Finance Exam Review Internal Analysis (Strategy, management, operations, marketing, etc) External Analysis (PEST, competitors, customers,

s, distribution, etc) Ratio Analysis (Leverage, liquidity, profitability, efficiency, etc) DCF Value of asset is the sum of the present value of all future cash flow it is expected to generate over time On a per share basis 1) 2) 3) 4) 5) WACC FCF TV Net Debt Discount

WACC: measure of returns earned across all capital WACC Formula Forward looking Book Value of Debt Market value of Equity Cost of Debt Current market yield on long term debt Coupon on outstanding bonds if recently issued Spread over treasuries given a credit rating Market yield on comparable company long-term debt Worst case: interest expense/ average debt outstanding (affected by debt repayment) Book Value of debt because it is held to maturities Cost of Equity Risk Free rate + Beta*(Rm-Rf) Risk Free Rate = treasury rate typically 10 years 2nd Rf can be different from 1st Rf 2nd = Market Risk Premium (justification needed if assumption) the noise Equity Beta and Asset Beta Equity Beta capture the risk/volatility associated with the entire firmlevered beta Asset Beta capture the risk/volatility associated with only firms assetaka unlevered beta Use Equity Beta in your CAPM calculations May need to look at comparable

 Un-lever, take median, and re-lever with target capital structure Use D/E not D/C Forward looking for all given information Think logically while not getting caught up with numbers WACC for Private Company, you need to adjust valuation by using liquidity premium Liquidity premium: apply a slight premium for WACC, typically 10-40% (WACC*1.1-1.4) to compensate for limited marketability of shares and companys reduced scrutiny (regulatory, accounting, investor, other) FCF EBIT = Revenue Op X EBIT = EBITADA D&A NOPAT = EBIT (1-T) used adjusted EBITDA to the extent information available) adjust for non-recurring items such as legal fees, write downs, and restructuring charges) DIFFERENTIATE YOURSELF Calculate EBITDA with + without synergies Revenue Synergies Resulting from cros-selling and up-selling opportunities Often expensive to capture (additional marketing, sales staff) Cost Synergies More realistic and easier to capture Typically one time reduction (decrease to a lower level, not further) D&A reduce EBITDA by D&A (typcailly as a % of sales) to get EBIT, would be according to case facts ==> JUSTIFY ASSUMPTIONS CapX CapX are capitalized and therefore not included as expense on the companys income statement 2 main categories Maintenance CapX Repair and replace assets, % of sales Growth CapX purchase new assets, future growth rate WC Operating Assets Operating Liabilities Operating Assets All non-Cash Current assets

 Inventory, A/R, prepaid expenses, other current assets Operating Liabilities non interest bearing current liabilities A/R, deferred revenue, other current liabilities Modeling NWC Current Assets Days of Inventory Days of A/R Prepaid Expense (% of Sales) Other Current Assets (% of Sales) Operating Liabilities Days of AP Deferred Revenue (% of Sales) Other Current Liabilities (% of Sales) Change in WC from previous Year TV

find assumed total EV by a trading multiple to a multiple final

year TV=EBITDA x Exit Multiple Exit Multiple = TEV/EBITDA based on target valuation and EBITDA is year n EBITDA TV - Perpetuity The formula TEV = Equity + Net Debt/ Shares Outstanding = Implied Share Price Sensitivity WACC and Terminal Growth Rate Base Case: Best WACC, Base Growth Rate Best Case: Low WACC, High Growth Rate Worst Case: High WACC, Low Growth Rate Other Key drivers of DCF for sensitivity Sales Growth EBITDA Multiple Exit Multiple CapX Range of Implied valuations from your DCF Do not give a single valuation for DCF analysis Growth rate by terminal year is 0 b/c no more growth is can acquired from the synergy

 Use targets WACC for both

Comparable Company Analysis (Relative Valuation) Imply a valuation from the market information of similar firms They share key business and financial characteristics Basis of comparison Business Profile Sector, Products and Services, customers and end markets, distribution channels, geography Financial Profile Size (Market Cap, Profitability, Margins), Growth Profile, ROI Numeric ones then eliminate qualitative ones How Multiple works calculation average or median from set of comparable companies median is better cuz no outliers take note of low and high values to establish range find your companys metric (earnings, earnings per shares, EBITDA) multiple your metric by your markets multiple Price per share/ Earnings per Share x My Earnings per share Price/Earnings Multiple Price per Share/Earnings per Share or Market Capitalization/Net Income Good to use when positive earnings, and comparable with similar geographies Similar capital structures Similar depreciation Earnings/income more indicative of value than cash flow EV/EBITDA Multiple Why? Use P/E when we care about taxes interests and depreciation = Final value, no need to add net debt EBITDA is before of the above, more indicative of cash flow EV/EBITDA =ENterprice Value + net debt / shares = shares Comparable Companies Analysis Investors prefer forward-looking metrics Use Todays price or enterprise value divided by future EPS/EBITDA Benchmarking and what really drives multiples Growth, Risk and Margins

