DCF, Comparable Companies, Comparable Transaction, LBO Analysis. 12. Of the major valuation methods, which one(s) are based on relative values? on intrinsic values? on ability to pay? Comparable Companies and Comparable Transactions are based on relative value. DCF is based off of intrinsic value. LBO is based off of ability to pay because it considers whether there is enough projected cash flow to operate the company and also pay down debt principal and cover interest payments. The analysis also determines if there is sufficient cash flow to pay dividends at some point to the private equity investor. The ability to retire debt and pay dividends results in a higher IRR.. 13. Suppose you are the sell-side advisor for a multinational household and personal products manufacturer and marketer that sells primarily to the mass consumer markets. The analyst on your deal team prepares the following comparable companies analysis. Which, if any, of the companies in the list would you potentially remove from the analysis? I would potentially remove Procter and Gamble because it is a huge conglomerate company that is much larger than any of the other peers. A company of $230 billion market cap will not be a good peer to a company that won’t operate at nearly that large of capacity with such a vast range of products. 14. Which valuation method tends to show the lowest valuation range? Why? LBO analysis tends to show the lowest and is known as the floor price. This is because this is the price a financial buyer would pay and it does not recognize synergies that would make a
strategic buyer pay more. Comparable companies also gives a low range because it doesn’t take into consideration a control premium, as well. 15. Which of the following companies would make a better LBO target, and why? (a) A diversified manufacturer of consumer snack products, or (b) a manufacturer of factory automation equipment for car makers, agricultural equipment, and other heavy machinery. I believe target A would make a better LBO target because the diversified consumer snack products company tends to have more stable cash flows, as compared to a manufacturer of factory automation equipment for car makers, agricultural equipment, and other heavy machinery. Also, target B may require heavier capital expenditures because it manufactures machinery. Also, consumer snack product manufacturer equipment will probably be easier to sell off than equipment that manufactures factory automation equipment. Chapter 5: Trading 1. When might an investment bank decline participation in an underwriting and why? An investment bank may decline participation in an underwriting when the risk associated with investors not purchasing the underwritten securities at a price equal to or greater than the price that the bank purchased the securities from the issuer is high. If the bank buys the underwritten securities from the issuer at a price higher than what they end up selling them for, then the bank loses money on the deal. Thus, the bank takes this risk into consideration when deciding whether
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- Fall '12
- U.S. Securities and Exchange Commission, investment bank