Finance Interview Preparation - IIM Calcutta

The companys financial management their investment

This preview shows page 26 - 28 out of 87 pages.

the company's financial management, their investment bankers, and the portfolio managers who are planning to buy stock in the company will ask is: "How much is the company worth?" To obtain a value for the company, they can look at recent comparable transactions. For example, suppose eharvard.com and estanford.com are other health care Internet companies that have recently successfully gone public. The financials of the companies are summarized below. Company Value (Market Cap) (mil) Sales (mil) EBITDA (mil) Earnings (Losses) (mil) Sales Multiples (Market Cap/Sales) Echicago.com ? 80 20 (10) ? Estanford.com 2100 70 17 (12) 30 Eharvard.com 3000 75 18 (8) 40 Because the three companies are in the same industry and have similar financials, the transaction for echicago.com can be valued at multiples similar to those for the other two. The value for echicago.com could be anywhere from 30 x 80 to 40 x 80, i.e. 2,400 to 3,200 millions of dollars, or $2.4 billion to $3.2 billion. (This range in valuation is how bankers would value the company; because of heavy speculation on Internet stocks recently, however, we would not be surprised if valued the company at an even higher price.) Multiples Quite often, there is not enough information to be able to determine the valuation using the comparable transactions method. In these cases, you can value a company based on market valuation multiples. Examples of these valuation multiples include price/earning multiples (also known as P/E ratios, this method, which compares a company's market capitalization to its annual income, is the most commonly used multiple) EBITDA multiples, and others. When using this method, you look at what multiples are used for other companies in the industry. Let's look at an example. What is the value of a company in the semiconductor industry that posts annual sales of $180 million, EBITDA of $70 million, and earnings of $40 million (let's call it Wharton Semiconductor). Companies in the semiconductor industry might be valued with sales multiples, earnings multiples or EBITDA multiples. The numbers used for EBITDA or earnings might be figured for the 12 months trailing (the previous 12 months), the last fiscal year, 12 months projected, or the next fiscal year projected. These figures can be obtained from research reports published by various research departments within investment banks or brokerage houses. Let's assume that there are four semiconductor companies similar to Wharton Semiconductor. An investment bank would perform a "Common Stock Comparison" to determine relevant multiples: Company Value (Market Sales EBITDA Earnings
Image of page 26

Subscribe to view the full document.

27 Cap) Chicago Semiconductor 900 220 115 82 Harvard Semiconductor 700 190 90 60 Kellogg Semiconductor 650 280 68 42 Stanford Semiconductor 320 150 45 26 Company Sales Multiples (Market Cap/Sales) EBITDA Multiples (Market Cap/EBITDA) Price-to- Earnings Multiples (Market Cap/Earnings) Chicago Semiconductor 4.1 7.8 11.0 Harvard Semiconductor 3.7 7.8 11.7 Kellogg Semiconductor 2.3 9.6 15.5 Stanford Semiconductor 2.1 7.1 12.3 Average 3.1 8.1 12.6 Using the average multiples from the Common Stock Comparison, we can estimate Wharton Semiconductor's value as follows:
Image of page 27
Image of page 28

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern