Would I rather invest in a company with an EV of $2B with 50% equity and 50% debt or

one with an EV of $2B with 100% equity if both EV’s grow by 2x over three years?

The company with 50% debt would yield higher returns (effects of leverage), also make sure to
clarify that the debt stays constant.

If Company B has assets of $100, liabilities of $60, goodwill of $30, EBITDA of $50 and is
valued at 10x EBITDA, what is the pro forma goodwill?

($100-$30)-$60 = $10 (book value of equity), $50 EBITDA*10x = $500 (purchase price) - $10 =
$490. Basically, you find the difference between the purchase price and the book value of equity
to get goodwill.

Company A has an EBT of $300, 50 million shares outstanding, $10 share price;
Company B has a net income of $25. A buys B for 100% stock with a tax rate of 50% at a
transaction value of $200 million. What are the pretax cost synergies required to make
this deal breakeven?

EPS of A initially: $150/50 = $3.0; PF SO = 200/10 + 50 = 70. PF NI = 150 + 25 = 175; PF EPS

= $175/70 = $2.50. Dilution/share = $0.50/share. Pre tax cost synergies = $0.50*70 / (1-50%) =
$70M.

Would you expect LTM EBITDA or NTM EBITDA to be higher?

I said NTM because US GDP, stock market, etc. tend to go up over time, so all things being
equal, NTM EBITDA would be higher.

As a follow up, since NTM is higher, how would you expect EV/EBITDA to perform over
time?

Ambiguous, EBITDA is higher but EV would likely grow too as EBITDA grows.

A company is levered at 10x, with an interest rate of 10% and an EBIT of $100. What is the
coverage ratio?

10x*$100 = $1000. Interest = $100. Coverage = EBIT/Interest = $100/$100 = 1.

Let’s say I have a diamond mine. How would I go about valuing this asset? What if my
MD insisted on using the Gordon Growth Method?

The key point here is that the value is depleted over time, no terminal value into perpetuity.
use negative growth rate if forced to use growth rate.
What is the beta of the diamond mine?

0.

If you had to pick any valuation method, which one would you pick?

Answers can vary. Be sure to mention that they are much more valuable altogether (football field
valuation). I said DCF assuming I am a good modeler and making accurate, unbiased
assumptions. Not sure if there is a correct answer.

If I pick up $50 off the ground does my EV change?

No.

What if I invest it in the business?

I asked to clarify and she said it could be invested in equity for example, so then I said yes, EV
up $50.

What are four reasons a strategic buyer may pay more for a business than a sponsor?

Synergies, historical expertise, intangibles, long term ownership, etc.

When we finance an acquisition, we consider which methods of financing to use. How do

we account for the cost of cash?

Foregone interest rate, usually embedded in PF financial statements, need to factor it out,
also opportunity cost.

Why might we use stock instead of cash or debt?

Preserve liquidity, company may be highly levered already, stock may be overvalued so
earnings yield is cheap, etc.

A company has $100M in revenue, $20M in EBITDA. If revenue increases by 10%, how
much does EBITDA increase?

Ask about cost structure now. Interviewer says 50% VC and 50% FC. $100-$20 = $80 of costs.
$40 are COGS, 60% gross margin. If revenue increases 10%, you keep 6%, or $6. EBITDA up
by $6.
Same company as the previous question, if the business also has $2B in assets, has 3x
D/E, and 2x P/B, what is the market cap?

D/E = 3 = (A-E)/E = 3; A = 4E; 2 = 4E; E = $500M; 2x P/B; 2 = P/B = P/500; P = Mkt Cap
= $1B.

A company has EV/EBITDA of 10x, Net Debt (ND) /EBITDA of 4x, and equity value of
$300M. What is the net debt?

EV/10 = Net Debt/4; 0.4(Equity Value + ND) = ND; 0.4(300+ND) = ND; ND = $200M.

If I have a business with a steady, low growth segment and a volatile, high growth but not
profitable segment, how would I go about valuing this business?

Sum of the parts.

As a follow up, which segment would have a higher discount rate?

High growth business, more volatile = riskier investment and thus higher required rate of return.

Which company would have a higher cost of capital, a company with 50% debt and 50%
equity or a company with 100% equity?

Company with 100% equity (Kd < Ke... higher in cap stack, interest rate usually cheaper than
equity investors because higher priority in event of liquidation, etc.).

How do you find the cost of equity?

Say the whole formula.

Which affects my valuation more? 1) $10 increase in revenue; 2) $10 increase in D&A; 3)
$10 increase in CapEx?

$10 increase in CapEx (closer to bottom line). Revenue comes with associate VCs and a $10
increase in D&A only changes valuation by the tax savings.

Company A acquires Company B with a 70% stake (all cash). Company B: 100 EV, 180 in
assets, 100 in liabilities, 80 in equity. What is the new balance sheet?

A: 130, L: 100, E: 30 (equity is wiped but this is the remaining equity to NCMI)

Name 6 components of total enterprise value?

TEV = Equity Value + Debt + Preferred Stock + Capital Lease Obligations + Unfunded Pension
Obligations – NOLs – Cash + Non-controlling interest

Does Revenue, COGS, or Capex impact a DCF the most? Why?

Capex, then COGS, then Revenue, b/c distance from FCF

What determines how much a line item will affect a DCF?

Distance from the FCF line

What are 5 common ways to value a company?

a. Comparables
b. Precedent Transactions
c. DCF
d. LBO
e. M&A Premium

What are 5 uncommon ways to value a company?

a. NAV
b. Sum of Parts
c. Future Share Price
d. DDM
e. Liquidation

Company A has revenue of 100mm, Company B has revenue of 100mm. When company
A acquires company B, revenues become 300m, with no revenue synergies. How is this
possible?

a. 2 Minority Positions consolidate into a majority, meaning accounting treatment changes such
that all of the third companies revenue is consolidated on the pro forma balance sheet
b. Company A and B both own 40% of company C

What will have a bigger impact on valuation, a 1% change to revenue growth or a 1%

change to the discount rate? Why?

a. 1% change to discount rate, because it is closer to the bottom line of the DCF-

What is the difference between a DTL and Income Tax Payable?

a. An income tax payable is a tax from normal ops

b. A DTL is the diff between cash vs tax schedule on depreciation
If a company has a P/E of 20x, an EV/EBITDA of 10x, Interest Expense of 20m, a 5%
interest rate, depreciation of 20m and a market cap of 200m, what is the company’s tax
rate?

a. Debt = 20 / .05 = 400

b. TEV = 400 + 200 = 600
c. EBITDA = 600 / 10 = 60
d. EBT = 60 - 20 - 20 = 20
e. P/E = 200 / x = 20; x = 10 therefore NI = 10
f. EBT - NI = Taxes = 20 - 10 = 10
g. Tax Rate = 10 / 20 = 50%

If leverage is 10x EBITDA and the cost of debt is 10%, what is the interest coverage ratio?

a. Interest Coverage Ratio = EBITDA / Interest Expense

b. Assume EBITDA is 100
c. Debt = 10*100 = 1000
d. Interest Expense = 1000*.1=100
e. EBITDA / Interest Expense = 100 / 100 = 1x

17) Company A acquires company B. Company A has a P/E of 10, Company B has a P/E
of 15x. Is the deal accretive or dilutive for company A?

a. Dilutive in an all stock deal because buyer P/E < seller P/E
b. If COD is 5% and tax rate is 40%, then what weighting of debt/equity financing would make
the deal neither accretive nor dilutive?
i. Yield of seller = 1/15 = 6.67% = .0667
ii. Set .05*(1-.4)X + .1*(1- X) = .0667
iii. X = .477 = cost of debt; 1- X = .523
c. What about if it’s 50% debt, 25% equity and 25% cash. (5% COD, 40% tax rate, 2% cost of
cash)
i. .05*(1-.4)*.5 + .1*.25 + .02*(1-.4)*.25 = .043
ii. Because .043 < yield of the seller, accretive

In an all-stock transaction, how do you know if the transaction is accretive or dilutive?

If the yield of the seller > cost of stock, then the transaction is accretive

How do you calculate the cost of stock / cost of equity

1 / buyer P/E
Let’s say you have ParentCo, with 2 subs- CoffeeCo and DonutCo. You own 100% of
CoffeeCo, and it has an EBITDA of 100m. CoffeeCo is private. You own 80% of DonutCo
and it has an EBITDA of 200m. It also trades at 5x EBITDA. ParentCo has a share price of
$10, with 100m shares. It has 500m in debt and 200m in cash. What multiple has the
market implicitly assigned to CoffeeCo?

a. ParentCo TEV = 10*100 + 500 – 200 = 1300

b. DonutCo TEV = 200*5 = 1000
c. CoffeeCo TEV = ParentCo TEV – DonutCo TEV = 1300 – 1000 = 300
d. 300 / 100 = 3x

In an all-stock transaction, what happens if the yield of the seller > cost of equity?

The transaction is accretive

Calculate the cost of cash?

Cost of cash = foregone interest on cash * (1 – Tax Rate)

What are the value drivers for an LBO?

a. Leverage to boost returns

b. Increased cash flows (to repay debt and pay interest)
c. Sell Company in the future at a higher price

If I switch from FIFO to LIFO, how does this affect the income statement if there is
inflation?

a. Inflation will increase COGS

b. If selling price increases by full amount then costs increase
c. FIFO will report more GP, NI, PTI, taxes and inventory than FIFO
d. COGS will decrease for FIFO
e. COGS will Increase for LIFO

What happens to COGS in FIFO situations with inflation?

COGS goes down

If you change from LIFO to FIFO and costs are rising, how would this impact your DCF?

It wouldn’t, LIFO to FIFO would increase inventory value, but COGS goes down
IRR Question – Entry: EBITDA $200mm; Valuation @ 10x EV /EBITDA; Leverage @ 6x EV /
EBITDA; Exit: EBITDA $300mm; Valuation @ 10x EV / EBITDA; Leverage @ 4x EBITDA; Is
debt paid down? IRR? MoM?

a. Entry: TEV = 2000; Debt = 1200; MEV = 800

b. Exit: TEV = 3000; Debt = 1200; MEV = 1800
c. MOM = 1800 / 800 = 9 / 4 = 2.25
d. IRR = (2.25)^(1/5)-1

100bps=

1%

Exchange ratio formula for 100% stock deal 2. Exchange ratio if buyer stock price is $50
and target offer price is $70. What is the exchange ratio?

a. Exchange ratio = (offer price/buyer price)*%stock

b. Exchange ratio = $70/$50=1.4 buyer shares issued per target share

4 reasons a strategic can pay more for a target than a financial sponsor. How?

a. Synergies
b. Lower cost of capital
c. Longer investment horizon
d. Lower return thresholds
e. Control premium

Calc implied starting sponsor equity given the following: Required IRR = 25%; Ending
equity value = $306; Exit year = 5

=306/(1+0.25)^5=100.3

Buying a company for 1 billion with 50% cash and 50% debt. You have 100 million asset
write up and a tax rate of 40%. Seller has total assets of 200 million, liabilities of 150
million. How are the BS affected?

a. Assets: -500 cash + 100 asset write-up + 200 seller assets = -200
b. Liabilities: (100*40%) = 40 DTL + 150 seller’s liabilities + 500 debt = 690
c. To balance, need 890 in GW

Calc implied premium paid assuming unaffected share price of $50 and offer price is
$67.50

(67.5/50)-1 = 35%
Find PEG from the following: Share price = 19.67 NI = 34.1 Expected EPS = .89 Expected
EPS growth rate = 12%

PE ratio = stock price / expected EPS = 19.67/.89 PEG = 22.1x/12 = 1.84

Firm A acquired remaining 70% of outstanding shares of Firm B that it did not previously
own for 600mm. Firm B has 120mm of debt and its EBITDA is 80. What is the transaction
multiple of EBITDA?

Gross up purchase to 100% to make use of Comparables that utilize 100% of firm's profits,
therefore 600/.7=857.1mm 2) Add back debt to get EV =857.1mm+120=977.1 3) Divide by
EBITDA to get multiple: 977.1/80=12.2

How are deferred financing fees treated in an LBO analysis?

Add it on the asset side of the balance sheet

Transaction with offer value =800; net debt =250; LTM EBITDA = 100 and pretax synergies
=5. Calc EBITDA multiple adjusted for synergies

a. Transaction value = offer value + debt =800+250=1050

b. Adjusted EBITDA for synergies = 100+5
c. Adjusted EBITDA multiple = 1050/105=7.8x

What happens to the PV of cash flows when using midyear convention?

Midyear convention moves each cash flow up by a half period which increases the PV since
each CF is received earlier

What is systemic risk?

Risk related to the overall market;

What would the impact be on M&A activity if the tax rate were to decrease to 20%?

a. Increased cash repatriation therefore more dry powder available for acquisitions
b. Increased cost of debt therefore increased WACC therefore decreased company valuations

In what cases do you see customers paying upfront in cash but company’s not recording
the cash as revenue?

a. Web-based subscription software

b. Annual contracts for cell phones
c. Subscriptions generally

What does the non-controlling interest line item on the liabilities side of a company’s B/S
correspond to?

a. The portion of the company you don’t own if you own between 50 and 100% of the company
b. If you own 70% of the company the non-controlling interest would be 30%

Why would a company with positive EBITDA over the past 10 years go bankrupt?

a. The company spends too much on CapEx which is not reflected in EBITDA
b. The company has high interest expense and cannot afford its debt
c. The company’s debt all matures on one date and can’t be refinanced therefore the company
runs out of money
d. The company has significant one-time charges from settlements for example

How would depreciation going up by 10 affect the 3 statements?

a. IS
i. EBT would both down by 10
ii. With a 40% tax rate, a 4 dollar tax shield is create because it would be -10 * -.4
iii. The resulting net income would be -6

b. SCF
i. -6 would become the top of the SCF
ii. Add back depreciation of 10 to end up with 4
iii. 4 is the net change in cash

c. BS
i. PPE goes down by 10
ii. Net cash goes up by 4
iii. Net change in assets is -6
iv. B/C net income is -6 the Liabilities and Shareholder’s Equity side is also -6

What happens to the 3 statements which prepaid expenses decrease by 10?

a. IS
i. EBT is down by 10 and NI is thus down by 6

b. SCF
i. Start off at -6 from NI
ii. B/c prepaid expenses is an asset, a decrease in prepaid expenses by 10 leads to an
increase in cash flow by 10
iii. Add back 10 in prepaid expenses in the statement of cash flows
 iv. Net change in cash becomes 4

c. BS
i. Net cash is up by 4
ii. Prepaid expenses are down by 10
iii. Net change in assets is -6
iv. B/c NI is -6 there’s balance

Company sells PPE for 120. On the BS, the PPE is worth 100. What happens to the 3
statements?

a. IS
i. Record a gain of 20 on the sale of assets
ii. EBT increases by 20
iii. At 40% tax rate, 8 dollars in tax expense
iv. Net income is 12

b. SCF
i. Start at 12 from IS
ii. Subtract out the gain of 20 from the sale of the asset
iii. CFO is down by 8
iv. In CFI, record entire amount of sale proceeds of 120
v. Net change in cash is 112

c. BS
i. Cash is up by 112
ii. PPE is down by 100 because you no longer have it
iii. Asset side is up by 12
iv. B/c NI is 12, the L+SE side is also 12 and therefore balances

What happens to the 3 statements when there’s an asset write down of 100?

a. IS
i. 100 write down reduces EBT by 100
ii. With taxes, NI declines by 60

b. SCF
i. Start off at 60 from NI
ii. Add back write down as non-cash expense of 100
iii. CFO increases by 40
iv. Net change in cash is up by 40

c. BS
i. Cash is up by 40
 ii. Asset is down by 100
iii. Net change in assets is -60
iv. L+SE is down by 60 as well due to NI

What is the treatment of an owned debt writedown?

Subtract it from the SCF because non-cash

How would a 100 write down of owned debt affect the 3 statements?

a. IS
i. PTI increases by 100 and NI is up by 60

b. SCF
i. NI is up by 60 for top of SCF
ii. Subtract 100 for debt write down bc it was non-cash
iii. Net change in cash is 40

c. BS
i. Cash is down by 40 therefore assets are down by 40
ii. Debt is down by 100 but stockholder’s equity increases by 60 for a net of 40

In year 1, Apple buys 100 worth of new factories with debt. Start of year 2. Debt is high
yield so no principal is paid off and interest rate is 10%. Factories depreciate at rate of
10% per year. What happens to the 3 statements?

a. IS
i. Operating income decreases by 10 due to depreciation
ii. Operating income decreases by 10 due to interest expense
iii. PTI is reduced by 20 in aggregate
iv. With 40% tax rate, tax shield become 8
v. NI becomes -12

b. SCF
i. This starts off at -12
ii. Depreciation is non-cash expense that is added back at 10
iii. Net change in cash is -2

c. BS
i. Cash goes down by 2 from net change in cash
ii. PPE is down by 10 due to depreciation
iii. Asset side is down by 12
iv. L+SE side is down by 12 bc NI feeds into RE
v. Debt number is unchanged
End of year 2. Factories break down and value is written down to 0. Loan must be repaid
now. How do the 3 statements change from the start of Year 2 to the end of Year 2?

a. IS
i. At end of year 2, value of factories is 80 due to depreciation
ii. 10 dollars in depreciation expense
iii. 80 in write-downs
iv. 10 dollars in interest expense
v. PTI is down 100
vi. At 40% tax rate, tax shield is 40
vii. NI is -60

b. SCF
i. Start at -60
ii. Write down is non-cash expense so add back 80
iii. Depreciation is non-cash expense so add back 10
iv. This leaves you with 30 in CFO
v. For CFI there’s 100 in loan payback as cash outflow
vi. Net change in cash is 70

c. BS
i. Cash is down by 70
ii. PPE has decreased by 90
iii. Assets side is down by 160
iv. Debt is down by 100
v. NI is down by 60
vi. L+SE side is down by 160 therefore balance

Company raises 100 worth of debt at 5% interest and 10% yearly principal payment to
purchase 100 worth of short term securities with 10% interest. What happens at the end
of Year 1 after the company has earned interest and paid pack some debt principal.

a. IS
i. Interest income is 10
ii. Interest expense from debt is 5
iii. PTI increases by 5
iv. Taxes are 2
v. NI is 3

b. SCF
i. Start at 3 from NI
ii. 10 in debt principal is paid back in CFI
iii. Net change in cash is -7
c. BS
i. Cash on Assets side is -7
ii. Assets side is down 7
iii. Debt is down 10
iv. RE are up 3 bc of NI
v. L+SE becomes 7
vi. Balance

Company has NOLs of 100 in DTA line item on BS because it had been unprofitable.
Company turns a profit and has PTI of 200 this year. Walk through the 3 financial
statements assuming NOLs are used as a direct tax deduction on the financial
statements

a. IS
i. Company applies entire NOL balance to offset PTI
ii. PTI falls by 100 and NI falls by 60

b. SCF
i. NI is down by 60 due to IS
ii. Add back NOLs of 100 and call it Deferred Taxes
iii. Cash up by 40

c. BS
i. Cash is up by 40
ii. DTA s down by 100
iii. Asset side is down by 60
iv. SE is down by 60 due to NI therefore balanced

Why do PE firms use leverage when buying a company

a. PE firms can earn higher returns on using less of their own money
b. PE firms have more capital to purchase other companies through using debt and equity

Which variables have the greatest impact on an LBO?

a. Purchase multiple
b. Exit multiple
c. Leverage / Debt used

What does the IRR function translate to?

The discount rate at which the net present value from the investment equals 0
Company has 100 shares outstanding at a share price of 10 each. It has 10 options
outstanding at an exercise price of 5 each. What is the diluted equity value?

a. Basic equity value is 1000 bc 100 shares * 10 = 1000

b. The options outstanding are in the money bc the current share price is above the exercise
price of 5
c. When options are exercised these 10 options becomes 10 shares
d. The number of shares becomes 110
e. The option proceeds are the 10 options * 5 exercise price therefore 50
f. Options proceeds / current share price equals repurchased shares therefore 50/10 =5
g. Diluted shares outstanding = shares outstanding + potential shares – shares repurchased or
100+10-5 or 105
h. Diluted equity value is 105 * 10 per share or 1050

Company has 10000 shares outstanding and a current share price of 20. It has 100
options outstanding at an exercise price of 10. It has 50 RSUs outstanding. It has 100
convertible bonds outstanding at a conversion price of 10 and a par value of 100.

a. Options treatment
i. Bc the 100 options outstanding are in the money, they all get converted into 100
shares
ii. The company receives option proceeds of 100*10 = 1000
iii. Share price is 20 therefore it can repurchase 1000/20 = 50 shares with options
proceeds
iv. There are now 50 shares outstanding bc 100 new shares – 50 repurchases = 50
b. RSU treatment – all 50 RSUs get added as if they’re common shares therefore there’s 100
shares outstanding again
c. Convertible bond treatment
i. Conversion price for convertible bonds is below company’s current share price so
conversion is allowed
ii. Divide the par value by conversion price to see how many new shares per bond get
created: 100/10 = 10 new shares per bond
iii. With 100 convertible bonds outstanding * 10 new shares per bond there are 1000
new shares
d. In total there are 1100 new shares between the options, RSUs and convertible bonds
e. Diluted share count is 10000+1100 = 11100 diluted shares outstanding
f. Diluted equity value is 11,000*20 or 222,000

How do you calculate UFCF?

EBIT*(1-Tax Rate)+ D&A + SBC – Change in NWC – CapEx

Why does an LBO produce a lower valuation than a DCF?

a. With an LBO you do not get any value from the cash flows of a company between year 1 and
the final year
b. You only get the value in the final year

Explain the basic concept of a DCF.

a. You value a company based on the PV of its FCFs far into the future
b. Divide the future into a near future period of 5-10 years
c. Calculate, project, discount and add those FCFs
d. Approximate the far future period FCFs
e. Discount far future period FCFs and discount to the present value
f. Add everything together

Why is debt less expensive than equity?

a. Interest on debt is tax deductible through the tax shield

b. Debt is senior to equity in a firm's capital structure. In a liquidation or bankruptcy, the debt
holders get paid first before the equity holders receive anything. To take on that additional risk,
equity investor demand a superior return

What does the cost of equity tell us?

The return than an equity investor might expect for investing in a given company

How do you unlever beta?

Unlevered beta = levered beta / (1 + (1-tax rate)*(total debt/equity))

Why do you un-lever and re-lever beta when you calculate it based on comps?

a. Betas found online are already levered because company’s stock reflects debt take on
b. Bc each company has different cap structure, need to unlever it to determine a company’s
riskiness regardless
of debt to equity mix
c. You must relever the median unlevered beta to account for the cap structure and total risk of
the company

How would the risk free rate change during a crisis?

It would decrease because governments would drop interest rates to encourage spending
How would the equity risk premium change during a crisis?

Equity risk premium would increase bc investors would demand higher returns before investing
in stocks

How would beta change during a crisis?

Beta would increase due to increased volatility

Why do companies become less valuable as a result of a financial crisis?

The market discounted their future cash flows at higher rates

How do you calculate terminal value?

a. Apply an exit multiple to the Year 5 EBITDA
b. Use the Gordon growth method: Terminal value = final year FCF * (1+g) / (discount rate – g)

2 identical companies. One has debt and one does not. Which has the higher WACC?

The one without debt will have a higher WACC bc debt is less expensive than equity

Why is cash preferred to acquire companies?

a. Cash is cheaper bc interest income generated is less than 5% and foregone interest on cash
is almost always
less than additional interest paid on debt
b. Cash is less risk than debt bc no chance buyer would fail raise sufficient funds from investors
c. Stock is most expensive way to finance transaction bc cost of equity is higher than cost of
debt
d. Buyer’s share price could change dramatically

Buyer pays 100mm for the seller in all stock deal but market decides it’s worth 50mn.
What happens?

Buyer’s share price goes down by the per-share dollar amount that corresponds to 50mm loss
in value

How does you calculate the preferred stock % value of the WACC equation

a. Go to 10Ks to find dividend paid out of preferred stock

b. Figure out how much preferred stock outstanding makes up the total capital structure
c. Divide the dividend by the price of the preferred stock to get the return
Company A buys company B with 100% debt. Company B has a PE multiple of 10x and
Company A has PE multiple of 15x. What interest rate is required on the debt to make the
deal dilutive?

a. Company A Cost of Stock = 1/15 = 6.7%

b. Company B Yield = 1/10 = 10%
c. The after-tax cost of debt must be greater than 10% for the acquisition cost to exceed
company b’s yield
d. 10%/(1-.4) = 16.7%
e. Would say approximately 17% interest rate on debt
f. Bc debt amount is high, the deal would probably be accretive

Company A has PE of 10x, this is higher than PE of Company B. The interest rate on debt
is 5%. If company A acquires Company B and they both have 40% tax rates, should
Company A use debt or stock for the most accretion?

a. Company A Cost of Debt 5%*(1-40%)=3%

b. Company A Cost of Stock = 1/10 = 10%
c. Company B Yield = higher than 10% since PE multiple is lower
d. Deal will always be accretive bc debt and s tock both cost less than the company’s yield
e. More accretion can be achieved using 100% stock bc cost of debt at 3% is much lower than
the cost of stock

Company A has EV of 100, market cap of 80, EBITDA of 10 and NI of 4. Company B has
EV of 40, market cap of 40, EBITDA of 8 and NI of 2.

a. Calculate EV/EBITDA and PE multiples for each

i. Company A: EV/EBITDA=100/10=10x. PE = 80/4 =20x
ii. Company B: EV/EBITDA=40/8=5x. PE = 40/2 = 20x

Company A has EV of 100, market cap of 80, EBITDA of 10 and NI of 4. Company B has
EV of 40, market cap of 40, EBITDA of 8 and NI of 2. Company A has 60 debt and 40 cash.
Company A decided to acquire Company using 100% debt a 10% interest rate and 25%
tax rate to acquire Company B. What are the combined multiples?

a. Add market caps to get combined market caps of 120

b. Combined company has 40 additional debt therefore A has 60 Debt and 40 Cash. EV is
120+60+40-40 = 180
c. Combined EBITDA is 18 and EV/EBITDA = 180/18=10x
d. Interest expense on 40 debt at 10% interest is 4
e. 4*(1-.25) = 3
f. NI falls to 3
g. Combined PE = 120/3 = 40
Acquire 70% of another company with Cash. Company is worth 100, assets of 180,
liabilities of 100, equity of 80.

a. Add seller assets and liabilities to your own but wipe out equity
b. Equity is wiped out bc seller is no longer independent
c. Asset side is up 180 and liabilities side is up 100
d. Subtract 70 cash from asset side so assets are down to 110
e. Bc equity of company was 80 and worth of the company is 100, create 20 good will
f. Add 20 goodwill to asset side to make it go up to 130
g. On liabilities side, create a non-controlling interest of 30 to present 30% of company not
owned
h. Both sides are up by 130

Walk through the balance sheet effects of the following scenario. Buyer has 10,000 in
assets, 8000 in liabilities, and 2000 in Shareholder’s Equity. Seller has 1000 in assets, 800
in liabilities and 200 in shareholder’s equity. Buyer pays 500 for the seller using 100%
cash.

a. Add liabilities to get a combined total of 8800

b. Wipe out seller’s SE to get combined SE of 2000
c. L+SE becomes 10,800
d. Add assets of both companies to get 11000
e. Subtract 500 cash used to purchase the seller
f. Asset side becomes 10,500
g. Create 300 in Goodwill as a plug on the asset side

What factors increase an IRR

a. Lower purchase price
b. Less equity
c. Higher revenue growth
d. Higher EBITDA margins
e. Lower interest rates
f. Lower capex

If the equity of a company is less than its worth or value, what must you include in an
acquisition?

a. The GW for the difference

A company has a revenue of 200, operating margin of 25%, and net income margin of
15%. Using this information, calculate the company’s tax rate. (Assume no interest)
-​ EBIT = 50, NI = 30 → 50*(1-x) = 30 →50-50x = 30 → 20 = 50x → x= 0.4
-​ Answer: 40% tax rate
If Company B has assets of $100, liabilities of $60, goodwill of $30, EBITDA of $50 and is
valued at 10x EBITDA, what is the pro forma goodwill?
-​ ($100-$30)-$60 = $10 (book value of equity), $50 EBITDA*10x = $500 (purchase
price) - $10 = $490. Basically, you find the difference between the purchase price
and the book value of equity to get goodwill.

