Equity Value, Enterprise Value & Multiples and Valuation Quiz Questions 1. You are given the following partial Balance Sheet and share price information. What is the company s Enterprise Value as of April 15? a. $2,235 b. Cannot determine this because we need the Balance Sheet from April 15. c. $2,115 d. $2,360 2. For which of the following reasons is cash *subtracted* when you calculate Enterprise Value? a. Equity Value already implicitly reflects the value of cash on the balance sheet. b. Cash reduces the effective purchase price for a company in a deal, because the buyer keeps it after the transaction. c. Only excess cash above the minimum cash required should be subtracted, but as a simplification you assume that all balance sheet cash is excess. 3. Why do you ADD the value of Noncontrolling Interests to Enterprise Value? a. You do not own 100% of these companies, but you should still add the portions you DO own because they contribute to the overall value of the company. b. Because 100% of the revenue/profits/assets/liabilities of those companies have already been reflected on the financial statements for an apples-to-apples comparison, you should also make sure that 100% of the value of these companies is reflected in Enterprise Value.
c. This is a misleading question it s better to simply remove the revenue/profits/assets/liabilities from the financial statements for the portions of the companies you do NOT own to ensure valid multiples. d. This is a false statement you should actually *subtract* Noncontrolling Interests because you do not own them, and therefore they should not be included in Enterprise Value. 4. How and why is Preferred Stock incorporated into the Enterprise Value calculation? a. Preferred Stock is subtracted in the Enterprise Value calculation because it is already reflected in Equity Value. b. Preferred Stock is subtracted in the Enterprise Value calculation because it is already reflected in Debt. c. Preferred Stock is added in the Enterprise Value calculation because it is similar to Debt investors receive a guaranteed dividend and it represents an additional liability for the buyer to repay. d. Preferred Stock is added in the Enterprise Value calculation because it represents ownership in another company s equity. 5. When calculating Enterprise Value, for which of the following items should you use the MARKET VALUE instead of the Book Value? a. Equity Value (Market Capitalization) b. Debt c. Noncontrolling Interests d. Cash e. Preferred Stock 6. True or False: Exchange-traded options (as opposed to options issued by the company directly to employees) create dilution when the exercise (or strike) price per share is below the current market price per share. a. True b. False Answer the following three questions based on the information below: 7. What is the company s current share price? a. $15.00
b. $10.00 c. $1.36 d. $55.15 8. Under the Treasury Stock Method, what are the diluted shares outstanding? a. 75 b. 90 c. 65 d. 85 9. What is the company s diluted earnings per share (EPS)? a. $1.54 b. $1.36 c. $1.20 d. $1.13 Use the following information to answer the next four questions: A company has $100,000 worth of convertible bonds with a par value of $1,000 and a conversion price of $50.00. 10. How many shares of common stock can one convertible bond be converted into? a. 100 b. 20 c. 50 d. Need additional information to determine this. 11. If the company has a current share price of $60, what is the dilution, in number of common shares created, from these convertible bonds? a. 2,000 b. 1,000 c. 1,917 d. 1,500 12. If the company s current share price were $70 rather than $60, dilution would: a. Increase b. Decrease c. Stay the same 13. If the company s current share price were $40 rather than $60, dilution would: a. Increase b. Decrease c. Stay the same 14. A private company with an enterprise value of $100,000 decides to go public in an Initial Public Offering (IPO). The company raises cash by issuing 1,000 NEW shares for $10/share. What is the company s enterprise value immediately after the IPO? a. $100,000 b. $90,000 c. $110,000
d. $105,000 15. Which of the following items would you be least likely to factor in when calculating Enterprise Value? a. The value of Net Operating Losses b. Equity Investments c. Unfunded Pension Obligations d. Capital Leases 16. Two similar companies in the same industry have different EV / EBITDA multiples, but the same Enterprise Values. Specifically, both companies have an EV of $84, but Company A has a multiple of 7x while Company B has a multiple of 6x. Which of the following could explain why Company B has a lower EV / EBITDA multiple than Company A? a. Company A has better growth prospects than Company B. b. Company A rents its buildings but Company B owns its own properties, and as a result Company A s EBITDA is lower due to the rental expense on the income statement. c. Company B had an unusually good year compared to the rest of the industry, but future years are expected to be more in-line with the industry in terms of growth and margins. d. All of the above. 17. You want to compare the financial performance of several companies, and you re considering using either EBITDA or EBIT as the primary profitability metric. For which of the following situations is EBITDA the better metric to use? a. A company has high CapEx and Depreciation, and you simply want to approximate its cash flow. b. A company has low CapEx and Depreciation, and you simply want to approximate its cash flow. c. You want to compare a set of companies where CapEx and Depreciation as percentages of revenue vary greatly. d. You want to compare a set of companies where some companies rent their properties, while others own them. 18. You are analyzing a set of retail companies where some of them own their buildings, while others rent properties. What is the best metric to use for public comps when you are COMPARING different companies (i.e. NOT approximating cash flow, but attempting to compare companies with different policies)? a. EV / EBITDA b. EV / EBIT c. EV / EBITDAR d. None of the above. 19. Why might a P/E multiple be a poor metric for valuation purposes? a. It is capital structure-dependent and is therefore affected by Cash and Debt levels and the interest rates on those. b. It is affected by tax rates, which could differ from one company to another. c. It is affected by non-cash charges such as Depreciation. d. All of the above.
