valquiz3review2.pdf - QUIZ 3 REVIEW SESSION Aswath...

QUIZ 3: REVIEW SESSION
Aswath Damodaran

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This quiz will cover…
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RelaEve ValuaEon
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DefiniEonal consistency checks
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DistribuEonal characterisEcs
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Drivers of mulEples
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ApplicaEon tweaks
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Private company valuaEon
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Discount rate adjustments
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Cash flow adjustments
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Post-valuaEon adjustments

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MulEples: The variaEons
Numerator = What you are paying for the asset
Denominator = What you are getting in return
Market value of equity Market value for the firm
Firm value = Market value of equity
+ Market value of debt
Market value of operating assets of firm
Enterprise value (EV) = Market value of equity
+ Market value of debt
- Cash
Revenues
a. Accounting
revenues
b. Drivers
- # Customers
- # Subscribers
= # units
Earnings
a. To Equity investors
- Net Income
- Earnings per share
b. To Firm
- Operating income (EBIT)
Book Value
a. Equity
= BV of equity
b. Firm
= BV of debt + BV of equity
c. Invested Capital
= BV of equity + BV of debt - Cash
Multiple =
Cash flow
a. To Equity
- Net Income + Depreciation
- Free CF to Equity
b. To Firm
- EBIT + DA (EBITDA)
- Free CF to Firm

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Example: Spring 2009 (Problem 1)
You have been asked to assess the relaEve valuaEons of four companies,
with significant cross holdings. You have been provided with the following
informaEon on the companies:
The accounEng numbers (including debt) come from the firm’s consolidated
financial statements , and you can assume that both minority holdings and
minority interests are in market value terms. Based on the EV/EBITDA raEo ,
which of these firms is the cheapest on a consolidated basis, assuming that
they are equivalent on risk and growth characterisEcs?

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SoluEon
Company B is the cheapest company.
Since EBITDA does not reflect income from minority
holdings, subtract minority holdings .
Since EBITDA reflects 100% of consolidated subsidiary’s
income, add minority interests .

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