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Valuation Methods
 
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When valuing a company as a going concern there are three main valuation methods used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions. These are the most common methods of valuation used in investment banking, equity research, private equity, corporate development, mergers & acquisitions (M&A), leveraged buyouts (LBO) and most areas of finance. Click here to learn more about this topic: https://corporatefinanceinstitute.com/resources/knowledge/valuation/valuation-methods/
WST: 4.1 Investment Banking Training - Basic Valuation Methodologies
 
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Wall St. Training Self-Study Instructor, Hamilton Lin, CFA reviews the basic valuation methodologies utilized by investment bankers and professionals to value companies, ranging from trading comps to deal comps to DCF to break-up analysis and other metrics. For more information of the video courses previewed here, go to: http://www.wstselfstudy.com/modules.html Over 80 hours of online, interactive Self-Study Videos! ***YOUTUBE VISITORS ONLY*** 10% off any online course, use Discount code: youtube http://www.wstselfstudy.com Wall St. Training Self-Study provides online, video-based, self-study financial modeling training solutions to Wall Street. Our interactive course modules are Excel-based and specialize in advanced and complex financial modeling, valuation modeling, investment banking, mergers & acquisitions and leveraged buyout training topics. Enhance your skills and master the content required by Wall Street investment banks, M&A, research, asset management, credit, and private equity firms.
Views: 54226 wstss
Discounted Cash Flow (DCF) Model – CH 3 Investment Banking Valuation Rosenbaum
 
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The discount cash flow analysis (DCF) is a fundamental valuation methodology broadly used by investment bankers, corporate officers, and other finance professionals. It is based on the principal that the value of a company can be derived from the PV of its projected free cash flow (FCF). While many videos cover the actual framework and how to build the excel model, the assumptions and thinking behind the model are often left to more “real world” examples. This is that example! Chapter 3 covered topics like; - How do you project revenues for a DCF model? - How many years do you project cashflows for? - What is the exit multiple method? - What is the perpetuity growth method? - How do you project EBITDA for a DCF model? - How do you project EBIT for a DCF model? - How do you project the NWC for a DCF model? - What is the mid-year convention? - How do you calculate unlevered free cash flow? For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles Videos referenced; Estimating Cost of Debt For WACC: https://www.youtube.com/watch?v=CSkPlxEe-dY Estimating Cost Of Equity For WACC: https://www.youtube.com/watch?v=ZigyWoDAMrE Projecting NWC; https://www.youtube.com/watch?v=2E1Hca2dVbI Why Is Your DCF Model Incorrect? https://www.youtube.com/watch?v=ByyK0AMuLxc
Views: 5768 FinanceKid
Equity Value vs. Enterprise Value and Valuation Multiples
 
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Learn how Equity Value and Enterprise Value change when a company issues debt, pays off debt, issues equity, and repurchases shares. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" The key point is that regardless of how a company is financed, its Enterprise Value - and Enterprise Value-based multiples - do NOT change. Equity Value, however, may change depending on its share count and any shares it issues or repurchases. So even when a company changes its debt or equity or cash levels, valuation multiples such as EV / EBITDA and EV / Revenue will not change immediately afterward... whereas a multiple such as P / E (Price Per Share / Earnings Per Share, or Equity Value / Net Income) will change if new equity has been issued. It's just like when you buy a house - house is worth $500K regardless of whether you pay with 100% cash or 50% cash and 50% debt, or anything else in between... but depending on how much cash and debt you use, your own EQUITY IN THAT HOUSE will be different. The $500K total value of the house is like the Enterprise Value for a company. And if you contribute $250K of your own cash and take on a $250K mortgage, the $250K you chip in is your "Equity Value" and the $250K mortgage is the "Debt." Over time, your own "Equity Value" in that house will increase and your own "Debt" will decrease as you repay the mortgage, but the $500K total value for the house stays the same as long as the house's intrinsic value remains the same. This example uses Coca-Cola's filings and financial statements - you can find them and try this yourself right here: http://www.coca-colacompany.com/investors/annual-other-reports http://www.coca-colacompany.com/investors/investors-info-quarterly-filings (NOTE: The numbers, of course, will be different if you look at this video at a later date, but the concept remains the same and has always been the same ever since Equity Value and Enterprise Value were invented.) MENTIONED RESOURCES http://youtube-breakingintowallstreet-com.s3.amazonaws.com/KO-Equity-Value-Enterprise-Value.xlsx
3 ways to value a company - MoneyWeek Investment Tutorials
 
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Valuing a company is more art than science. Tim Bennett explains why and introduces three ways potential investors can get started. Related links… • How to value a company using discounted cash flow (DCF) - https://www.youtube.com/watch?v=jfcRUzKZZE8 • How to value a company using net assets - https://www.youtube.com/watch?v=rV68zoBKTJE • What is a balance sheet? https://www.youtube.com/watch?v=DuKEcxVplnY MoneyWeek videos are designed to help you become a better investor, and to give you a better understanding of the markets. They’re aimed at both beginners and more experienced investors. In all our videos we explain things in an easy-to-understand way. Some videos are about important ideas and concepts. Others are about investment stories and themes in the news. The emphasis is on clarity and brevity. We don’t want to waste your time with a 20-minute video that could easily be so much shorter.
Views: 236599 MoneyWeek
WACC, Cost of Equity, and Cost of Debt in a DCF
 
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In this WACC and Cost of Equity tutorial, you'll learn how changes to assumptions in a DCF impact variables like the Cost of Equity, Cost of Debt. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You'll also learn about WACC (Weighted Average Cost of Capital) - and why it is not always so straightforward to answer these questions in interviews. Table of Contents: 2:22 Why Everything is Interrelated 4:22 Summary of Factors That Impact a DCF 6:37 Changes to Debt Percentages in the Capital Structure 11:38 The Risk-Free Rate, Equity Risk Premium, and Beta 12:49 The Tax Rate 14:55 Recap and Summary Why Do WACC, the Cost of Equity, and the Cost of Debt Matter? This is a VERY common interview question: "If a company goes from 10% debt to 30% debt, does its WACC increase or decrease?" "What if the Risk-Free Rate changes? How is everything else impacted?" "What if the company is bigger / smaller?" Plus, you need to use these concepts on the job all the time when valuing companies… these "costs" represent your opportunity cost from investing in a specific company, and you use them to evaluate that company's cash flows and determine how much the company is worth to you. EX: If you can get a 10% yield by investing in other, similar companies in this market, you'd evaluate this company's cash flows against that 10% "discount rate"… …and if this company's debt, tax rate, or overall size changes, you better know how the discount rate also changes! It could easily change the company's value to you, the investor. The Most Important Concept… Everything is interrelated - in other words, more debt will impact BOTH the equity AND the debt investors! Why? Because additional leverage makes the company riskier for everyone involved. The chance of bankruptcy is higher, so the "cost" even to the equity investors increases. AND: Other variables like the Risk-Free Rate will end up impacting everything, including Cost of Equity and Cost of Debt, because both of them are tied to overall interest rates on "safe" government bonds. Tricky: Some changes only make an impact when a company actually has debt (changes to the tax rate), and you can't always predict how the value derived from a DCF will change in response to this. Changes to the DCF Analysis and the Impact on Cost of Equity, Cost of Debt, WACC, and Implied Value: Smaller Company: Cost of Debt, Equity, and WACC are all higher. Bigger Company: Cost of Debt, Equity, and WACC are all lower. * Assuming the same capital structure percentages - if the capital structure is NOT the same, this could go either way. Emerging Market: Cost of Debt, Equity, and WACC are all higher. No Debt to Some Debt: Cost of Equity and Cost of Debt are higher. WACC is lower at first, but eventually higher. Some Debt to No Debt: Cost of Equity and Cost of Debt are lower. It's impossible to say how WACC changes because it depends on where you are in the "U-shaped curve" - if you're above the debt % that minimizes WACC, WACC will decrease. Otherwise, if you're at that minimum or below it, WACC will increase. Higher Risk-Free Rate: Cost of Equity, Debt, and WACC are all higher; they're all lower with a lower Risk-Free Rate. Higher Equity Risk Premium and Higher Beta: Cost of Equity is higher, and so is WACC; Cost of Debt doesn't change in a predictable way in response to these. When these are lower, Cost of Equity and WACC are both lower. Higher Tax Rate: Cost of Equity, Debt, and WACC are all lower; they're higher when the tax rate is lower. ** Assumes the company has debt - if it does not, taxes don't make an impact because there is no tax benefit to interest paid on debt.
Valuation and Discounted Cash Flow Analysis (DCF)
 
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Here's a quick overview on Valuation. We also construct an entire discounted cash flow analysis on WalMart in conjunction with my book Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity http://www.amazon.com/Financial-Modeling-Valuation-Practical-Investment/dp/1118558766/ref=sr_1_8?ie=UTF8&qid=1422553204&sr=8-8&keywords=valuation
Views: 82491 Paul Pignataro
Warren Buffett - Earnings Are Key to Valuing Banks
 
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How I Make $20,000 Investing Online 1. Sign up for FREE: http://2by.us/money 2. Turn on Auto-trading mode 3. Enjoy Profit Warren Buffett - Earnings Are Key to Valuing Banks Warren Buffett - Earnings Are Key to Valuing Banks Warren Buffett - Earnings Are Key to Valuing Banks Warren Buffett - Earnings Are Key to Valuing Banks Warren Buffett - Earnings Are Key to Valuing Banks https://www.youtube.com/watch?v=wAeq2jD6HNU Sub: https://www.youtube.com/channel/UCh97U0WgzDvTDnf1us3A6Aw invest, investing, money, cash, dollar, euro, make money, start up, buffett, documentary, hd, stock, market, financial,
Views: 1648 Investor Network
Dividend Discount Model - Commercial Bank Valuation (FIG)
 
