Private Equity : Lecture 2

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Questions and Answers

Which method can be used to obtain a 'ballpark' valuation for a firm?

  • Comparables (correct)
  • DCF
  • Growth rate analysis
  • Risk assessment

What is the market value of Danone if it exhibits $35,740,000,000 of sales?

  • $35,740,000
  • $357,400,000,000 (correct)
  • $35,740,000,000
  • $3,574,000,000

What are the common ratios used in public markets for valuation?

  • Share price ratio, market value ratio, revenue ratio
  • Share price ratio, market value ratio, earnings ratio
  • P-E ratio, market-to-book ratio, revenue ratio (correct)
  • P-E ratio, market-to-book ratio, earnings ratio

What is Step 1 in the comparables valuation method?

<p>Identify firms with similar characteristics (B)</p> Signup and view all the answers

What is Step 2 in the comparables valuation method?

<p>Identify ratios (B)</p> Signup and view all the answers

What is Step 3 in the comparables valuation method?

<p>Multiply (A)</p> Signup and view all the answers

What does DCF stand for in valuation?

<p>Discounted Cash Flow (B)</p> Signup and view all the answers

What is one of the caveats of using the DCF method for valuing start-ups?

<p>Lack of comparables (A)</p> Signup and view all the answers

What is one of the caveats of using the comparables method for valuing start-ups?

<p>Lack of comparables (C)</p> Signup and view all the answers

What is the implied market value of equity of Ford if the Price Earnings Ratio of (General Motors + VW)/2 is used and Ford's earnings are given?

<p>The average of General Motors' and VW's market values (C)</p> Signup and view all the answers

Which of the following is a non-financial, industry-specific measure of value?

<p>Number of subscribers enrolled by a firm (A)</p> Signup and view all the answers

What is the average value for Chipgen according to the given information?

<p>67.7 m (B)</p> Signup and view all the answers

What is the proper discount for liquidity when valuing shares in private firms?

<p>Between 25% and 30% (A)</p> Signup and view all the answers

What is the formula for computing discounted cash flows (DCF)?

<p>DCF = CF0 + CF1 / (1 + r)1 + CF2 / (1 + r)2 + ... + CFT / (1 + r)T (C)</p> Signup and view all the answers

Which of the following is NOT included in the computation of cash flows (CF)?

<p>Earnings before interest and tax (EBIT) (D)</p> Signup and view all the answers

Why is it necessary to correct for depreciation (DEPR) in cash flow computations?

<p>To accurately reflect the costs included in financial statements (B)</p> Signup and view all the answers

Why is it necessary to correct for the increase in net working capital (ΔNWC) in cash flow computations?

<p>To accurately reflect the changes in working capital (B)</p> Signup and view all the answers

What is the expected growth rate of cash flows after 2019 for Jersey Inc.?

<p>5% (B)</p> Signup and view all the answers

What is the total debt interest payments in 2017, 2018, and 2019 for Jersey Inc.?

<p>$10 million (A)</p> Signup and view all the answers

What is the value of EBIT in 2018 for Jersey Inc.?

<p>$102.5 million (C)</p> Signup and view all the answers

Which formula is used to calculate the terminal value (TV) at time T using the perpetuity method?

<p>$TV_T = [CF_T * (1 + g)] / (r - g)$ (B)</p> Signup and view all the answers

Which formula is used to calculate the discount rate (r) using the Weighted Average Cost of Capital (WACC) formula?

<p>$r = (D / V) * r_d * (1- Ï„) + (E / V) * r_e$ (B)</p> Signup and view all the answers

What is the formula for calculating the expected rate of return on equity using the Capital Asset Pricing Model (CAPM)?

<p>$E(r_e) = r_f + β * [E(r_m) - r_f]$ (B)</p> Signup and view all the answers

What is the formula for calculating the Net Present Value (NPV) using the Discounted Cash-Flow (DCF) method?

<p>$DCF = CF_0 + [CF_1 / (1 + r)] + ...+ [(CF_T + TV_T) / (1 + r)^T]$ (C)</p> Signup and view all the answers

What is the formula for unlevering the beta (β)?

<p>$β_u = β_L * [E / (E + D)]$ (A)</p> Signup and view all the answers

What is the formula for relevering the beta (β)?

<p>$β' = β_u / [E' / (E' + D')]$ (B)</p> Signup and view all the answers

What are some drawbacks of the Discounted Cash-Flow (DCF) method?

<p>Lack of comparable companies, terminal value sensitivity, and beta as the proper measure of firm risk (A)</p> Signup and view all the answers

What is the risk-free rate used in the Capital Asset Pricing Model (CAPM)?

<p>8% (B)</p> Signup and view all the answers

Which formula is used to calculate the terminal value (TV) at time T using the perpetuity method?

<p>$TV_T = [CF_T * (1 + g)] / (r - g)$ (B)</p> Signup and view all the answers

What is the formula for calculating the discount rate (r) using the Weighted Average Cost of Capital (WACC) formula?

<p>$r = (D / V) * r_d * (1 - \tau) + (E / V) * r_e$ (D)</p> Signup and view all the answers

What is the formula for calculating the expected rate of return on equity (E(r_e)) using the Capital Asset Pricing Model (CAPM)?

<p>$E(r_e) = r_f + \beta * [E(r_m) - r_f]$ (B)</p> Signup and view all the answers

What is the formula for calculating the Net Present Value (NPV) using the Discounted Cash Flow (DCF) method?

<p>$DCF = CF_0 + [CF_1 / (1 + r)] + \ldots + [(CF_T + TV_T) / (1 + r)^T]$ (D)</p> Signup and view all the answers

What is the formula for unlevering beta (βu)?

<p>$\betau = \betaL * [E / (E + D)]$ (B)</p> Signup and view all the answers

What is the formula for relevering beta (β')?

<p>$\beta' = \betau / [E' / (E' + D')]$ (B)</p> Signup and view all the answers

What is one of the drawbacks of using the DCF method for valuation?

<p>Lack of comparable companies (A)</p> Signup and view all the answers

What is one of the drawbacks of using the DCF method for valuation?

<p>Terminal value sensitivity (A)</p> Signup and view all the answers

Which formula is used to calculate the terminal value (TV) at time T using the perpetuity method?

<p>$TV_T = \left[ CF_T \times (1 + g) \right] / (r - g)$ (D)</p> Signup and view all the answers

What is Step 3 in the comparables valuation method?

<p>Determine the Discount Rate using the Weighted Average Cost of Capital (WACC) formula (C)</p> Signup and view all the answers

What is the formula for computing discounted cash flows (DCF)?

<p>$DCF = CF_0 + [CF_1 / (1 + r)] + ...+ [(CF_T + TV_T) / (1 + r)^T]$ (A)</p> Signup and view all the answers

What is the formula for calculating the Net Present Value (NPV) using the Discounted Cash-Flow (DCF) method?

<p>$NPV = CF_0 + [CF_1 / (1 + r)] + ...+ [(CF_T + TV_T) / (1 + r)^T]$ (B)</p> Signup and view all the answers

What is the formula for unlevering the beta (β)?

<p>$β_u = β_L \times \left[ \frac{E},{E + D} \right]$ (B)</p> Signup and view all the answers

What is the formula for relevering the beta (β)?

<p>$β' = β_u / \left[ \frac{E'},{E' + D'} \right]$ (A)</p> Signup and view all the answers

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