What are some driving factors behind mergers and acquisitions? Why do mergers and acquisitions happen?
Strategic Financial sponsors / private equity: buying businesses with significant debt to amplify return for investors and reduce initial equity investment
Why do most M&A deals fail to be accretive?
Why do investment banks create more DCF models than LBO models?
LBO models are typically built by private equity firms or for private equity (PE) firms trying to do a leveraged buyout; they involve 3 statements and are quite time consuming. DCFs are much more common for most non-PE companies, and most of a bank’s clients are non-PE. They typically involve forecasting unlevered free cash flows, […]
Is there an interest tax shield on unlevered free cash flows and why? What about depreciation tax shield?
No, unlevered free cash flows (UFCF) do not account for interest income or interest expense. Unlevered free cash flows are before the effects of debt. Therefore, there is no tax shield from interest. However, there is a tax shield from depreciation, since unlevered free cash flow does include depreciation expense before calculating taxes. The formula […]
If you had to do a DCF in 15-30 minutes, which parts would you simplify? Why those specific parts of the model?
These parts take up time since typically, separate models and schedules are built for them. However, they have relatively less of an impact on the valuation output compared to revenue growth, EBITDA margin expansion, WACC, and terminal value.Also, for public companies, costs can be consolidated into cost of goods sold (COGS), selling, general and adminstrative […]
How do you project capex?
Management will often make indications if they are going to be investing more heavily in capex than usual. This information and commentary can be found in earnings transcripts, annual reports, and the MD&A section of quarterly filings. Based on management guidance, we can either put in the capex directly as a $ amount, or drive […]
If the revenue growth for 2020 is 5%, followed by (10%), 14%, and (8%), what questions would you ask about the business?
I would ask what is causing the decline in revenue in 2nd and 4th year. In particular, I would try to figure out if this is a pricing or volume problem, and if it’s cyclical (ie driven by the economy) or non-cyclical. If it’s non-cyclical, I would try to evaluate if the revenue downfalls are […]
What’s the difference between intrinsic and relative valuation?
Intrinsic valuation is based on future cash flows, while relative valuation is based on the multiples that comparable companies are trading at or the multiples that previous acquisitions (precedent transactions) have occurred. Intrinsic valuation is driven more by assumptions while relative valuation is driven by the market.Intrinsic valuation is can be done on companies with […]
Why do so many investors use a DCF?
A DCF model is very useful for understanding a business’s finances inside and out, and seeing how certain changes in revenue growth, gross margins, etc. could effect the company’s enterprise value. Although a DCF can very rarely guess the exact price of a stock or value of a company, it can provide investors with a […]
How would a decrease in net working capital in your DCF? What does that mean?
A decrease in net working capital would increase unlevered free cash flow. It represents less money being tied up in the daily operations of the business. For example, an increase in the number of days it takes us to pay our suppliers (also known as days payable outstanding) would free up cash.