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Why the Dividend Discount Model (DDM) is used to value commercial banks instead of the traditional Discounted Cash Flow (DCF) analysis. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" There are 3 main reasons why the DCF and the concept of Free Cash Flow (FCF) do not apply to commercial banks: 1. You can't separate operating vs. investing vs. financing activities - the lines are very blurry for a bank, since items like debt are more operationally-related and fund the bank's lending activities. 2. CapEx doesn't represent re-investment in the business, as it does for a normal company - for a bank,"re-investment" means hiring people, doing more lending, etc. 3. Working Capital represents something much different for a bank - the standard definition of Current Assets Excl. Cash Minus Current Liabilities Excl. Debt makes no sense, because for banks that includes tons of investments, securities, other borrowings, etc. so you could see massive swings... What You Do Instead - Use Dividends as a Proxy for Free Cash Flow Why? Because banks are CONSTRAINED by capital requirements - according to the Basel accords (I, II, III), they must maintain a certain "buffer" at all times to cover unexpected losses on their loans... So just like CapEx requirements, Net Income growth, and Working Capital constrain FCF for normal companies, the Tier 1 Capital / Tangible Common Equity / Total Capital requirements constrain dividends for banks. So we'll project a bank's regulatory capital, its asset growth, and its net income, and use those to project its dividends - then, discount, and sum up the dividends and discount and add the NPV of its terminal value. How to Set Up a Dividend Discount Model (DDM) 1. Make assumptions for Total Assets, Asset Growth, targeted Tier 1 (or other) Ratios, Risk-Weighted Assets, Return on Assets (ROA) or Return on Equity (ROE), and Cost of Equity. 2. Next, project Assets and Risk-Weighted Assets. 3. Then, project Net Income based on ROA or ROE. 4. Then, project Shareholders' Equity (AKA Tier 1 Capital) based on targeted capital ratio... 5. And BACK INTO dividends! Different from a normal company's DDM! Set dividends such that the minimum capital ratio is maintained, based on starting Shareholders' Equity and Net Income that year. 6. Flesh out the rest of the model - stats, growth rates, other metrics. 7. Discount and sum up dividends. 8. Calculate, discount, and add Terminal Value so that NPV = NPV of Terminal Value + NPV of All Dividends. 9. Calculate the Implied Share Price and compare to actual Share Price. Is the bank undervalued? Overvalued? What are the clues so far? What Next? Try it with a real company, using its historical financial information. Add more complex / realistic assumptions, based on industry research, channel checks, the bank's own strengths/weaknesses, etc. Add more advanced features - other ways to calculate Terminal Value, more accurate regulatory capital, mid-year discount and/or stub periods, stock issuances / repurchases, multiple growth stages, and so on.
Comparable Companies Analysis – CH 1 Investment Banking Valuation Rosenbaum
 
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In this video, I provide a comprehensive overview of the comparable companies analysis used in investment banking and the different steps needed to offer a defensible valuation range. The video is long but offers all the information you need to know for an entry level analyst and any student looking to prepare for a related interview. I am working off the second edition Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions textbook by Joshua Rosenbaum and Joshua Pearl. Chapter 1 covered topics like; - Finding the right universe of comparable companies using business and financial characteristics - Enterprise and equity value multiples - Treasury stock and if-converted methods for fully diluted shares - Net share settlement method (NSS) - Calendarization of financial data - Adjustments for non-recurring items - Benchmarking and valuation For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 6360 FinanceKid
Valuation Methodologies - Investment Banking University
 
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Valuation Methodologies 1. Public Company Valuation TEV = MVE + Debt + Preferred + Minority - Cash 2. Comp Companies – Also known as trading comps. Management team gives you 1 to 2 years projections or equity research comp reports to get forward multiples (x Revenue or x EBITDA ) which may be used as the basis for this valuation. You can get comps from the general overview as it will discuss the target’s comps in the 10K. Find comps with good multiples to then tell your story to the marketplace to then get a certain valuation. a. Select the universe of comparable companies – Choose 7, 8, 10 comps, need their 10K, 10Q, analyst reports to get TEV for each comp then divide by line item to get multiple. b. Locate financial information on comp companies – Information must come from latest filing (10K or 10Q). Print out 10K, 10Q, analyst reports. c. Spread key financial information, ratios and multiples – Calculate TEV (in comp spread tab). To get MVE, use TSM method. TSM = Exercisable options outstanding x (share price – strike) / share price. d. Benchmark comp companies – Get the multiple that the company is trading at for each metric for each comp and get mean and median of comps for the metrics (ex. TEV/EBITDA) e. Determine implied valuation – Multiply mean and median multiple x the revenue or EBITDA to get the valuation range for your target company. Notes: The better the company, the higher the multiple and the better valuation you get. In IB/PE/CorpFin, you need to know comp companies and transaction comps. “Here are the comps in your sector…” Higher multiple because… Operating in better markets, better operations The multiple tells you which company is better, margin analysis tells you why they are better. Sell side key question: “Which comp would you use to guide potential buyers?” 3. Precedent Transactions – comp transactions a. Select universe of comp transactions b. Locate deal-related and financial information – Need press release of the deal, 8K, 10K, and 10Q. Type of payment: cash, stock, cash & stock. c. Spread financial information, ratios and multiples – Get transaction TEV (implied) & transaction MVE (implied) d. Benchmark precedent transactions e. Determine implied valuation Notes: 20% to 25% control premium paid with the transaction multiple being an implied one based upon the valuation. Determine whether the market is good or bad based upon whether people are paying good premiums (control premiums). When a transaction occurs, update client on the latest transaction to show them impact on the control premiums being paid and implied multiple as well. Point to the transaction comps that have the highest control premium. 4. Discounted Cash Flow (DCF) a. Spread historical financial statements (input historicals) and derive historical ratios, trends and variables (drivers of future performance; margins and growth rates). Project financial statements (proforma). Revolver modeling to link IS, BS, and SCF b. Project free cash flow (FCF) c. Determine Weighted Average Cost of Capital (WACC) – Discount rate Cost of equity: Rf = 10 year treasury Market risk premium = Rm – Rf. Refer to Ibbotson. Ultimately this is S&P returns over 70, 80, or 90 years Beta = Levered beta of comps to unlevered median and mean of comps (unlevered beta); should be .5 to 2.5; 2 year to 5 year betas (taking out capital structure and relever to actual capital structure. With beta, we are putting capital structure on unlevered beta mean and median of comps to calculate WACC of own company. Cost of debt: weighted average of tranches of debt tax effected; found in 10K. Rates from the notes. If private company, get from clients the tranches and to get rates, go to DCM to get approximation. Cost of equity 20% to 25% in private markets. No use of debt is an inefficient use of capital. Trying to optimize the D/E ratio to minimize cost of financing. d. Determine terminal value – EBITDA multiple which is going to be almost 80% of the company value. Terminal value = LTM multiple from comps x EBITDA. Perpetuity growth rate should be 2.5% to 3% and should not be larger than the size of the GDP of the country e. Calculate net present value (NPV) and determine implied valuation
Investment Banking Mock Interview: What is an LBO?
 
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In this video, Joshua Rosenbaum and Joshua Pearl, authors of the highly acclaimed and authoritative textbook, Investment Banking, walk you through some common technical questions asked during the investment banking interview process, specifically "What is an LBO?" You can access more investment banking mock interview and training videos at http://www.efficientlearning.com/investment-banking/
Views: 47783 Wiley Finance
Simple LBO Model - Case Study and Tutorial
 
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In this LBO Model tutorial, you'll learn how to build a very simple LBO model "on paper" that you can use to answer quick questions in PE (and other) interviews. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" This matters because in many cases, they'll ask you to calculate numbers such as IRR and multiple of invested capital very quickly and will not actually ask you to build a more complex model until later in the process. You should always START this exercise by looking at the actual question or set of questions they are asking you: "Calculate the purchase price required for ABC Capital to obtain a 3.0x multiple of invested capital (MOIC) if it plans to sell OpCo after five years at an EV / EBITDA multiple of 6.0x." So they're giving you the exit multiple and the return on investment that the PE firm is targeting, and you have to figure out the initial purchase price by "working backwards." Here's how we interpret each line in this case study and use it in the model: "OpCo currently has EBITDA of $250mm, and ABC believes that the new management team could keep EBITDA flat for the next 5 years." This tells you to make the initial EBITDA $250mm and keep it at that level for 5 years - skip revenue, COGS, OpEx, and everything else because none of that matters if this is all they give you. "ABC Capital has obtained debt financing of $750mm at 10% interest, and OpCo expects working capital to be a source of funds at $6mm per year." The initial debt balance is $750mm and there's a 10% interest rate, so the interest expense will be $75mm per year. In the "Cash Flow Statement Adjustments", since Working Capital is a SOURCE of funds it will add $6mm to cash flow each year. "OpCo requires capital expenditures of $35mm per year, and it has a tax rate of 40%. Assume no transaction fees, zero minimum cash required, and that PP&E on the balance sheet remains constant for the next 5 years." Also in the CFS section, CapEx = $35mm per year, and Depreciation also equals $35mm per year since the PP&E balance does not change at all. So you can also fill in the Depreciation figure on the Income Statement. No transaction fees and no minimum cash requirement simplify the purchase price and debt repayment - although we don't even have debt repayment here. "Assume that excess cash is NOT used to repay debt, and instead simply accumulates on the Balance Sheet." This makes the final numbers easier to calculate, since interest expense will never change and you can simply add up cash generated to get to the final cash number at the end. PROCESS: 1. Start with the Income Statement - EBITDA is $250mm per year. Subtract Depreciation of $35mm per year, and interest of $75mm per year. So EBIT = $140mm. Taxes = $140mm * 40%, so Net Income = $140mm - $56mm = $84mm. 2. On the simplified CFS, Net Income = $84mm, Depreciation = $35mm, Change in Working Capital = $6mm, CapEx = ($35mm), so Cash Generated per year = $90mm. 3. EBITDA Exit Multiple = 6.0x, and final year EBITDA = $250mm, so Exit EV = $1.5B. Subtract the outstanding debt of $750mm and add the cash generated in this period of $450mm, so Equity Proceeds = $1.2B. 4. Targeted MOIC = 3.0x so the PE firm would have to invest $400mm in the beginning. $400mm equity + $750mm debt = $1.150B, so the purchase multiple is $1,150 / $250 = 4.6x. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-04-Simple-LBO-Model.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-04-Simple-LBO-Model.xlsx
What's in an Equity Research Report?
 
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In this tutorial, you'll learn what goes into an equity research report, including how it differs from a stock pitch in terms of structure and argument, the main sections of the reports, and how you might write your own reports. http://www.mergersandinquisitions.com/equity-research-report/ Table of Contents: 1:43 Part 1: Stock Pitches vs. Equity Research Reports 6:00 Part 2: The 4 Main Differences in Research Reports 12:46 Part 3: Sample Reports and the Typical Sections 20:53 Recap and Summary Part 1: Stock Pitches vs. Equity Research Reports The main difference is that equity research reports are like "watered-down" stock pitches: you still recommend for or against investment in a public company, but your views are weaker, "Sell" recommendations are rare, and you spend a lot more time describing the company and its operations and financials. By contrast, in hedge fund stock pitches you take more extreme views and spend more time explaining how your views differ from those of the market as a whole. Part 2: The 4 Main Differences in Research Reports 1) There's More Emphasis on Recent Results and Announcements 2) Far-Outside-the-Mainstream Views Are Less Common 3) Research Reports Give "Target Prices" Rather Than Target Price Ranges 4) The Investment Thesis, Catalysts, and Risk Factors Are "Looser" Part 3: Sample Reports and the Typical Sections The main sections of a report are as follows: Page 1: Update, Rating, Price Target, and Recent Results The first page of an "Update" report states the bank's recommendation (Buy, Hold, or Sell, sometimes with slightly different terminology), and gives recent updates on the company. A specific "target price" must be based on specific multiples and specific assumptions in a DCF or DDM. So with Jazz, we explain that the $170.00 target is based on 20.7x and 15.3x EV/EBITDA multiples for the comps, and a discount rate of 8.07% and Terminal FCF growth rate of 0.3% in the DCF. Next: Operations and Financial Summary Next, you'll see a section with lots of graphs and charts detailing the company's financial performance, market share, and important metrics and ratios. For a pharmaceutical company like Jazz, you might see revenue by product, pricing and # of patients per product per year, and EBITDA margins. For a commercial bank like Shawbrook, you might see loan growth, interest rates, interest income and net income, and regulatory capital figures such as the Common Equity Tier 1 (CET 1) and Tangible Common Equity (TCE) ratios: This section of the report explains how the research analyst/associate forecast the company's performance and came up with the numbers used in the valuation. Valuation The valuation section is the one that's most similar in a research report and a stock pitch. In both fields, you explain how you arrived at the company's implied value, which usually involves pasting in a DCF or DDM analysis and comparable companies and transactions. The methodologies are the same, but the assumptions might differ substantially. In research, you're also more likely to point to specific multiples, such as the 75th percentile EV/EBITDA multiple, and explain why they are the most meaningful ones. Investment Thesis, Catalysts, and Risks This section is short, and it is more of an afterthought than anything else. We do give reasons for why these companies might be mispriced, but the reasoning isn't that detailed and it's not linked to specific share prices. Banks present Investment Risks mostly so they can say, "Well, we warned you there were risks and that our recommendation might be wrong." http://www.mergersandinquisitions.com/equity-research-report/
Investment Banking Interview Preparation
 
