Professional Documents
Culture Documents
1
About Us
• Pillars of Wall Street provides real-world financial training for new and
seasoned professionals, as well as university students
• Founded by experienced financial instructors who are also former
investment bankers, we offer in-house financial training for corporate
clients, university seminars for undergraduates and MBAs as well as public
courses for smaller groups and individuals
• We use our experiences on Wall Street to emphasize practical applications,
applying the same level of dedication in the classroom as that required to
execute deals
• We ensure you are desk-ready through our live instruction and interactive,
learning by doing approach
• You are the pillars of your organization’s success, and we teach you the
pillars that will serve as the cornerstones of your financial career: financial
accounting, financial modeling and Excel, corporate valuation and
transaction structuring
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Key Valuation Concepts
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What is Valuation?
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Who Needs Valuation?
• Investment bankers
• Equity research analysts
• Salespeople and traders
• Private equity / buyout professionals
• Attorneys
• Restructuring professionals
• Credit analysts
• Corporate business development
• Anyone looking to make an investment decision
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Valuation and the Accounting Equation
Net Operating Assets Invested Capital
Operating Assets – Operating = Financial Liabilities – Financial
Liabilities Assets + Shareholders’ Equity
Operating Operating
Operating Liabilities Operating Liabilities
Assets Assets
= Financial = Financial
Liabilities Liabilities
Financial Financial
Assets Assets
Equity Equity
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Valuation and the Accounting Equation
Accounting View of Market View of
Balance Sheet Balance Sheet
= Debt = Debt
Operating Operating
Assets Assets
Equity Equity
Net
Market Value Debt
of Net Enterprise
Operational Value
Assets Equity Value
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Primary Valuation Methodologies
Trading
Comparables
Analysis
Leveraged Transaction
Buyout Comparables
Valuation Analysis
Discounted
Cash Flow
Analysis
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Fundamental vs. Relative Valuation
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Majority vs. Minority Stake
• Minority stake
– Trading Comparables Analysis
– DCF (without synergies)
• Majority stake
– Transaction Comparables Analysis
– LBO
– DCF with synergies (assumes control)
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Equity Value → Enterprise Value
Cash (1)
Debt (2)
Enterprise
Value
(firm value)
Equity
Value
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Calculating Enterprise Value
Problem #1
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Calculating Enterprise Value
Problem #2
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Enterprise Value → Equity Value
Cash (1)
Debt (2)
Enterprise
Value
(firm value) Equity
Value
(residual claim)
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Calculating Equity Value
Problem #1
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Calculating Equity Value and Share Price
Problem #2
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Diluted Shares Outstanding
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Treasury Stock Method
• # of options = 20
• Market price = $10.00
• Strike price = $8.00
• Net new shares created?
Answer:
1) Option proceeds received by company = 20 * $8.00 = $160
2) Shares repurchased with option proceeds = $160 / $10.00 = 16
3) Net new shares = 20 – 16 = 4
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Valuation Checklist: EQ to EV
− Long-term
+ NCI
investments
− Non-core + Preferred
assets stock
Enterprise Equity
Value Value
(residual
(firm value)
claim)
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Valuation Checklist: EV to EQ
+ Long-term
− NCI
investments
+ Non-core − Preferred
assets stock
Enterprise Equity
Value Value
(residual
(firm value)
claim)
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Trading Comparables Analysis
Description Pros Cons
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What Earnings Go With Which Value?
Interest
Cash (1)
Income
Interest
Debt (2)
Expense
Enterprise Revenue
Value EBITDA
(firm value) EBIT Equity
Net Income Value
(residual claim)
= Core, continuing
= Continuing
and controlled
(1) Includes cash, cash equivalents and investments.
(2) Includes financial liabilities, debt equivalents, preferred stock and noncontrolling interest.
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Non-Recurring Items
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Valuing a Target using Trading Comps
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P/E Multiple
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Enterprise Value vs. Equity Value Multiples
Scenario 1 Scenario 2 Scenario 3
Enterprise value 5,000 5,000 5,000
+ Cash 0 800 200
- Debt 0 (200) (1,500)
Equity value 5,000 5,600 3,700
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Uses of Common Multiples
Multiple Comments
• EV / Revenue • Useful for companies with little to no earnings (e.g., tech start up)
• Largely used as sanity check on EV / EBITDA
• Not as relevant since cash flow and profitability not taken into account
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Transaction Comparables Analysis
Description Pros Cons
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Valuing a Target using Transaction Comps
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Discounted Cash Flow Analysis
Description Pros Cons
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Steps to DCF Analysis
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Calculating Unlevered Free Cash Flows
Calculation Comments
EBITDA • Proxy for operating cash flow
– D&A • Need to capture D&A tax shield
= EBIT • Operating profit
– Taxes • Long term effective tax rate * EBIT
= NOPAT • Net operating profit after taxes
+ D&A • Add back non-cash expense
– Capex • Subtract fixed investments
+ / – ∆ in OWC • Add / subtract change in OWC
+ / – ∆ in other • Add / subtract change in other operating items
= Unlevered FCF • Cash flow available to all capital providers
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Weighted Average Cost of Capital
Ke = cost of equity
Kd = cost of debt
E= market value of equity
D= market value of debt
T= marginal tax rate
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Terminal Value
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Calculating Terminal Value
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Discount Cash Flows and Terminal Value
Terminal Value
FCF 5
FCF 4
FCF 3
FCF 2
FCF 1
Enterprise
Value
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Leveraged Buyout Analysis
Description Pros Cons
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Internal Rate of Return
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IRR Calculation
• Note: The basic IRR formula does not incorporate cash dividends
that may be paid to equity holders prior to exit. In practice, this is
uncommon as debt covenants typically prohibit dividends to equity
holders prior to debt being paid in full
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Example: Purchasing a Home
• Purchase home for $500,000
• Finance purchase with 20% down
• Rent home for 5 years
• Pay off $300,000 debt over 5 years and sell home for $500,000
Purchase: $100K Equity / $400K Debt Sale: $400K Equity / $100K Debt
IRR = ?
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LBO Example
Entry Exit (Year 5)
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Football Field
Methodology Implied Share Price Relevant Metrics
Reference Points: Current price (5/30/13): $47.08
52-Week High and Low $32.50 $65.70 52-week high (3/10/13) and low (8/17/12)
Equity Research Price Targets $48.00 $59.00 Price targets for 10 research analysts
Comparable Company Analysis $37.05 $45.43 5.0x – 6.0x FY 2013E EBITDA of $415 mm
Precedent Transactions Analysis $62.83 $71.29 8.0x – 9.0x FY 2012 EBITDA of $419 mm
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Sample Questions
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Sample Questions (Cont’d)
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