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How is synergy quantified in the valuation?
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-Estimate the expected revenue, expense & cost of capital (post-transaction) and integrate into the DCF projection model.
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Where:Vab = Combined value of both firmsVa = A's measure of its own valueVb = The market value of B's sharesP = Premium paid for BE = Expenses in the acquisition process
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Note: If results in negative value, then acquirer would have overpaid.
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In the venture capital arena, how does the development stage of a company effect the discount rate?
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-The early (start-up) stage requires higher rates of return (up to 70%) than do later or Pre-IPO stages.
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What are the 5 main points in regards to debt in the valuation.
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1. Net debt is total interest-bearing debt less cash on hand.2. Assumption: cash is available for debt repayment3. However, should only deduct "excess" cash4. Excess cash is cash "available for distribution"5. Excess cash is cash not need to support the forecast used in the analysis
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What is the Fama-French Three Factor Model?
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-Takes into account not only Beta in predicting expected return, but also two other factors.
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What are the 6 steps in part #2 of the valuation process "Data gathering and analysis"?"FOLEIM"
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1. Financial - Historical F/S's2. Operational - Charecteristics, structure, etc.3. Legal - Relevant legal considerations.4. Economic - Overview of economic climate5. Industry - Overview of industry6. Market - Overview of market
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When preparing a valuation for purposes fo an acquisition under the "Investment" standard, what should be kept in mind?
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-Use buyer specific assumptions in the analysis (discount rate, expectations, synergies, etc.) and valuation is performed in a post-transaction context under IV standard.
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What is an accretive vs dilutive transaction?
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Accretive transactions result from high P/E ratio stock being exchanged for a targets stock with a lower P/E ratio. Dilutive transaction would be the opposite.
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How can channel stuffing be detected through ratio analysis?
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-eg, rapid increase in sales, followed by slowing inventory and recievables turnover may be an indication.
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How is terminal value calculated using a market value approach?
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-Apply P/E multiple to net income in terminal year or multiply EBITDA in terminal year by EBITDA multiple.
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What is channel stuffing?
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-Companies desperate to meet earnings targets "stuff" channels of distribution by, for instance, giving favorable financing terms to retail outlets. This artificially robs future quarters for percieved immediate growth.
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Assumptions:1. The asset under consideration must be capable of being placed into a diversified portfolio.2. Diversification must be relatively easy and costless.
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How is the CAPM model modified for valuing closely held businesses?
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True or False: Enterprise Value = Debt Mkt Value + Equity Mkt Value
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-TrueNote: Mkt Value of "Common" Equity is the object of most valuations.
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1. Small company adjustment, since small caps tend to outperform market because investors require higher returns for the greater risk and...
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2. Low book-to-market ratio adjustment, since investors require higher returns for companies experiencing greater financial difficulties.
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Disc Rate = E/P + Growth %
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Growth is added because discount rate is applied to one period in the future, while the P/E ratio is derived from trailing earnings.
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How are fluctations in net working capital and debt taken into account in a seasonal business?
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-Last 12 month average NWC & debt is derived from the balances at the end of quarters 1 - 4, rather than beg and end of year.
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Note: This is a sanity check only.
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From what are market multiples derived?
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In quantifying synergy, what is the formula for Net Acquisition Value (NAV)?
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NAV = [Vab - (Va +Vb)] - (P+E)
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What is the definition of a seasonal business?
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-One whose revenues & profits fluctuate materially throughout the year, driven by seasonal factors such as weather or major holidays.
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Last twelve months data (LTM)
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What is the Precedent Transaction Method?
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Thus:
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CAPM (expected return) = (CAPM Formula) + Alpha + SCP +SCA
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True or False: Rev Rul 59-60 states that..."there is no general formula that can be applied to the many different valuation situations..."
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-True
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What are the 5 steps in part #4 of the valuation process "Preparation of written report"?"Describe, Describe, Provide, Provide, Provide, "
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1. Describe the definition of the assignment2. Describe the approaches/methods considered and used.3. Provide historical analysis - FOLEIM4. Provide forecast and relevant assumptions.5. Provide valuation analysis and list relevant assumptions.
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Under the 3rd driver of value "Company Specific Factors", what are the 5 Ms Matrix?
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1. Mix of products2. Market charecteristics/competition3. Business Model 4. Depth of Managment5. Money or level of capitalization
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1. Unsystematic risk (Alpha) is assumed to be diversified away in original version, hence can be added back, since the average buyer does not hold diversified portfolio of small to medium-sized businesses.
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2. Small company premiums and Specific company adjustments may also be added.
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What are the 5 steps in part #1 of the valuation process "Definition of the Assignment"?"DDDD E"
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-Describe who has retained who.-Describe the entity & interest under examination.-Describe the purpose and the Objective of the analysis.-Define the Scope & Standard of Value for the analysis.-Establish the "As Of" date of the analysis.
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What are the 3 components of Market Value of Equity (MVE)?
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1. Liquidation preference of preferred stock2. Minority interests3. Common equity
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How is terminal value reconciled under the alternative methods?
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NCF x (1+g)/(K-g) = EBITDA x EBITDA multiple.
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What are the 9 steps in part #3 of the valuation process "Preparation of the Valuation Analysis"?"SAD PPP SDF"
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-Select method - Income, market, and/or Cost-Apply selected methods-Develop justifications for selections-Prepare "Normalized" F/S's-Prepare forecasts-Perform "sanity" checks-Select appropriate methods within each approach-Develop indications of values-Finalize analysis and establish final indication of value.
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What are the 4 main steps in the valuation process?"DD PP"
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1. Definition of the assignment2. Data gathering and analysis3. Preparation of the valuation analysis.4. Preparation of the written report.
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What is the systematic risk principle?
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-The return on a risky portfolio is based solely on its systematic risk, since nonsystematic risk can be diversified away at virtually no cost.
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What is another way to describe Beta?
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-Systematic risk adjustment
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What are the 3 broad "Drivers of Value"?
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1. The broad economy2. Specific industry forces3. Company specific factors (The 5 Ms Matrix)
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What is the formula for deriving a discount rate based on the P/E ratio?
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Take the inverse and add growth.
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