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This is an overview of what to expect in a first round investment banking interview.
Views: 160571 Paul Pignataro
Valuation DCF Case Study
 
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In class today we went through a DCF case study example. This was similar to a portion of a bulge bracket bank final round case one of our past students had provided for us. My fourth book coming out this month will be pages of similar case studies increasing in difficulty to best prepare a candidate for investment banking interviews. https://www.amazon.com/Technical-Interview-Investment-Banking-Website/dp/1119161398/ref=sr_1_4?ie=UTF8&qid=1486645420&sr=8-4&keywords=pignataro
Views: 9809 Paul Pignataro
WST: 4.7 Investment Banking Training - Valuation Control Premiums Paid
 
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Wall St. Training Self-Study Instructor, Hamilton Lin, CFA explores the logic underpinning how to value control premiums based on premiums paid to stock prices of publicly trade companies. For more information of the video courses previewed here, go to: http://www.wstselfstudy.com/modules.html Over 80 hours of online, interactive Self-Study Videos! ***YOUTUBE VISITORS ONLY*** 10% off any online course, use Discount code: youtube http://www.wstselfstudy.com Wall St. Training Self-Study provides online, video-based, self-study financial modeling training solutions to Wall Street. Our interactive course modules are Excel-based and specialize in advanced and complex financial modeling, valuation modeling, investment banking, mergers & acquisitions and leveraged buyout training topics. Enhance your skills and master the content required by Wall Street investment banks, M&A, research, asset management, credit, and private equity firms.
Views: 6343 wstss
Key Financial Metrics and Ratios: ROA, ROE, and ROIC
 
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Learn key financial metrics & ratios to analyze companies financial statements. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You’ll learn about the key metrics and ratios used to analyze companies’ financial statements, including Return on Equity (ROE), Return on Assets (ROA), and Return on Invested Capital (ROIC), as well as Inventory Turnover, Receivables Turnover, Payables Turnover, the Current Ratio, and the Asset Turnover Ratio. Table of Contents: 1:15 Why Metrics and Ratios Matter 4:58 Return on Equity (ROE), Return on Assets (ROA), and Return on Invested Capital (ROIC) 10:50 Asset-Based and Turnover-Based Ratios 14:40 Interpretation of Key Metrics and Ratios for Wal-Mart, Amazon, and Salesforce 19:32 Why the Key Metrics and Ratios Are Sometimes Not That Useful Why Metrics and Ratios? They let you evaluate and compare different companies, and see why one company might be worth more (higher valuation multiple) than others. They let you answer questions such as: How much equity is required to generate a certain amount of after-tax profit (Net Income)? How much in assets is required to generate a certain amount of after-tax profit (Net Income)? How much total capital is required to do this? How dependent is a company on its assets? How liquid is the company? Can it meet its obligations? How quickly does it sell all its Inventory, pay its outstanding invoices, and collect its receivables? ROA, ROA, and ROIC Return on Equity (ROE) = Net Income / Average Shareholders’ Equity Return on Assets (ROA) = Net Income / Average Assets Return on Invested Capital (ROIC) = NOPAT / (Total Debt + Equity + Other Long-Term Funding Sources) Return on Equity (ROE): How efficiently is a company using its equity to generate after-tax profits? Return on Assets (ROA): How well is a company using its assets / how dependent is it on them? Return on Invested Capital (ROIC): How well is a company using ALL its capital, or how much capital is required to grow its business? Here, Wal-Mart easily ranks #1 in all these metrics because it has a very high ROE of 20-25%, an ROA of close to 10%, and an ROIC of 13-14%; for Amazon and Salesforce, these numbers are negative or close to 0%. Asset-Based Ratios and Turnover-Based Ratios Asset Turnover Ratio = Revenue / Average Assets How dependent is a company on its asset base to generate revenue? Current Ratio = Current Assets / Current Liabilities How liquid is a company? Can it use its short-term assets to repay its short-term obligations, if required? Inventory Turnover = COGS / Average Inventory How many times per year does a company sell off all its Inventory? Receivables Turnover = Revenue / Average AR How quickly does a company collect its receivables from customers that haven’t paid in cash yet? Payables Turnover = COGS / Average AP (*) How quickly does a company submit cash payment for outstanding invoices? Interpretation of Figures for Wal-Mart, Amazon, and Salesforce On the surface, many of these metrics make Wal-Mart seem like a "better" company - much higher ROE, ROA, and ROIC, and Amazon is negative on some of those! Wal-Mart tends to have higher margins as well, and shows more consistency with those margins. Similar inventory management, but Wal-Mart collects from customers and pays invoices much more quickly than Amazon. Wal-Mart is levered a bit more heavily, though. And yet… Amazon is a much more expensive stock, or at least it was at this point in time, and the market values it much more highly based on metrics such as the P / E ratio. At the time of this analysis, Wal-Mart P / E Ratio = 16x, and Amazon P / E Ratio = 456x! How could that be possible? Is Amazon really nearly 30x as valuable as Wal-Mart with WORSE metrics? Answer: The "Revenue Growth" line tells the whole story here. You're comparing 2 very different companies – one is a mature, predictable, mostly slow-growing firm, and one is growing revenue at 20-30% per year, despite revenue in the tens of billions already. Admittedly, Amazon's valuation still seems ridiculous, but it's not that surprising it's valued more highly than Wal-Mart, given that it's growing 20-30x more quickly. The Bottom-Line: These metrics are MOST useful when comparing companies of similar sizes, growth rates, and margins – not as useful when you're comparing a high-growth company to a stable, mature firm. RESOURCES http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-14-Key-Financial-Metrics-Ratios.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-14-Key-Financial-Metrics-Ratios.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-14-Amazon-Financial-Statements.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-14-Salesforce-Financial-Statements.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-14-Walmart-Financial-Statements.pdf
How to value a company using multiples - MoneyWeek Investment Tutorials
 
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For investors wanting to do a quick and dirty check on whether a firm is cheap or expensive, multiples can be helpful. As part of his short series on valuing companies, Tim Bennett explains why and how to go about using them.
Views: 118660 MoneyWeek
Financial Modeling Quick Lesson: Building a Discounted Cash Flow (DCF) Model - Part 1
 
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Learn the building blocks of a simple one-page discounted cash flow (DCF) model consistent with the best practices you would find in investment banking. If you are preparing for investment banking interviews, know that the DCF is the source of a TON of investment banking interview questions. To download the backup Excel file, go to www.wallstreetprep.com/blog/financial-modeling-quick-lesson-building-a-discounted-cash-flow-dcf-model-part-1/ The DCF modeled here is a simplified version of a fully-integrated DCF model. For a deeper dive into DCF modeling in Excel, please visit www.wallstreetprep.com.
Views: 340523 Wall Street Prep
Investment Banking Training    Financial Modeling and Valuation
 
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Global Investment Banking Analyst/Associate Program Location: London or Remote/Web Video Conferencing The Global Investment Banking Program is an exciting opportunity to gain experience of real world transactions and working knowledge for Investment Banking, Private Equity and Hedge Fund careers. The program will give you solid understanding of transaction concepts and robust practical skills for extensive investment banking work experience. The 5-week program provides the following real world experience: • Analysis of London stock exchange and New York stock exchange listed companies • Preparation of buy and sell side transaction pitches, teasers, and writing confidential investment memo • Excel Financial modeling and valuation of public listed companies by using "Comparable comps" method • Excel Financial modeling and valuation of public listed companies by using " Discounted cash flow" method • Excel Financial modeling and determination of the premium paid by buyer of the business by using "Transaction comps" method • Excel Financial modeling and leveraged buyout of the company by a Private Equity sponsor • Preparation of M&A transaction-ready model with Accretion/Dilution analysis of the deal • Board presentation and closing of investment banking transactions Upon completion of the program you will be prepared to carry out responsibilities of a full-time Analyst/Associate in investment banks and private equity firms. The program statement on your CV and your work experience reference report will enable you to stand out from thousands of other candidates and ensure that you are a strong contender in one the most competitive industries in the world. How to apply: Please send your CV to [email protected] Please note that a placement fee applies
Views: 15215 Global Banking School
How to Create the Football Field Chart in Investment Banking Valuations
 
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In this Football Field Chart lesson, you'll learn how to create the infamous chart in investment banking. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You will also learn how you can use it to assess and compare different valuation methodologies. While it may take some time to *format* the chart, the actual creation of the chart itself isn't too complicated... IF you know the proper tricks to make the process easier. Table of Contents: 2:02 Setting Up the Graph 4:51 Creating and Formatting the Graph 7:52 Interpreting the Graph 12:03 Recap and Summary 1. Setting Up the Graph First, link in the name for each methodology along with the Min, 25th Percentile, Median, 75th Percentile, and Max. Trick: Need to flip this and display them in the reverse order because of how Excel charts and graphs work… so input numbers in the leftmost column and sort by that column to do this quickly. Then, calculate the distance between each point on the right-hand side. "Trick" here is that each bar in the chart will be the length between one point and the next point - NOT that bar's absolute value! 2. Creating and Formatting the Graph Create a Stacked Bar Chart in Excel, with this data range selected, and then start formatting… we're skipping much of this here in the interest of time, and because it's covered in the Excel course in the graph/chart lessons there. Typically, you hide everything below the "Min" point, and you may also hide the Min to 25th and 75th to Max ranges depending on the #s… definitely the case if there are outliers, as there are here. You could also add a legend, axis titles, better labels, text labels of the indicative range of multiples and the company's figures on the right-hand side, and so on - depends on time available and how annoying your bosses want to be. 3. Interpreting the Graph VERY strange results here - first off, Precedent Transactions typically give higher values than Public Comps… ...but it's the reverse here, possibly because the market has radically shifted in the past ~1 year as multiples have soared. P / E and EV / Revenue multiples seem to indicate that the company is appropriately valued if you go by the median to 75th percentile range of the set (which may be appropriate here, given JAZZ's higher growth and margins vs. the comps). …and EV / EBITDA multiples indicate that the company may be undervalued substantially, even if you look at only the median of each set. The M&A comps and multiples may not even be that meaningful because of the problem we cited above - but it would be interesting to look at *premiums paid* for each company in addition to the standard multiples, because premiums often tell a different and more useful story. The DCF gives a much higher value than other methodologies, but this is not unusual because our view differs the MOST strongly from consensus estimates far into the future - so if we were analyzing this as a potential investment, the DCF would arguably be the most meaningful methodology here. On the other hand, if we did NOT put much time/effort into the DCF, then it might be the least meaningful of our methodologies here. Also, the much lower tax rate is more of a factor in the DCF… got tax inversions? Jazz Pharma is incorporated in Ireland, so its ~18% effective tax rate might be a huge draw for potential acquirers.
Investment Banking Valuation - Capital Asset Pricing Model (CAPM)
 
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Valuation Methods - Capital Asset Pricing Model (CAPM) CAPM is used to find cost of equity (COE) Part of Finance and Investment Banking crash course Additional courses coming on: -discounted cash flow DCF analysis -public comparable company analysis -precedent transaction analysis -LBO analysis (based on demand) Actuarial Science resume advice: http://www.actuarialninja.com/ Random news website: http://haolaowai.org/
Views: 509 Mifan Films
Leveraged Buyouts (LBOs) – CH 4 Investment Banking Valuation Rosenbaum
 
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A leveraged buyout (LBO) is the acquisition of a company, division, business, or collection of assets using debt to finance a large portion of the purchase price. The remaining portion of the purchase price is funded with an equity contribution by a financial sponsor. The ability to leverage the relatively small equity investment is important for sponsors to achieve acceptable returns. The use of leverage provides the additional benefit of tax savings realized due to the tax deductibility of interest expense. Questions answered in the video include? - What are private equity firms and how do they invest? - How does leverage impact the equity returns of a sponsor? - What is a leveraged buyout (LBO)? - How does changing the financing mix change overall returns? - What is the internal rate of return (IRR)? - What are the characteristics of a strong LBO candidate? - What are the available sources of LBO financing? For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 3323 FinanceKid
Enterprise Value: Why You Add and Subtract Items
 
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In this Enterprise Value lesson we take a look at the rules of thumb to figure out what should be added or subtracted when you calculate it. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" This also covers a short case study based on Vivendi (a leading media/telecom conglomerate based in France), Everyone knows the definition of Enterprise Value: Take Equity Value, add Debt and Preferred Stock (and others), and subtract Cash... But WHY do you do any of that? Enterprise Value represents the value of the company's CORE BUSINESS OPERATIONS to ALL THE INVESTORS in the company - equity, debt, preferred stock, etc. So focus on OPERATIONAL ITEMS and ALL INVESTORS when thinking about what to include... and what to exclude! Table of Contents: 1:19 What Enterprise Value Means 2:10 The 3 Key Rules of Thumb 5:15 Walk-Through of Vivendi's Assets and What to Subtract 11:08 How to Determine the Proper Treatment for Certain Assets 12:33 Excel Calculations for Assets Subtracted 13:30 Walk-Through of Vivendi's Liabilities & Equity and What to Add 15:14 How to Determine the Proper Treatment for Certain Liabilities 17:04 Excel Calculations for Liabilities Added 18:57 The Equity Section and Noncontrolling Interests 19:45 Recap and Summary The Three Rules of Thumb: 1. Is this item a *long-term funding source* for the company? In other words, will the funds we raise from this item help fund our business for years to come? If so, you should ADD this item when calculating Enterprise Value! Examples: Debt, Preferred Stock, Noncontrolling Interests (Minority Interests), Capital Leases, Unfunded Pension Obligations, Restructuring/Environmental Liabilities... 2. Will this item cost an acquirer of the company something extra when they go to buy it? And is it NOT something that will be repaid out of the company's normal operating cash flows (e.g., Accounts Payable)? If so, ADD it when calculating Enterprise Value! Examples: Debt, Preferred Stock. 3. Is this item NOT an operating asset? In other words, could the company continue to operate even WITHOUT this particular asset and be fine? If so, SUBTRACT it when calculating Enterprise Value! (These items often "save acquirers money" when buying the company.) Examples: Cash, Liquid Investments, Net Operating Losses, Assets from Discontinued Operations or Assets Held for Sale... How Does Each Item In Our Analysis Satisfy This Criteria? ITEMS THAT YOU SUBTRACT: Cash - Non-operating asset, the company doesn't "need" it to run its business beyond a certain low, minimum level. Liquid Investments - Also non-operating, the company has no need to invest in the stock market if it sells normal products/services. Equity Investments - Non-operating, not recorded in this company's revenue/expenses, doesn't "need" it to run the business. Other Non-Core Assets - Typically items that will be sold off or discontinued soon, so they're the very definition of "non-operating." NOLs - Also non-operating since long-term tax savings from these are not required to run the business. ITEMS THAT YOU ADD: Debt - Long-term funding source, and an acquirer has to repay it. Preferred Stock - Long-term funding source, and an acquirer has to repay it. Noncontrolling Interests - Long-term funding source, but this one's mostly for *comparability*... the company has recorded 100% of revenue and expenses from this company, so we want to capture 100% of its value as well (see our dedicated lesson on this one). Unfunded Pension Obligations - They're a long-term funding source! "Work for us now, we'll pay you a bit less, but we'll take care of you when you retire! Really!" To the company, very much like super-long-term debt.... but owed to employees, not outside investors. Plus, an acquirer has to pay for these somehow... Capital Leases - Also a long-term funding source, sort of like debt used to fund PP&E... these leases are used to fund operations and must be repaid. Restructuring & Legal Liabilities - Increases the cost to an acquirer, and they are also "long-term funding" of a sort - "Instead of paying for these expenses right now, we'll take care of them far into the future and reflect that liability." The Bottom-Line The Enterprise Value calculation is always somewhat subjective, and you'll see it done different ways. Everyone agrees on certain items (Cash, Debt, Preferred Stock), but the treatment of others varies by group, firm, industry, etc. As long as you can justify and explain how you calculated it, you'll be fine - even if someone else wants to change it later. To do that, keep in mind the 3 key rules of thumb above. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-07-VIV-Equity-Value-Enterprise-Value.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-07-VIV-Annual-Financial-Statements-Notes.pdf
CH 4 Questions - LBO Transactions, Investment Banking Valuation Rosenbaum
 
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Once you’ve watched the full CH4 video and learned about the LBO transaction and the private equity industry, test your knowledge with these 15 questions! I walk through the examples and tie what we learned in the chapter video to these questions. So what did we learn? - What are private equity firms and how do they invest? - How does leverage impact the equity returns of a sponsor? - What is a leveraged buyout (LBO)? - How does changing the financing mix change overall returns? - What is the internal rate of return (IRR)? - What are the characteristics of a strong LBO candidate? - What are the available sources of LBO financing? For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 688 FinanceKid
What Is A Valuation Multiple?
 
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This lesson was prompted by a question that came in from a reader and student of our courses the other day: "When you divide Enterprise Value by Revenue (EV / Revenue), or Price Per Share by Earnings Per Share (P / E), what does that actually mean? By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" In other words, if Enterprise Value / Revenue is 5.8x, what does that number actually mean?" Answer often given in textbooks: How valuable a company is in relation to its sales, profits, and so on... based on those metrics, how does the market value that company? But the real answer: the multiple itself means nothing at all! By itself, a single valuation multiple such as 5.8x or 15.3x or 25.7x means... absolutely nothing. Valuation multiples are ONLY meaningful in relation to the multiples of OTHER, similar companies ("public comps" or "public company comparables"). It's like saying, in real life, "The asking price for that house is $500,000, or around $500 per square foot. What does that mean?" Answer: It depends... on the asking prices of similar houses in the region, also on the location, the type of house, # beds and bathrooms, the condition, the neighborhood, the public school system... Could mean that the house is very expensive, or that it's very cheap, or that it's priced about right. You already know this if you've studied valuation and have valued companies on your own... BUT there are 2 specific points that often go overlooked with valuation multiples: 1. The companies you're comparing should ideally have similar growth and margin profiles, or the comparison is less meaningful. It's NOT enough just to be in the same industry and be about the same size - that's a starting point, but financial profiles should ideally be similar as well. Be very careful - acquisitions often distort these numbers! Very different margins also distort the numbers (ex: 2 companies with similar revenue and 1 has a much higher margin - mathematically speaking, very likely to trade at a LOWER multiple just because the denominator will be bigger). 2. Even if the companies DO have similar financial profiles, a higher or lower multiple doesn't necessarily mean that one company is "overvalued" or "undervalued" because qualitative factors also play a role. For example, did the company just make an acquisition? Did it miss earnings? Did it get sued? Did a new competitor pop up? Think of valuation multiples as "clues" in a detective story... they can guide you in the right direction, but 1 clue is not enough evidence to solve the mystery of whether a company is valued appropriately. We demonstrate both of these points with Ralcorp (a food and beverages company) in the video, and show you how the set of public comps all have very different financial profiles that were impacted by acquisitions in some cases. Key Takeaways: 1. A valuation multiple means nothing on its own - only meaningful when compared to other companies', and ideally the median multiple from a set of other companies. 2. When picking a set of public comps, it's not just about industry and size... even if you do select companies with those criteria, must pay attention to growth and margins as well. If all the companies in your set have very different growth and margins from the company you're valuing, you may want to consider a different set. If there are acquisitions, it's better to pay more attention to forward multiples / growth rates / margins instead - for 1-2 years in the future. The analysis is MOST meaningful if, for example, all the companies have very similar growth and margins but the one you're looking at trades at much different multiples - then it's worth investigating further and seeing what explains that. 3. Just because a multiple is higher or lower than other companies' multiples doesn't mean that the company you're valuing is overvalued or undervalued... it's just one of many factors. Here, the presence of a hostile bidder threw off the numbers. Plus, rumors of the company spinning off divisions... Could be any number of things in real life as well - earnings announcements, changes in strategy, expansion plans, patents, lawsuits, management team changes, etc.
Investment Banking Areas Explained: Advisory Services
 
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The next type of investment banking services we will examine are advisory services, comprising assistance in transactions, like mergers and acquisitions (known as M&A) and debt restructurings. As we already said, M&A stands for Mergers and Acquisitions. In every M&A process, there are at least two parties. One of the companies is called the Buyer or the Buying company, and the other one is called the Target, which is the firm acquired. The Buyer company can offer a compensation to the Target company’s shareholders in several ways. They can offer a cash compensation, a stock package of the new entity, or a combination of both. The technical name of the amount paid is called “consideration.” There are several reasons M&A deals play an important role in a company’s life. Top managers understand that, sometimes, it is cheaper to acquire something that has been already created, rather than trying to generate it internally. In addition, businesses are so complimentary that their combination can unlock a great deal of savings, efficiencies, and opportunities. We will focus on these aspects in the chapter dedicated to the mechanics of M&A services. Why do companies need help when acquiring other companies? Investment bankers are ideally positioned to provide valuable M&A insights to their clients, as they know their business and the industry in which they operate. Sometimes, an investment bank advises several firms from an industry and can gain perspective through multiple points of view. Besides M&A, many investment banks engage in restructuring services. These services are necessary when a firm cannot service its debt and is in danger of going bankrupt. I’m sure you can imagine how tough it is to work on these transactions and assist companies in deep trouble. What leads to the distress of a company? Why would a company borrow money it can’t repay? Well, the simple answer is that things change, and sometimes, unforeseen circumstances can materialize. On Facebook: https://www.facebook.com/365careers/ On the web: http://www.365careers.com/ On Twitter: https://twitter.com/365careers Subscribe to our channel: https://www.youtube.com/365careers
Views: 30133 365 Careers
Can Enterprise Value Be Negative? What About Equity Value?
 
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In this tutorial, you’ll learn about whether or not Enterprise Value and Equity Value can be negative, the conditions that might cause them to be negative, and why negative values are quite rare in practice. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 2:34 Part 1: How Enterprise Value Can Be Negative 5:33 DCF Demonstration of Negative Enterprise Value 9:30 Part 2: How Implied Equity Value Can Be Negative 10:25 Part 3: The Qualifications and Fine Print for "Negative" Enterprise Values and Equity Values 11:44 Recap and Summary Resources: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-15-Can-Enterprise-Value-Be-Negative.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-15-Can-Enterprise-Value-Be-Negative.xlsx Lesson Outline: Yes, Enterprise Value can be negative… and Implied Equity Value can also be negative. BUT we need to be more precise with the terminology and qualify those statements a bit more. Enterprise Value is the value of core-business Assets to all investors in the company. Equity Value is the value of all the Assets, but only to common shareholders (equity investors). And Equity or Shareholders’ Equity is a Balance Sheet figure that has no market value. Net Income, Dividends, and stock-related activities such as issuances and repurchases affect it. “Current” refers to a company’s Equity Value or Enterprise Value based on its public share price, and it represents the market’s views of the company’s value. “Implied” or “Intrinsic” refers to YOUR VIEWS of the company’s value. Current Enterprise Value: Yes, it can be negative Implied Enterprise Value: Yes, it can be negative Current Equity Value: No, it can’t be negative (in theory) Implied Equity Value: Yes, it can be negative Equity or Shareholders’ Equity (Balance Sheet figure): Yes, it can be negative How Enterprise Value Can Be Negative Suppose a company has a market cap (Current Equity Value) of $30 million, no Debt, and Cash of $35 million. Its Enterprise Value is, therefore, negative $5 million. The intuition is that the market expects the company’s core-business Assets to generate negative cash flow in the future, which makes them worth a negative amount. If you buy the company, you have to contribute more cash over time to keep it running, so owning the company actually costs you something. But even if its cash flow eventually turns positive, its Implied Enterprise Value could still be negative. For example, if its Unlevered Free Cash Flows are very negative for the first ~10 years and turn slightly positive in the last 5 years, and in the Terminal Period beyond Year 15, everything is normal, the Implied EV from the DCF could still be negative, as it was here. Money today is worth more than money tomorrow, so highly negative cash flows early on hurt us more than positive cash flows much further into the future. Companies like Uber and Snap that keep growing and keep losing more and more money are dealing with this issue. Current Equity Value cannot be negative, in theory, because it equals Share Price * Shares Outstanding, and both of those must be positive (or at least, greater than or equal to 0). But Implied Equity Value could be negative for the same reasons as described above: It indicates that the market expects the company will keep burning through cash and that even if a turnaround happens, it may not be enough to justify that early burn. Fine Print and Qualifications While these scenarios are possible, they are pretty rare, and they tend not to last for very long. A company with negative Enterprise Value will tend to turn around, as the market’s view of it shifts, or it will go bankrupt and die if the market’s view was correct. A company shouldn’t be able to last that long if its core business is worthless! Often, in real life, you’ll just say the company’s Implied Share Price is $0.00 if you get negatives in these calculations, and you’ll rely more on methodologies such as Liquidation Valuation for distressed companies. Be wary of anyone who says a company with a negative Enterprise Value is a “bargain” – if you’re just a minority shareholder, that company is under no obligation to distribute cash to you. So, yes, the company’s share price might be $5.00, and its Cash per Share might be $6.00. But that doesn’t mean much if the company plans to burn through all the cash and never let you have any!
CH 1 Questions - Comparable Companies Analysis, Investment Banking Valuation Rosenbaum
 
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Test your knowledge of comparable companies analysis! The following video covers the chapter 1 questions from the Joshua Rosenbaum Investment Banking book. The multiple choice questions offer a great challenge for any students preparing for their investment banking interviews. Chapter 1 covered topics like; - Finding the right universe of comparable companies using business and financial characteristics - Enterprise and equity value multiples - Treasury stock and if-converted methods for fully diluted shares - Net share settlement method (NSS) - Calendarization of financial data - Adjustments for non-recurring items - Benchmarking and valuation For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 1366 FinanceKid
REIT Valuation: Crash Course
 
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In this tutorial, you’ll learn how REITs operate, how to create simple 3-statement projection models for them, how to extend the projections into a DCF analysis, and how to complete a Net Asset Value (NAV) model and use Public Comps to value a REIT. https://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 2:14 Part #1: Basic Characteristics of REITs and U.S. GAAP vs. IFRS 6:17 Part #2: Simple Projection Model for a REIT 12:00 Part #3: Extension of the Projection Model into a DCF for a REIT 16:03 Part #4: Net Asset Value (NAV) for REITs and Public Comps 19:40 Recap and Summary Resources: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/REIT-Valuation-Slides.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/REIT-Valuation-Example.xlsx Lesson Outline: To value REITs simply and effectively, you must understand how they operate, their special requirements, and the differences between U.S. GAAP-based and IFRS-based REITs. REITs buy, sell, develop, and operate properties or other real estate assets. They must distribute a high percentage of Net Income in the form of Dividends (90% in the U.S.), and high percentages of their revenue and assets must come from real estate. In exchange, they pay no corporate income taxes (or greatly reduced corporate taxes). REITs are always maintaining, acquiring, developing, renovating, and selling properties, and since they distribute so much Cash, they constantly need to raise Debt and Equity to operate. The Gains and Losses on property sales make Net Income fluctuate, so you look at alternative metrics, such as Funds from Operations (FFO) or EPRA Earnings, when analyzing REITs. Funds from Operations (FFO) = Net Income + RE Depreciation & Amortization + Losses / (Gains) + Impairments. Under U.S. GAAP, REITs depreciate properties and record a huge Depreciation expense on the IS; under IFRS, they revalue properties constantly and record huge Fair Value Gains and Losses instead. Also as a result of that, Book Value is important and meaningful for IFRS-based REITs but must be adjusted significantly for U.S.-based REITs. To project a REIT’s statements, you start by projecting its “same-store” (existing) properties by assuming rental growth and margins. Then, assume acquisition, development/redevelopment spending, a yield on spending, and margins there, and assume something for dispositions and the lost revenue and operating income. Add up all the property-level revenue and expenses, and then project corporate items such as Depreciation, Maintenance CapEx, and SG&A with traditional percentage approaches. Make Dividends a % of FFO, AFFO, or EPRA Earnings, and assume Debt and Equity issued based on the REIT’s Cash before financing vs. its minimum Cash balance. To value a REIT with a DCF, extend these projections, factor in all CapEx and Asset Sales, as well as Stock Issued, and project revenue, margins, D&A, CapEx, and Asset Sales through a 10-year period. Calculate and discount Terminal Value the normal way, discount and sum up the Free Cash Flows, back into the Implied Equity Value and divide by the share count (current + future shares to be issued) to get the Implied Share Price. The DDM is similar, but you use Cost of Equity instead of WACC, Equity Value-based multiples for the Terminal Value, and you discount and sum up Dividends rather than Unlevered FCF. To calculate NAV for U.S.-based REITs, project the 12-month forward Net Operating Income from properties, divide it by an appropriate Cap Rate or Yield (based on similar transactions or companies in the market), and then take the market value of the other assets and add them up. Then, adjust the Liabilities, and subtract them from the market value of Assets to determine Net Asset Value; divide by the share count to get NAV per Share and compare it to the Current Share Price. Public Comps are similar, but the screening criteria are usually Real Estate Assets, Geography, and Sub-Industry. You can use traditional metrics and multiples like EBITDA and EV / EBITDA, but you’ll also use alternative ones such as FFO, P / FFO, NAV, and P / NAV, and, for IFRS-based REITs, Book Value and P / BV. To find the data, you can use “Related Companies” on Google Finance, get the assumed growth rates for the projections from sources like Yahoo Finance, and go from there.
Purchase Price in M&A Deals: Equity Value or Enterprise Value?
 
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In this tutorial, you’ll learn why the real price paid by a buyer to acquire a seller in an M&A deal is neither the Purchase Equity Value nor the Purchase Enterprise Value… exactly. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 4:29: Problem #1: The Treatment of Debt 8:03: Problem #2: The Treatment of Cash 11:45: Recap and Summary Common questions: “In an M&A deal, does the buyer pay the Equity Value or the Enterprise Value to acquire the seller?” “What does it mean in press releases when they say the purchase consideration ‘includes the assumption of debt’? Does that mean the price is the Enterprise Value?” The Basic Definitions Equity Value: Value of ALL the company’s assets, but only to common equity investors (shareholders). Enterprise Value: Value of ONLY the core business operations, but to ALL investors (equity, debt, etc.). So when you calculate Enterprise Value, starting with Equity Value… Add Items When: They represent other investors (Debt investors, Preferred Stock investors, etc.) or long-term funding sources (Capital Leases, Unfunded Pensions) Subtract Items When: They are not related to the company’s core business operations (side activities, cash or excess cash, investments, real estate, etc.) The Confusion The problem is that many sources say Enterprise Value is what it “really costs to acquire a company.” But that’s not exactly true – yes, sometimes Enterprise Value is closer, but it depends on the deal terms and the items in Enterprise Value. We know, WITH CERTAINTY, that if you acquire 100% of a company, you must pay for 100% of its common shares. So the Purchase Equity Value is sort of a “floor” for the purchase price in an M&A deal. But should you really add the seller’s Debt, Preferred Stock, and other funding sources, and subtract 100% of the seller’s cash balance to determine the “real price”? There are many problems with that approach, but we’ll look at two of them here: PROBLEM #1: Does Debt really increase the purchase price? It depends, because debt can be either “assumed” (kept) or “refinanced” (replaced with new debt or paid off). Debt is Assumed: Does not increase the amount the buyer “really pays” for the seller. Debt is Repaid with the Buyer’s Cash: Does increase the amount the buyer “really pays”. Existing Debt is Replaced with New Debt: Increases the amount the buyer “really pays,” but the buyer still isn’t paying more cash. PROBLEM #2: Does Cash really reduce the purchase price? A buyer can’t just “take” a seller’s entire cash balance following a deal – all companies need a certain “minimum cash balance” to keep operating, paying the bills, etc. That portion of cash is actually a core business operating asset. Enterprise Value: As a simplification, we ignore the minimum cash and subtract all cash instead. So if a company operating by itself always needs some minimum amount of cash, it certainly still needs a minimum amount of cash in an M&A deal. Other Complications Transaction Fees: These always exist, and will always increase the price the buyer pays (lawyers, accountants, bankers, etc.). Unfunded Pensions, Capital Leases, etc.: These don’t necessarily have to be “paid” or “repaid” upon change of control… so they may not even affect the price, even though they factor into Enterprise Value. Extra Cash: What if the buyer’s cash + seller’s cash are used to fund the deal? Then the real price paid may not even be comparable to the seller’s Equity Value or Enterprise Value. The Bottom Line You have to distinguish between the *valuation* of a company or deal and the *actual price paid*. Equity Value and Enterprise Value are useful for valuation, but less useful for determining the real price paid. The real price paid may be between Equity Value and Enterprise Value, above them, or even below them, depending on the terms of the deal – due to the treatment of debt and cash, fees, and liabilities that don’t affect the cash cost of doing the deal. When you see language like “Including assumption of net debt,” that means the approximate Purchase Enterprise Value for the deal, because they are calculating it as Purchase Equity Value + Debt – Cash. But it’s still not what the buyer actually pays – it’s just a way to value the deal and get multiples like EV / EBITDA. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/108-10-Purchase-Price-MA-Deals.pdf
The LBO Model: Learn to Value Any Business Like a Private Equity Pro
 