Company A acquires Company B with a 70% stake (all cash). Company B: 100 EV, 180 in
assets, 100 in liabilities, 80 in equity. What is the new balance sheet?
-​ A: 130, L: 100, E: 30 (equity is wiped but this is the remaining equity to NCMI)

If a company has a P/E of 20x, an EV/EBITDA of 10x, Interest Expense of 20m, a 5%

interest rate, depreciation of 20m and a market cap of 200m, what is the company’s tax
rate?
-​ a. Debt = 20 / .05 = 400
-​ b. TEV = 400 + 200 = 600
-​ c. EBITDA = 600 / 10 = 60
-​ d. EBT = 60 - 20 - 20 = 20
-​ e. P/E = 200 / x = 20; x = 10 therefore NI = 10
-​ f. EBT - NI = Taxes = 20 - 10 = 10
-​ g. Tax Rate = 10 / 20 = 50%

Company has NOLs of 100 in DTA line item on BS because it had been unprofitable.
Company turns a profit and has PTI of 200 this year. Walk through the 3 financial
statements assuming NOLs are used as a direct tax deduction on the financial
statements
-​ a. IS
-​ Company applies entire NOL balance to offset PTI
-​ PTI falls by 100 and NI falls by 60
-​ b. SCF
-​ NI is down by 60 due to IS
-​ Add back NOLs of 100 and call it Deferred T axes
-​ Cash up by 40
-​ c. BS
-​ Cash is up by 40
-​ DTA s down by 100
-​ Asset side is down by 60
-​ SE is down by 60 due to NI therefore balanced

Company acquires a factory for 200 with half debt and half cash. Assuming that the
factory depreciates on a 10 year straight line basis with no salvage value. Interest on the
debt is 10% (half pik, half cash). Walk me through what happens after one year, assume
20% tax rate?
-​ One year
a.​ IS
 i.​ Depreciation of 20 dollars
ii.​ Interest expense of 10 dollars per year
iii.​ Pre Tax income of down 30, taxes break of 6 dollars
iv.​ Net income of down 24
b.​ CS
i.​ Net income of down 24
ii.​ Add back 20 dollars of depreciation (non cash)
iii.​ Add back 5 dollars of PIK interest (what is payment in kind interest,
explain how it benefits both debtors and creditors)
iv.​ Cash Flow from Operations = ^1
v.​ Total Cash flow up 1
c.​ BS
i.​ Cash is equal to up 1
ii.​ PPE is down 20
iii.​ Total Assets is down 19
iv.​ Debt is up 5
v.​ Retaining earnings from net income is down 24
vi.​ L&E equal down 19
-​ Follow up question: At the start of the this year, company pays down 50% of their debt
(point is that they get total debt is now 105)

​ ​ Is. no change

​ ​ B. CS
​ ​ ​ - Cash flow from Financing down 52.5
​ ​ C. BS
​ ​ ​ - Cash flow is down 52.5
​ ​ ​ - debt is down 52.5

Walk me through the statements when stock based compensation goes up $60 with a
20% tax rate.
-​ IS: Stock Based Comp Expense up by $60. Pre Tax Income down by $60. NI
down by $48.
-​ CF: NI down by $48. Add back Stock Based Comp in CFO $60. Net change in
cash is up by $12.
-​ BS: Equity- Stock Based Comp up by $60. NI down by $48. Cash up by $12.
Balances.

Assuming a 30% tax rate, walk me through 3 statements with a: $100 interest expense
(50% cash interest / 50% PIK interest) and $50 interest income
-​ IS: Interest expense is up by $100. interest income of $50. Pre-Tax Income
down by $50. NI down by $35.
-​ CF: NI down by $35. Add back $50 PIK interest. Net change in cash is up by
$15.
-​ BS. Cash up by $15. Liability up by $50 (Interest payable). RE down by $35.
Calculate unlevered free cash flow from net income
-​ NI + Interest and Tax Expense = EBIT - EBIT(1-Tax) + D&A - change in
Working Capital - CapEx

If a company had LTM 10x EV/Rev multiple, 100% rev growth rate, what is NTM rev
multiple?
- Company would have a 5x Ev/Rev assuming no change to EV - try to get them
to mention this
​
A company has EV/EBITDA of 10x, Net Debt (ND) /EBITDA of 4x, and equity value of
$300M. What is the net debt?
-​ EV/10 = Net Debt/4; 0.4(Equity Value + ND) = ND; 0.4(300+ND) = ND; ND =
$200M.

