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12 Cards in this Set
- Front
- Back
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Walk me through a DCF |
A DCF values a company on the basis of its future cash flows and discounting them to arrive at their present value. First, you project out a company's revenues using assumptions for growth, margins, and changes in operating assets and liabilities; which allows you to calculate the free cash flow for each year. You then discount these cash flows by a discount rate, which is normally the WACC, which allows you to arrive at the Net Present Value for these cash flows. Once you have the present value of these cash flows; we also need to calculate the company's terminal value, which is calculated via the multiples or Gordon Growth method. This terminal value is also discounted to NPV using the discount rate. Finally, having discounted the company's FCF and Terminal value to their NPV, we can add those two to get the company's enterprise value. |
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What are the three major valuation methodologies? |
Public Comps, precedent transactions, and a DCF. |
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What is WACC? |
WACC reflects the "cost" of Equity, debt, and preferred stock. WACC is given as =Cost of Equity*(%Equity) + Cost of Debt*(%Debt)*(1-Tax Rate) + Cost of Preferred Stock*)%Preferred Stock) |
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How do you calculate Cost of Equity? |
Risk-Free Rate + Equity Risk Premium*Levered Beta |
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Walk me through the 3 major financial statements: |
The three financial statements are the income sheet, the balance sheet, and the statement of cash flows. The income statement starts out with revenue on top and then lists the expenses for that revenue, eventually ending with Net Income on the bottom line. The Balance Sheet lists the company's assets, liabilities, and shareholder's equity; which must sum. This demonstrates a company's resources and where they've been obtained from. The Cash Flow Statement starts out with Net Income, less non-cash expenses, as well as any changes in working capital and financing, to get the net change in the bottom. The linkages between the three are that net income flows into shareholder's equity on the balance sheet, changes in working capital on the balance sheet show up on the cash flow statement, and the net change in cash from the cash flow statement shoes up as the new cash number on the balance sheet. |
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What is the difference between levered and unlevered cash flow; and how does it affect a DCF? |
Levered cash flow is the amount of cash a business has after it has paid off its debt and financial obligations; while unlevered cash flow is before such payments have been made. Using levered cash flow gives you the equity value of a business, as all investors have been paid. In contrast, using unlevered cash flow gives you the enterprise value of a business, as it demonstrates the business as a whole. |
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Walk me through how you get from Revenue to Unlevered Free Cash Flow in the projections |
Subtract COGS and Operating Expenses from Revenue to get to Operating Income (EBIT) - or just use the assumed EBIT margin. Then, multiply by (1-Tax Rate), add back in depreciation, amortization, and other non cash charges, as well as the change in operating assets an liabilities. Finally, subtract CapEx to calculate unlevered free cash flow. Levered Free Cash flow is similar, but you also much subtract Net Interest Expense as well as Mandatory Debt Repayments. |
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How do you calculate the Beta in the Cost of Equity calculation? |
Un-Levered Beta =Levered Beta / (1 + ((1 - Tax Rate) x (Total Debt/Equity))) Levered Beta = Un-LeveredBeta x (1 + ((1 - Tax Rate) x (Total Debt/Equity))) |
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What are the most common valuation multiples, and what do they mean? |
Enterprise Value /Revenue: How valuable is a company in relation toits overall sales. Enterprise Value /EBITDA: How valuable is a company in relation toits approximate cash flow. Enterprise Value /EBIT: How valuable is a company in relation tothe pre-tax profit it earns from its core business operations. Price Per Share /Earnings Per Share (P / E): How valuable is acompany in relation to its after-tax profits, inclusive of interest income andexpense and other non-core business activities. |
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Walk me through an LBO Model |
In an LBO Model, Step 1 is making assumptions aboutthe Purchase Price, Debt/Equity ratio, Interest Rate on Debt, and other variables;you might also assume something about the company’s operations, such as RevenueGrowth or Margins, depending on how much information you have. Step 2 is to create a Sources & Uses section,which shows how the transaction is financed and what the capital is used for;it also tells you how much Investor Equity (cash) is required. Step 3 is to adjust the company’s Balance Sheet forthe new Debt and Equity figures, allocate the purchase price, and add inGoodwill & Other Intangibles on the Assets side to make everything balance. In Step 4, you project out the company’s IncomeStatement, Balance Sheet and Cash Flow Statement, and determine how much debtis paid off each year, based on the available Cash Flow and the requiredInterest Payments. Finally, in Step 5,you make assumptions about the exit after several years, usually assuming anEBITDA Exit Multiple, and calculate the return based on how much equity isreturned to the firm. |
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What is the EV formula? |
EV=Market Value of Common Stock+Market Value of Preferred+Market Value of Debt-Cash& Cash Equivalents |
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Walk me through how Depreciation going up by $10 would affect the statements. |
Income Statement: Operating Income would decline by $10 and assuming a 40% tax rate,Net Income would go down by $6. Cash Flow Statement: The Net Income at the top goes down by $6, but the $10Depreciation is a non-cash expense that gets added back, so overall Cash Flow fromOperations goes up by $4. There are no changes elsewhere, so the overall Net Change inCash goes up by $4. Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets sidebecause of the Depreciation, and Cash is up by $4 from the changes on the Cash FlowStatement. Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders’ Equityon the Liabilities & Shareholders’ Equity side is down by $6 and both sides of theBalance Sheet balance. |