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Jon Taylor of Stanton Park Advisors (www.stantonparkllc.com) explains how to use a leverage buyout (LBO) model to value a business. The LBO model template can be downloaded at www.stantonparkllc.com in the blog section.
Views: 33423 Jon Taylor
Investment Banking Interview Question: Financial Statements
 
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In this video, Joshua Rosenbaum and Joshua Pearl, authors of the highly acclaimed and authoritative textbook, Investment Banking, walk you through how to answer technical questions asked during the investment banking interview process, specifically "How do the three main financial statements link together?" You can access more investment banking mock interview and training videos at http://www.efficientlearning.com/investment-banking/
Views: 52619 Wiley Finance
Precedent Transactions Analysis – CH 2 Investment Banking Valuation Rosenbaum
 
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In this video, I provide a comprehensive overview of the precedent transactions analysis used in investment banking and the different steps needed to offer a defensible valuation range. The video is long but offers all the information you need to know as an entry level analyst and for any student looking to prepare for a related interview. I am working off the second edition Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions textbook by Joshua Rosenbaum and Joshua Pearl. Chapter 2 covered topics like; - Strategic vs. Financial buyers - Deal dynamics and motivations - Purchase considerations; cash, stock-for-stock, cash/stock mix - Schedule TO, 14D-9, 13E-3, and proxy statements - Enterprise and equity value multiples - Treasury stock and if-converted methods for fully diluted shares - Synergies and necessary adjustments For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 1597 FinanceKid
Value-Added Real Estate Private Equity Case Study
 
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In this Value-Added Real Estate Private Equity Case Study tutorial video, you'll learn what to expect in real estate private equity case studies and you'll get an example of a real value-added RE PE case study with the solution file and a walk-through of the key points. Please get all the files and the textual description and explanation here: http://www.mergersandinquisitions.com/value-added-real-estate-private-equity-case-study/ Table of Contents: 2:41 Part 1: The Types of RE PE Case Studies 5:19 Part 2: This Case Study and What Makes It Tricky 12:40 Part 3: Why Excel is Horrible for This Case Study 16:59 The Scenarios in This Model 17:51 Part 4: The Property Model and Returns Analysis 26:39 Part 5: The Investment Recommendation 28:37 Recap and Summary Part 1: The Types of RE PE Case Studies The 3 main types are core / core-plus, value-added, and opportunistic. In the first category, the property stays nearly the same over the holding period and the market analysis is more important than a complex model. In the second category, the property changes significantly (more tenants, higher rents, a renovation, etc.) and the models tend to be more complex. The modeling often gets the most complex in the third category because a new property is developed, an existing one is redeveloped, or the building changes massively (e.g., rescuing a distressed property). The complexity also depends on how granular the model is - modeling individual tenants with different lease terms always gets more complicated than a high-level model with average unit sizes, square feet or square meters, etc. Part 2: This Case Study and What Makes It Tricky This case study is less about analyzing the market data, and more about getting all the Excel formulas correct, making the correct calculations, and finishing on time. Since we have information on 13 individual tenants in the building, we NEED to do a more granular analysis and look at each tenant separately. The Excel formulas for free months of rent, TIs and LCs, and other key terms in the leases are somewhat tricky to figure out. Part 3: Why Excel is Horrible for This Case Study The problem here is that there are two scenarios for each existing tenant: they might renew, or they might not renew, when their lease expires. If it's just these two scenarios you can do a reasonable job plotting them out in Excel. But when it goes beyond that - say, 2-year contracts over a 10-year period, resulting in 5 "renewal points" and 2^5 or 32 scenarios - Excel becomes unwieldy for this exercise. You're better off using ARGUS to model this if you have that level of complexity and an entire probability tree. As it stands, our formulas get quite complex here though they are not THAT difficult to understand if you break down the individual components. The Scenarios in This Model The main difference between the three scenarios here is that the occupancy rate stays the same, at 74%, in the Downside Case, whereas it increases to 80% in the Base Case because we find three new tenants, and it increases to 85% in the Upside Case as we find four new tenants. Also, the growth assumptions and the TIs, LCs, and other concessions such as free months of rent differ between the three cases and are most generous in the Upside Case and least generous in the Downside Case. Part 4: The Property Model and Returns Analysis In short, after setting up all the formulas for rent, free months of rent, absorption (the difference between market rent and in-place rent), turnover vacancy (the time between one tenant cancelling and moving out and finding a new one to replace him), and general vacancy, we fill out the rest of the Pro-Forma Model. We include all the operating expenses to determine the property's NOI, and then plot out the debt repayments over time and the interest expense paid on debt. The Acquisition/Exit assumptions and Sources & Uses schedule are all quite straightforward: we assume lower Exit Cap Rates due to the renovation, but there's less of a decline in the Downside Case. In the Returns Analysis, we set up a "waterfall schedule" to split and distribute the returns: up to a 10% IRR is split 80/20 between the LPs and GPs, then between a 10% and 15% IRR it's split 70/30, and then above 15% it's split 60/40. Part 5: The Investment Recommendation We recommend acquiring the property because the numbers work well and meet our targeted IRR and CoC multiple in the Base and Downside cases, the market data is positive, and we believe it's plausible for the occupancy rate and average rents to increase up to the market levels in the area. For the deal NOT to work, something catastrophic would have to happen: rents falling by 25%, the lease renewal rate dropping to 30%, or something in that vein... and we believe there are ways to mitigate against all those risks. http://www.mergersandinquisitions.com/value-added-real-estate-private-equity-case-study/
Oil & Gas Stock Pitch: How to Research and Present It
 
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In this tutorial, you'll learn how to research, structure, and present an oil & gas stock pitch. More at http://www.mergersandinquisitions.com/oil-gas-stock-pitch/ You'll also learn how it's different from investment recommendations and stock pitches in other industries. We'll use Ultra Petroleum [UPL] as the example company, and present a SHORT recommendation based on a detailed analysis of their filings, investor presentations, and earnings call transcripts, along with a complex Net Asset Value (NAV) Model, based on individual wells drilled in different regions. Table of Contents: 1:19 The Structure of an Oil & Gas Stock Pitch 3:15 Investment Thesis 6:19 Catalysts 10:42 Valuation 13:38 Risk Factors 15:51 Why This Recommendation Was Wrong 19:25 Recap and Summary Investment Thesis Why is the company mis-priced? How does the market view it, and why is everyone else wrong? Here, we cite 3 reasons: 1. The company has overstated its average EUR per well in some regions, which means its reserves may be overstated or otherwise inaccurate. 2. Cutting capital expenditures (D&C Costs) and operating expenses (LOE) over time makes less of an impact on the company's implied value than they claim it does - being a low-cost producer is nice, but even substantial reductions over time don't boost the value by all that much. 3. Drilling in Pennsylvania may be stopped or reduced due to the company's JV partners, and the market hasn't yet factored in the chances of that happening and the impact on the company's implied value. Catalysts A few examples of potential catalysts: Oil & Gas-Specific: Reserve Reports / Drill Results, Well Drilling Schedules / Expanded or Reduced Drilling, Produce / No Produce Decisions, New Technology Deployment to reduce D&C Costs, Improved Well Spacing, Pipeline Developments, Hedging Contract Changes More Generic: Geographic Expansion, Acquisitions or Divestitures, Earnings Announcements, Competitors' Activities, Financing Activities For UPL, we use these 3 catalysts: 1. The close of the $650 million Uinta Basin acquisition. 2. The release of new reserve reports from the company's existing regions. 3. The possible halt to drilling in the Marcellus shale of Pennsylvania. For each one, we show the implied per share impact on the company based on the NAV model. Valuation We use the NAV model here, lay out our assumptions in the beginning, and then mostly focus on the OUTPUT of the model to avoid pasting in sheets and sheets of Excel. With the NAV Model, you split the company into existing production (PDP and PDNP) and new production (PUD, PROB, and POSS), make "high-level" estimates for the existing production, and assume a decline rate over time. For the others, assume that a certain # of new wells are drilled each year, assume that they start producing at a certain level and then decline to 0 over time, and then project the revenue, expenses, CapEx, and cash flow for each region and reserve type... Finally, you sum up everything at the end. The main point is to show that the assumption we're MOST uncertain of - EUR per well - makes a huge difference on the valuation... ...While other assumptions, such as the D&C Costs and LOE per well, make a smaller difference and so it doesn't matter much even if the company can reduce those costs. Risk Factors You can "reverse" the catalysts and ask, "What happens if this catalyst does NOT happen, or what if the results are different than expected?" Our top risk factors are: 1. The $650 million Uinta Basin acquisition fails to close. 2. Even if the acquisition does close, initial drilling reports might be positive and indicate higher-than-expected reserve levels. 3. Full drilling continues in the Marcellus shale as natural gas prices recover. 4. The company's improved well spacing pilots prove successful, and it is able to increase its effective EUR per well. So the first 3 are "reversals" of the catalysts, and we therefore also assess the implied per share impact from them. The last risk factor is more of an "X Factor" type of item that might cause the company's reserves to jump up dramatically if executed well. Why This Recommendation Was Wrong First off, gas prices spiked up to very high levels ($7.00 - $8.00) due to an unusually cold winter. That killed the "Short" recommendation since all oil & gas companies become more valuable when commodity prices spike up. Next, the company beat revenue and EPS consensus estimates twice in the past 6-7 months after this pitch; equity research analysts also upgraded their ratings on the stock. Finally, the stock had already fallen substantially in the past 2-3 years before this... so our timing wasn't great. How to Avoid Disaster: We recommended setting a buy-stop order at $23.00 - $24.00 / share to limit our losses. That would have limited our losses to ~25%.
CH 3 Questions - Discounted Cash Flow (DCF) Model, Investment Banking Valuation Rosenbaum
 