List ways that a company can use cash.

A company borrows $100 of debt to pay a dividend of $100. How does this affect EV?

Calculate Enterprise Value if EPS = 2, shares outstanding = 100, eq, P/E = 4X, Debt = 200,
Non-controlling interest = 75, cash = 50, and inventory = 100

Why would a company choose to issue stock over debt?

Revenue multiple of 5x, 50 million revenue, 100 million senior debt, 200 million junior
debt, 200 million cash. What is the company’s equity value?

$20 N/I, $30 cash, 11x P/E, $50 debt, 8x EV/EBITDA. What is EBITDA?

What kind of industries /companies would have EBITDA close to Net income?

If the business also has $2B in assets, has 3x D/E, and 2x P/B, what is the market cap?
-​ D/E = 3 = (A-E)/E = 3; A = 4E; 2 = 4E; E = $500M; 2x P/B; 2 = P/B = P/500; P =
Mkt Cap = $1B.

How would you calculate beta for a private company?

In what cases would terminal value comprise a high percentage of value in a DCF?

If you are thinking about valuing a business…. Would you rather have a $1 increase in
price of every unit sold, or increase the volume of units sold?
How would 500m loan effect ev and if u used 50m of it to buy a factory

What is generally higher LFCF or UFCF? Can LFCF ever be greater than?

If the EV/ Sales multiple is 2x and the EV/EBITDA multiple is 8x, what is the EBITDA
Margin?

A company has 2 million shares at $50 each and $20 million in convertible bonds, par
$1,000, conversion price $25. How many diluted shares are there?

-​ 1,000/25​=40 shares; 20,000,000/1000​=20,000 bonds; 20,000×40=800,000 new

shares; 20,000×40=800,000 new shares; Total diluted shares = 2,000,000 +
800,000 = 2,800,000

Company A has an Equity Value of $1,000 and Net Income of $100. Company B has a
Purchase Equity Value of $2,000 and Net Income of $[Link] a 100% Stock deal to be
accretive, how much in synergies must be realized?
-​ Comp A PE = $1,000/$100 = 10x Comp B PE = $2,000/$50 = 40xComp A
WACA: 1/10 = 10% Comp B Sellers Yield: 1/40 = 2.5% Need company B to have
a net income greater than or equal to $200 so that their P/E ratio will be LESS
THAN or EQUAL to 10x. After-tax synergies = $150 or more $50 + $150 = $200

Assume company A has 10 shares outstanding at a share price of $25, and its NI is $10. It
acquired Company B for a Purchase Equity Value of $150. Company B has a Net income
of $10 as well. Assume the same tax rates for both companies. A uses all stock to buy B.
How accretive is this deal?
-​ Company a’s EPS is $10/10 = $1
-​ To do the deal Company A must issue 6 new shares since $150/$25 = 6, so the
combined share count is 16
-​ Since no cash or debt were used and the tax rates are the same, the combined
net income = company A net income + company B net income = $10 +$10 = $20
-​ The combined EPs is 20/16 = 1.25, so there’s 25% accretion

Company A has an EBT of $300M, 50 million shares outstanding, $10 share price;
Company B has a net income of $25M. A buys B for 100% stock with a tax rate of 50% at
a transaction value of $200 million. What are the pretax cost synergies required to make
this deal breakeven?
-​ EPSof A initially:$150/50=$3.0;PFSO=200/10+50=[Link]=150+25=175;
PFEPS= $175/70 = $2.50. Dilution/share = $0.50/share. Pre tax cost synergies =
$0.50*70 / (1-50%) = $70M.

Why would a company want to use cash instead of debt or equity in a purchase?
Which would you rather have: $100m of cost synergies or $100m of revenue
synergies(from cross-selling)?

What is the difference between stock and asset sale?

Company A, with a P / E of 25x, acquires Company B for a purchase P / E multiple of

[Link] the deal be accretive?
-​ Yes, 100% stock. Comp A Waca: 1/25 Comp B: 1/15 Accretive

Give me an example of how you might estimate revenue and expense synergies in an
M&A deal.

What is the difference between a bond vs loan?

WACC = 15%, KE of PE firm = 20%, projected IRR = 25%. Is this a good deal? What if the
projected IRR is 18%?
-​ Always compare IRR to WACC. If IRR>WACC, it’s NPV positive so that’s good.

How do we measure returns? Why do we need the two (MOIC and IRR)?

Would you rather have a company that provides services or a company that
manufactures products?

Walk me through the pros and cons of the different exit strategies for a company that is
LBO