multiples Method) or you can use the Gordon Growth method to estimate its value based on its growth rate into perpetuity. The formula for Terminal Value using Gordon Growth is: Terminal Value = Year 5 Free Cash Flow * (1 + Growth Rate) / (Discount Rate – Growth Rate).