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Once you’ve watched the full CH3 video and learned how to build a DCF model, test your knowledge with these 15 questions! I walk through the examples and tie what we learned in the chapter video to these questions. So what did we learn? - How do you project revenues for a DCF model? - How many years do you project cashflows for? - What is the exit multiple method? - What is the perpetuity growth method? - How do you project EBITDA for a DCF model? - How do you project EBIT for a DCF model? - How do you project the NWC for a DCF model? - What is the mid-year convention? - How do you calculate unlevered free cash flow? For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 1227 FinanceKid
Private Company Valuation
 
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In this tutorial, you'll learn how private companies are valued differently from public companies, including differences in the financial statements, the public comps, the precedent transactions, and the DCF analysis and WACC. Get all the files and the textual description and explanation here: http://www.mergersandinquisitions.com/private-company-valuation/ Table of Contents: 1:29 The Three Types of Private Companies and the Main Differences 6:22 Accounting and 3-Statement Differences 12:04 Valuation Differences 16:14 DCF and WACC Differences 21:09 Recap and Summary The Three Type of Private Companies To master this topic, you need to understand that "private companies" are very different, even though they're in the same basic category. There are three main types worth analyzing: Money Businesses: These are true small businesses, owned by families or individuals, with no aspirations of becoming huge. They are often heavily dependent on one person or several individuals. Examples include restaurants, law firms, and even this BIWS/M&I business. Meth Businesses: These are venture-backed startups aiming to disrupt big markets and eventually become huge companies. Examples include Kakao, WhatsApp, Instagram, and Tumblr – all before they were acquired. Empire Businesses: These are large companies with management teams and Boards of Directors; they could be public but have chosen not to be. Examples include Ikea, Cargill, SAS, and Koch Industries. You see the most differences with Money Businesses and much smaller differences with the other two categories. The main differences have to do with accounting and the three financial statements, valuation, and the DCF analysis. Accounting and 3-Statement Differences Key adjustments might include "normalizing" the company's financial statements to make them compliant with US GAAP or IFRS, classifying the owner's dividends as a compensation expense on the Income Statement, removing intermingled personal expenses, and adjusting the tax rate in future periods. These points should NOT be issues with Meth Businesses (startups) or Empire Businesses (large private companies) unless the company is another Enron. Valuation Differences The valuation of a private company depends heavily on its purpose: are you valuing the company right before an IPO? Or evaluating it for an acquisition by an individual or private/public buyer? These companies might be worth very different amounts to different parties – they *should* be worth the most in IPO scenarios because private companies gain a larger, diverse shareholder base like that. You'll almost always apply an "illiquidity discount" or "private company discount" to the multiples from the public comps; a 10x EBITDA multiple is great, but it doesn't hold up so well if the comps have $500 million in revenue and your company has $500,000 in revenue. This discount might range from 10% to 30% or more, depending on the size and scale of the company you're valuing. Precedent Transactions tend to be more similar, and you don't apply the same type of huge discount there for larger private companies. You may see more "creative" metrics used, such as Enterprise Value / Monthly Active Users, especially for private mobile/gaming/social companies. DCF and WACC Differences The biggest problems here are the Discount Rate and the Terminal Value. The Discount Rate has to be higher for private companies, but you can't calculate it in the traditional way because private companies don't have Betas or Market Caps. Instead, you often use the industry-average capital structure or average from the comparables to determine the appropriate percentages, and then calculate Beta, Cost of Equity, and WACC based on that. There are other approaches as well – use the firm's optimal capital structure, create a giant circular reference, or use earnings volatility or dividend growth rates – but this is the most realistic one. You use this approach for all private companies because they all have the same problem (no Market Cap or Beta). You'll also have to discount the Terminal Value, but this is mostly an issue for Money Businesses because of their dependency on the owner and key individuals. You could heavily discount the Terminal Value, use the company's future Liquidation Value AS the Terminal Value, or assume the company stops operating in the future and skip Terminal Value entirely. Regardless of which one you use, Terminal Value will be substantially lower for this type of company. The result is that the valuation will be MOST different for a Money Business, with smaller, but still possibly substantial, differences for Meth Businesses and Empire Businesses. http://www.mergersandinquisitions.com/private-company-valuation/
WST: 4.4 Investment Banking Training - Valuation Up and Down Capital Structure
 
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Wall St. Training Self-Study Instructor, Hamilton Lin, CFA hones in the importance of understanding how to move up and down the capital structure, from Total Enterprise Value to Equity Value to Price per Share. For more information of the video courses previewed here, go to: http://www.wstselfstudy.com/modules.html Over 80 hours of online, interactive Self-Study Videos! ***YOUTUBE VISITORS ONLY*** 10% off any online course, use Discount code: youtube http://www.wstselfstudy.com Wall St. Training Self-Study provides online, video-based, self-study financial modeling training solutions to Wall Street. Our interactive course modules are Excel-based and specialize in advanced and complex financial modeling, valuation modeling, investment banking, mergers & acquisitions and leveraged buyout training topics. Enhance your skills and master the content required by Wall Street investment banks, M&A, research, asset management, credit, and private equity firms.
Views: 6976 wstss
#ImarticusLive - Investment Banking and Valuation Techniques
 
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Investment Banking and Valuation Techniques is a webinar held on October 24, 2016. Visit: http://www.imarticus.org
Views: 1909 Imarticus Learning
Equity vs. debt | Stocks and bonds | Finance & Capital Markets | Khan Academy
 
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Debt vs. Equity. Market Capitalization, Asset Value, and Enterprise Value. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/chapter-7-bankruptcy-liquidation?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/venture-capital-and-capital-markets/v/more-on-ipos?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: This is an old set of videos, but if you put up with Sal's messy handwriting (it has since improved) and spotty sound, there is a lot to be learned here. In particular, this tutorial walks through starting, financing and taking public a company (and even talks about what happens if it has trouble paying its debts). About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
Views: 341519 Khan Academy
WST: 4.3 Investment Banking Training - Valuation Multiples
 
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Wall St. Training Self-Study Instructor, Hamilton Lin, CFA illustrates the concept behind how to apply multiples in relative valuation. For more information of the video courses previewed here, go to: http://www.wstselfstudy.com/modules.html Over 80 hours of online, interactive Self-Study Videos! ***YOUTUBE VISITORS ONLY*** 10% off any online course, use Discount code: youtube http://www.wstselfstudy.com Wall St. Training Self-Study provides online, video-based, self-study financial modeling training solutions to Wall Street. Our interactive course modules are Excel-based and specialize in advanced and complex financial modeling, valuation modeling, investment banking, mergers & acquisitions and leveraged buyout training topics. Enhance your skills and master the content required by Wall Street investment banks, M&A, research, asset management, credit, and private equity firms.
Views: 16318 wstss
Excel Shortcuts Investment Banking: Quick Tips
 
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You’ll get a quick, but very powerful, tip on how to optimize your Excel setup with the Quick Access Toolbar (QAT) and custom shortcuts in this tutorial. These tips will save you a ton of time when creating valuations, organizing data, and doing any formatting exercise. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Shortcuts Introduced: These are all BUILT-IN shortcuts: Alt, T, O: Options Menu Alt, H, FC: Font Color Alt, H, FS: Font Size Alt, H, H: Fill Color Alt, H, A, C: Center Alt, H, B: Borders Alt, H, O, I: AutoFit Column Width Alt, H, O, W: Column Width Alt, H, 0: Increase Decimal Places Alt, H, 9: Decrease Decimal Places These are the NEW shortcuts you can create via the Quick Access Toolbar: Alt, 1: Font Color Alt, 2: Font Size Alt, 3: Fill Color Alt, 4: Center Alt, 5: Borders Alt, 6: AutoFit Column Width Alt, 7: Column Width Alt, 8: Increase Decimal Places Alt, 9: Decrease Decimal Places Lesson Outline: Many Excel shortcuts that you use repeatedly when creating valuations, models and when formatting data are cumbersome to enter. Something as simple as changing the font color takes 4 keystrokes – Alt, H, F, C – if you use the built-in method for it. Other common commands such as alignment, fill colors, borders, and column widths also take 3-4 keystrokes. A more efficient alternative is to set up the Quick Access Toolbar (QAT) so that you can access the most common commands with shortcuts like Alt, 1 instead. You can either import our file (see the link below under RESOURCES) or go to the Options menu (Alt, T, O) and then the Quick Access Toolbar tab, and create the menu yourself. We recommend setting “Font Color” in position #1, followed by Font Size, Fill Color, Center, Borders, AutoFit Column Width, Column Width, and Increase and Decrease Decimal places. These are some of the most frequently used commands in Excel, and you’ll save a ton of time with the new, shorter versions. A command like AutoFit Column Width that used to take 4 keystrokes now takes only 2 (Alt, 6) with this approach. You might realize 30-40% time savings when working in Excel if you use this full set of shortcuts. They’re especially useful for formatting and analyzing data and doing the initial setup in financial models. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-QAT-Export.exportedUI https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-Shortcuts-Investment-Banking-Slides.pdf
Sell-Side M&A – CH 6 Investment Banking Valuation Rosenbaum
 
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The sale of a company, division, business, or collection of assets is a major event for its owners, management, employees, and other stakeholders. It is an intense, time-consuming process with high stakes, usually spanning several months. The seller typically hires an investment bank and its team of trained professionals to ensure that key objectives are met and a favorable result is achieved. This video covers sell-side M&A from chapter 6 of the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions textbook by Joshua Rosenbaum and Joshua Pearl. Questions answered in the video include? - What is a broad auction? - What is a targeted auction? - What is a negotiated sale? - What is the sell-side M&A process from start to finish? - What is the difference between a strategic and financial buyer? - What is a Confidential Information Memorandum (CIM)? - What is a letter of intent (LOI)? - One step vs two-step merger For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 2152 FinanceKid
LBO Model Interview Questions: What to Expect
 