 since growth, risk, and margins drive multiples, compare growth risk and profitability of your comparable if you do have this information This will provide you with context Look at comparable and justify why theyre trading at this price based on growth, risk, and margins Is our multiple justified compared to other competitors? Justification for A+ exams Precedent Transaction Analysis How much did buyers bought similar companies in the past Convert purchase price into a multiple Purchase price = enterprise value (Equity + Net Debt) Considerations How recent is it? Is the other business comparable? Market timing and economic state? Financial or strategic acquisition? Were there synergies and how much ownership was acquired? Control premiums Exam Structure Issue/role/timing (5% of exam) External size up Internal size up Decision criteria Valuation DCF(Stand alone, with synergies) Multiples Valuation (P/E, EV/EBITDA, Precedents) Valuation Range Decision Bidding Strategy Walk Away Price (if M&A) External Analysis PEST Industry Analysis Growth, Risk, Margins (always connect to this?) Interest Rates- ease of borrowing, gives you and idea what is going on in the global economy Competition Barrier to Entry fragmented, price points? KSF Potential Bidders

 Size-up of acquirers industry What are some reasons M&A and IPO Activity? Internal Analysis Operational Capabilities Margins, costs, strengths, weakness, opps, threats, comp advantage, marketing, operations, and managements M&A scenario - size up both acquirer and target Past performance key ratios, recent share price drop? Ownership who owns our company, what implications does this have for an M&A or IPO scenario, connect to how we will bid it? Family owned business? Give them equity and cash, combination to attract? (IMPROTANT) Strategy compatible strategy and complementary with target Are we private? Private or public? We have public debt? How easy to get access to them Valuation and Decisions What should I pay? Why am I interested? How important is it to me? Pay a premium? Competitive implications, synergies, personal outlook different from market outlook How do I finance the transaction? Market timing, ownership, cost of cash, debt, and equity BEST WAY TO USE CASH TO BUY B/C ITS THE CHEAPEST, AFTER IS TO USE DEBT CONSIDER HOW MUCH DEBT THEY ALEADY HAVE EQUITY MOST EXPENSIVE OF THE 3 Alignment with target capital structure Walk away price? Recommendations and Action Plan Recommendations should be summarized paragraphs Be logical and concise Make all major and minor decisions Does the merger or IPO make sense strategically and financially? What are risk and contingencies? Actions Plan Bidding Strategy Decision tree How to finance? Timeline for short and long term goals?

 Relate all of your implications to valuation Keep your valuation in perspective, always relate back to your qualitative size up and analysis of the business Risky business should lead to a lower valuation High growth business should lead to a higher valuation Justify every assumption and be specific Think about the best way to pay for business? Cash is cheapest, then debt then equity Keep ownership in mind important to offer shares IF IPO, 10-15% discount? Just to incentivize to get big investors in Public Firm Vs Private Firm Public announced public immediately Offer to everybody, hard to control how much control you can get Smaller percentage of shares to gain control of the firm Private prices can go back and forth with the amount of shares to purchase under control need 51% to gain control more negotiation merger vs acquisition acquire dont need to consolidate financial statement Un-lever re-lever beta 1) Private company no beta, use comparable Average beta, average D/E, dont do each one separately re-lever based on the target capital structure of out company Industry and target debt 2) target capital structure and what we have right now is different re-lever beta b/c of forward looking DCF negative CF play with G, look at more multiple DCF + DCF/Synergy

 Add preiumum depend on comparable, DCF/Syngergy = benchmark for top, multiple gives u a range, if multiples is at lower end, pay for lower end compared to DCF, multiple help u assess if you should pay for the lower end or higher end of the DCF why pay for 50%+ for the synergy? When you need the deal to happen, if it hurts you more than us, create a strategy to prevent takeover make it interesting for the buyer key player to become after the acquisition pay over soccer field? Like factbook paying over for instagram, but hardly pay over companies /c overpaying and theres only so much to realize M&A Bidding strategy and timeline 1) Start Price 2) 3) Walk-away rice See timeline of Timeline (2-3 months) or (2-3 weeks) need to fast for private b/c others can acqire it as well Contingency Financing Cash, equity, debt cost of bankruptcy, market timing , financial flexibility do not use equity when undervalued Price Timeline (BookBuilding) Contingency, lower price, or issue debt Postpone IPO and try get financing otherwise private equity firm, banks, and other things IPO = maretet time, wait 6 months and redo IPO if current IPO us not at the price that we want .