20. Which of the following answer choices represent DIFFERENCES between Levered Free Cash Flow (AKA Free Cash Flow to Equity) and Unlevered Free Cash Flow (AKA Free Cash Flow to Firm)? a. Levered Free Cash Flow includes the impact of interest expense, but Unlevered Free Cash Flow does not. b. Levered Free Cash Flow represents the cash flow that s available to only equity investors, whereas Unlevered Free Cash Flow is available to debt and equity investors. c. Levered Free Cash Flow includes the impact of mandatory debt repayments, but Unlevered Free Cash Flow does not. d. Levered Free Cash Flow includes the impact of interest income, but Unlevered Free Cash Flow does not. 21. Companies A and B both have revenue of $100 and EV / Revenue multiples of 2.0x. However, Company A has an EV / EBITDA multiple of 5.0x, but Company B has an EV / EBITDA multiple of 8.0x. What is Company A s EBITDA? a. $40 b. $25 c. $50 d. $30 22. True or False: A company can have a negative Equity Value. a. True b. False 23. Let s pretend that you re creating a set of public company comparables (comps) for each of the companies below. Which of the metrics listed below is NOT appropriate for the company type? Select the INCORRECT pairings out of the list below. a. Commercial Bank EV / EBITDA b. Chain of Sporting Goods Stores EV / EBITDAR c. Real Estate Investment Trust (REIT) Equity Value / Adjusted Funds from Operations (AFFO) d. Oil & Gas Company Focused on Exploration & Production (E&P) P / BV e. New Online Social Networking Company with No Revenue or Profits EV / Unique Visitors f. Railroad Company with High Annual CapEx and Depreciation EV / EBITDA 24. There are two main valuation types: relative (based on what other companies are worth) and intrinsic (based on how much cash flow the company generates). Which of the following choices are examples of INTRINSIC valuation? a. Discounted Cash Flow (DCF) b. Public Company Comparables c. Leveraged Buyout (LBO) Model d. Precedent Transactions e. Premiums Paid Analysis f. Dividend Discount Model (DDM) 25. You are selecting a set of Public Company Comparables to value a potential client. What s the BEST method for selecting this set?
a. Choose 30 companies across various industries and in various countries that are similar in size (market cap, revenue, or EBITDA) to your potential client. b. Select a set of 30 companies in your potential client s industry and country of varying size and profitability (market cap, revenue, or EBITDA). c. Pick a set of 6 companies in your target s industry and country that are similar in size (market cap, revenue, or EBITDA) to your target. d. Select one (1) company that is very similar to your potential client in terms of industry, location, size, and profitability. 26. Pretend that the four sets of comparables listed in the previous question were instead sets of precedent transactions. In addition to industry, size, and geography, what other criteria would you ALWAYS use to narrow down your list to an appropriate set? a. Time b. % Cash / Stock Used c. Stock vs. Asset Deal d. Premium Paid for Seller 27. Why do you need to calendarize financial figures in a Public Company Comparables analysis? a. It s not truly necessary this is an optional step, required only if you want to make the results slightly more accurate. b. You only need to calendarize if the fiscal years are misaligned, e.g. if one company s FY ends on September 30 but another company s ends on December 31 and you do it so that you re comparing apples to apples and using financial metrics that cover the same time periods for all the companies. c. You can t just rely on annual numbers in a set of Public Comps, but must instead add in recent quarterly data to be as accurate as possible and this is why you calendarize. d. You have to calendarize for Precedent Transactions, but not for Public Company Comparables. 28. Deferred Revenue is a liability why is it NOT included in the Enterprise Valuation calculation? a. The question premise is false it is included in Enterprise Value. b. Deferred Revenue is almost always written off in a transaction, and therefore does not represent a liability that the buyer must repay. c. Enterprise Value is only concerned with major items like Debt and Equity Value, and so Deferred Revenue is excluded because its value is typically immaterial. d. Deferred Revenue is recognized over the course of a company s normal business operations, and therefore does not represent a liability that the buyer must repay with separate funds in the future. 29. In order to properly compare financial metrics for a set of Public Comps, you exclude (or add back ) unusual or non-recurring items from your calculation of metrics such as EBITDA. Which of the following expenses would you typically exclude? a. Administrative expenses b. Restructuring charges c. Asset write-downs d. Consulting/audit expenses