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In this tutorial, you'll learn about the most common LBO modeling-related questions and some tricks and rules of thumb you can use to approximate the IRR and solve for assumptions like the purchase price and EBITDA growth in leveraged buyouts. Table of Contents: 2:36 Question #1: LBO Model Walkthrough 5:34 Question #2: Ideal LBO Candidates 8:09 Question #3: How to Approximate IRR 11:46 Question #4: How to Solve for EBITDA or the Purchase Price 13:58 Question #5: How to Approximate the IRR in an IPO Exit 16:03 Recap, Summary, and Key Principles Lesson Outline: Will you get LBO-related questions in interviews? Yes, possibly, but full case studies are unlikely unless you're interviewing for PE roles or more advanced IB roles. Interviewers now ask trickier questions about the fundamentals, they ask progressions of questions on the same topic or scenario, and they're more likely to give you *simple* cases and numerical tests rather than complex ones. A typical progression for LBO models might be as follows: Question #1: LBO Model Walkthrough "In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it; the math works because leverage amplifies returns; the PE firm earns a higher return if the deal does well because it uses less of its own money upfront." In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins. In Step 2, you create a Sources & Uses schedule to calculate the Investor Equity paid by the PE firm. In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill. In Step 4, you project the company's statements, or at least its cash flow, and determine how much Debt it repays each year. Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the MoM multiple and IRR. Question #2: Ideal LBO Candidates Price is the most important factor because almost any deal can work at the right price – but if the price is too high, the chances of failure increase substantially. Beyond that, stable and predictable cash flows are important, there shouldn't be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion. Question #3: Approximating IRR "A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt. The company's EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What's the IRR?" Initial Investor Equity = $100 million * 10 * 40% = $400 million Exit Enterprise Value = $150 million * 9 = $1,350 million Debt Remaining Upon Exit = $600 million – $250 million = $350 million Exit Equity Proceeds = $1,350 million – $350 million = $1 billion IRR: 2.5x multiple over 5 years; 2x = 15% and 3x = 25%, so it's ~20%. Question #4: Back-Solving for Assumptions "You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA. You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?" Initial Investor Equity = $100 * 10 * 50% = $500 20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%) Exit Equity Proceeds = $500 * 2.5 = $1,250 Remaining Debt = $250, so Exit Enterprise Value = $1,500 Required EBITDA = $150, since $1,500 / 10 = $150 Question #5: Approximating IRR in an IPO Exit "A PE firm acquires a $200 EBITDA company for an 8x multiple using 50% Debt. The company's EBITDA increases to $240 in 3 years, and it repays ALL the Debt. The PE firm takes it public and sells off its stake evenly over 3 years at a 10x multiple. What's the IRR?" Initial Investor Equity = $200 * 8 * 50% = $800 Exit Enterprise Value = Exit Equity Proceeds = $240 * 10 = $2,400 "Average Year" to Exit = 1/3 * 3 + 1/3 * 4 + 1/3 * 5 = 4 years IRR: 3x over 3 years = ~45%, and 3x over 5 years = ~25% Approximate IRR: ~35% (This one's a bit off – see Excel.) RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-13-LBO-Model-Interview-Questions-Slides.pdf
Debt vs. Equity Analysis: How to Advise Companies on Financing
 
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In this tutorial, you'll learn how to analyze Debt vs. Equity financing options for a company, evaluate the credit stats and ratios in different operational cases, and make a recommendation based on both qualitative and quantitative factors. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 0:50 The Short, Simple Answer 3:54 The Longer Answer – Central Japan Railway Example 12:31 Recap and Summary If you have an upcoming case study where you have to analyze a company's financial statements and recommend Debt or Equity, how should you do it? SHORT ANSWER: All else being equal, companies want the cheapest possible financing. Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower. But there are also constraints and limitations on Debt – the company might not be able to exceed a certain Debt / EBITDA, or it might have to keep its EBITDA / Interest above a certain level. So, you have to test these constraints first and see how much Debt a company can raise, or if it has to use Equity or a mix of Debt and Equity. The Step-by-Step Process Step 1: Create different operational scenarios for the company – these can be simple, such as lower revenue growth and margins in the Downside case. Step 2: "Stress test" the company and see if it can meet the required credit stats, ratios, and other requirements in the Downside cases. Step 3: If not, try alternative Debt structures (e.g., no principal repayments but higher interest rates) and see if they work. Step 4: If not, consider using Equity for some or all of the company's financing needs. Real-Life Example – Central Japan Railway The company needs to raise ¥1.6 trillion ($16 billion USD) of capital to finance a new railroad line. Option #1: Additional Equity funding (would represent 43% of its current Market Cap). Option #2: Term Loans with 10-year maturities, 5% amortization, ~4% interest, 50% cash flow sweep, and maintenance covenants. Option #3: Subordinated Notes with 10-year maturities, no amortization, ~8% interest rates, no early repayments, and only a Debt Service Coverage Ratio (DSCR) covenant. We start by evaluating the Term Loans since they're the cheapest form of financing. Even in the Base Case, it would be almost impossible for the company to comply with the minimum DSCR covenant, and it looks far worse in the Downside cases Next, we try the Subordinated Notes instead – the lack of principal repayment will make it easier for the company to comply with the DSCR. The DSCR numbers are better, but there are still issues in the Downside and Extreme Downside cases. So, we decide to try some amount of Equity as well. We start with 25% or 50% Equity, which we can simulate by setting the EBITDA multiple for Debt to 1.5x or 1.0x instead. The DSCR compliance is much better in these scenarios, but we still run into problems in Year 4. Overall, though, 50% Subordinated Notes / 50% Equity is better if we strongly believe in the Extreme Downside case; 75% / 25% is better if the normal Downside case is more plausible. Qualitative factors also support our conclusions. For example, the company has extremely high EBITDA margins, low revenue growth, and stable cash flows due to its near-monopoly in the center of Japan, so it's an ideal candidate for Debt. Also, there's limited downside risk in the next 5-10 years; population decline in Japan is more of a concern over the next several decades. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Debt-vs-Equity-Analysis-Slides.pdf
HOW TO VALUE A STOCK 📈 When Should You Buy A Stock?
 
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FOLLOW ME ON INSTAGRAM FOR DAILY MOTIVATIONAL CONTENT ✔️ @ryanscribnerofficial _______ Ready to start investing? 🤔💸 WEBULL: "Get a FREE STOCK worth up to $1000." 💰 http://ryanoscribner.com/webull BETTERMENT: "Passive investing, they manage everything for you." 📈 http://ryanoscribner.com/betterment FUNDRISE: "Passive real estate investing, 8 to 11% returns." 🏠 http://ryanoscribner.com/fundrise M1 FINANCE: "Invest in partial shares of stocks like Amazon." 📌 http://ryanoscribner.com/m1-finance LENDING CLUB: "Become the bank and make interest on loans." 🏦 http://ryanoscribner.com/lending-club COINBASE: "Get $10 in free Bitcoin (when you fund $100)." ⭐ http://ryanoscribner.com/coinbase _______ Want more Ryan Scribner? 🙌 MY INVESTING BLOG ▶︎ https://investingsimple.blog/ FREE INVESTING COURSE ▶︎ http://ryanoscribner.com/free-course FACEBOOK GROUP FOR ENTREPRENEURS ▶︎ https://www.facebook.com/groups/164766680793265/ COURSE CREATION COMPANION ▶︎ http://ryanoscribner.com/course-creation-companion LIKE MY FACEBOOK PAGE ▶︎ https://www.facebook.com/ryanoscribner/ PASSIVE INCOME MASTERCLASS LIVE EVENTS ▶︎ http://ryanoscribner.com/passive-income _______ Premium Educational Programs 🧐 PRIVATE STOCK MARKET INVESTING SITE 📊 http://ryanoscribner.com/stock-radar STOCK MARKET INVESTING COURSE 📈 http://ryanoscribner.com/stock-market-investing-course _______ Ready to keep learning? 🤔📚 My Favorite Personal Finance Book 📘 https://amzn.to/2NiyDiz My Favorite Investing Book 📗 https://amzn.to/2KEyd7D My 2nd Favorite Investing Book 📗 https://amzn.to/2tZmxBU My Favorite Personal Development Book 📕 https://amzn.to/2KJKgRn Not a fan of reading? Join Audible and get two free audio books! ❌📚 http://ryanoscribner.com/audible _______ DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. I am merely sharing my opinion with no guarantee of gains or losses on investments. AFFILIATE DISCLOSURE: I am affiliated with a number of the offerings on this channel. This includes the links above under "Ready To Start Investing" as well as other influencers I bring on the channel. This also includes the use of Amazon affiliate links. (Send me something) Scribner Media LLC PO Box 641 Ballston Spa, NY 12020
Views: 73464 Ryan Scribner
NAV Model (Oil & Gas): Production Decline Curve
 
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When you're valuing an E&P (Exploration & Production) company, the Net Asset Value (NAV) Model is the key methodology. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" UNLIKE in a DCF, where cash flow growth is assumed into infinity, in a NAV model you assume the company's cash flows go to $0 eventually as it completely produces all of its reserves and has nothing left. A granular NAV model is complex, but it comes down to a 2-step process: Step 1: Model the company's existing production from wells it already has... and assume a decline rate for the annual production each year, also assuming commodity prices to determine revenue, and linking operating expenses to production and calculating cash flow like that. Step 2: Assume the company drills new wells in its PUD (Proved Undeveloped), PROB (Probable), and POSS (Possible) reserves. The second step involves dozens of sub-steps and assumptions, but here we're just going to focus on ONE small part of this process: estimating the decline rate of a new well the company drills. It starts off at a very high production rate, but then declines quickly within even the first year of its useful life - and we need to estimate the decline rates each year to build the rest of the model. You COULD do lots of complicated math, try fitting hyperbolic or exponential functions, run a regression analysis, etc., but we suggest a much simpler approach here: if the company doesn't disclose data on its decline rates for individual wells, find data from another company operating in the same region and fit it to your company's "average" wells. How to Do That: Step 1: Find the company's key data, such as the EUR per well and IP rate per well in the region you're looking at. Step 2: Now, see if the company discloses data on its own decline rates... if so, you're set! If not, or if it's not enough, find another company operating in the region that discloses more data (EQT here), and go to that company's investor presentations to get the numbers. Step 3: In the first year, assume that production is some % of 365 * IP Rate per Well... because there is a huge drop-off in daily production from Month 1 to Month 12 in that first year. EQT's data shows 45%; we assume 60% here since UPL has a slightly flatter decline curve. Step 4: Copy and paste the other company's decline rates into each year of your decline curve. Step 5: Enter the correct formula for calculating annual production each year AFTER the initial year... here: =MIN(AU129*(1+AT130),$AT$126-SUM(AU$129:AU129)) Want to take either Last Year Production * (1 + Decline Rate) (the first part), or the total remaining reserves in this well (the second part). Step 6: Set up Subtotal / Remainder / Total math and ensure that everything is produced. Step 7: "Fit the data" using Goal Seek and the Factor - multiply each decline rate by a certain factor and use Goal Seek (Alt + A + W + G) to solve for the factor that makes the Subtotal equal to the EUR. Step 8: Build in support for a different EUR by scaling the production up or down in the "Total" column. Step 9: Allocate the production to oil vs. gas. vs. NGLs. Step 10: Complete the Subtotal / Remainder / Total math at the bottom. What Next? Next, we'd complete this process for all the wells the company drills in every region, estimate revenue, expenses, and cash flow for each one, and then aggregate the discounted cash flow values in every region across all reserve types... Which brings us closer to the implied NAV per share, which is what the NAV model is really all about. Stay tuned for more!
Session 1: Introduction to Valuation
 
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Lays out the rationale for doing valuation as well as the issues of bias, complexity and uncertainty that bedevil it.
Views: 410144 Aswath Damodaran

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