30. While completing an analysis of Public Company Comparables, you calculate the set of valuation multiples below as of the end of Year 1. Which company is *expected* to have the highest EBITDA growth rate, as a percentage, in Year 2? a. Company A b. Company B c. Company C d. Cannot determine from the calculations above. 31. You ve completed Public Company Comparables and Precedent Transactions analyses. These analyses have median EV / EBITDA multiples of 9.0x and 9.5x, respectively. The company you are analyzing (the target) is currently trading at an 8.0x EV / EBITDA multiple. Relative to the comparables, is the target overvalued or undervalued? a. Undervalued b. Overvalued c. Cannot say without additional information. d. It s neither undervalued nor overvalued. 32. After completing an analysis of Public Company Comparables and Precedent Transactions, you would like to summarize the data. Would it be better to use the mean (average) of your set s EV/ EBITDA multiples or the median (the middle value)? a. The median is best because it dampens the effects of any outliers (unusually high or low multiples). b. The median is best because it will select the middle value; the comp that is closest to this middle value will be the best comparable and you can then use its metrics to value your target. c. The average is best because it incorporates all comparables metrics equally, without adding extra weight to those in the middle of the range. d. The average is best because comp sets are generally small, and using the median can result in skewed results with a small data set. 33. A company with a P / E multiple of 15.0x announces a 2-for-1 stock split. In theory, the P / E multiple should: a. Increase b. Decrease c. Stay the same d. You need to know the terms of the stock split to answer this question
Use the financial statements (Income Statement, Balance Sheet, and Cash Flow Statement) shown below to answer the following questions. All dollar amounts and share counts are in millions, except for per share amounts which are in dollars as stated. Note that Year 0 is a historical year, while Years 1 and 2 are projected years.
34. What is this company s Enterprise Value at the end of Year 0? Assume that the share price is $51.24 and that both short-term and long-term securities count as cash & cash-equivalents. a. $11,325 b. $12,031 c. $11,073
d. $8,957 35. What is this company s EBITDA in Year 0? Assume that Stock-Based Compensation is also added back when calculating EBITDA since it is a non-cash charge. a. $1,631 b. $1,696 c. $1,746 d. $1,709 36. Based on your answers to Questions 34 and 35, what is the company s EV / EBITDA multiple at the end of Year 0? a. 6.7x b. 5.5x c. 7.1x d. 6.6x 37. What is the forward EV / EBITDA multiple expected to be at the end of Year 1? a. 6.0x b. 6.1x c. 4.8x d. 5.9x 38. At a share price of $51.24, what is the company s P / E multiple in Year 0? a. 16.8x b. 17.5x c. 15.5x d. 9.1x 39. From the Cash Flow Statement, we see that the company expects to make a large $2.3 million Capital Expenditure in Year 2, which will be financed partially by raising $1 million of additional Debt. How will this affect the company s EV / EBITDA and EV / EBIT multiples BEYOND Year 2? a. Both multiples will *increase* because Enterprise Value will increase due to cash decreasing from the large Capital Expenditure. b. Both multiples will *decrease* because the Capital Expenditure will result in a higher future Depreciation expense and the additional Debt will result in a higher future interest expense. c. EV / EBIT will *increase* because the Capital Expenditure will result in a higher future Depreciation expense, while EV / EBITDA will remain *constant* because it excludes the Depreciation expense. d. EV / EBITDA will *increase* because the Capital Expenditure will result in a higher future Depreciation expense, while EV / EBIT will remain *constant* because it excludes the Depreciation expense. 40. When is the first time that Levered Free Cash Flow turns negative over these 3 years? a. Year 0 b. Year 1 c. Year 2 d. None of the above it s positive in each year.
41. Which other multiple is MOST similar to Equity Value / Levered Free Cash Flow? a. EV / EBIT, because both of these reflect the partial or full impact of CapEx and the Depreciation resulting from it. b. EV / EBITDA, since EBITDA is an approximation for the cash flow the company generates. c. P / E, because both metrics are Equity Value-based and include taxes, non-cash charges, and the partial or full impact of the company s capital structure. d. P / BV, because Book Value is based on the company s Balance Sheet and Levered FCF also depends on its Balance Sheet since debt and cash come from there.