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Adventis FMC Level 2 with Complete Solutions | Verified 2025 |, Exams of Finance

University of Oklahoma (OU)Finance

Adventis FMC Level 2 with Complete Solutions | Already Passed| Verified 2025

Typology: Exams

2024/2025

Available from 06/23/2025

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Adventis FMC Level 2 with Complete Solutions |
Already Passed| Verified 2025
what is value - ✔✔what people are willing to pay for (what the buyer pays)
who said, "Value is what people are willing to pay for" - ✔✔John Naisbitt
2 primary types of valuation - ✔✔1. relative valuation
2. intrinsic valuation
relative valuation refers to what - ✔✔methods that compare the price of a company to the market value
of similar assets
intrinsic value refers to what - ✔✔the value of a company through fundamental analysis without
reference to its market value but instead around its ability to generate cash flow
in an M&A context, what is EV - ✔✔transaction value
in an M&A context, what is equity value - ✔✔purchase price
a company sold for $100M and the company being bought had $15M of debt and $2M of cash, what
happens and what is the transaction value and purchase price - ✔✔- the $2M would be used by
shareholders of the acquired company to pay down existing $15M in debt to make $13M in debt now
(15 - 2 = 13)
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Download Adventis FMC Level 2 with Complete Solutions | Verified 2025 | and more Exams Finance in PDF only on Docsity!

Adventis FMC Level 2 with Complete Solutions |

Already Passed| Verified 2025

what is value - ✔✔what people are willing to pay for (what the buyer pays) who said, "Value is what people are willing to pay for" - ✔✔John Naisbitt 2 primary types of valuation - ✔✔1. relative valuation

  1. intrinsic valuation relative valuation refers to what - ✔✔methods that compare the price of a company to the market value of similar assets intrinsic value refers to what - ✔✔the value of a company through fundamental analysis without reference to its market value but instead around its ability to generate cash flow in an M&A context, what is EV - ✔✔transaction value in an M&A context, what is equity value - ✔✔purchase price a company sold for $100M and the company being bought had $15M of debt and $2M of cash, what happens and what is the transaction value and purchase price - ✔✔- the $2M would be used by shareholders of the acquired company to pay down existing $15M in debt to make $13M in debt now (15 - 2 = 13)
  • the proceeds from the deal would then be used to pay down the remaining debt (EV = CS + PS + Debt - Cash)
  • Result is 100 - 13 = 87
  • TV = $100M
  • Purchase price = $87 (check to shareholders of acquired company) 2 primary types of relative valuation - ✔✔1. comparable company analysis
  1. acquisition comparables analysis comparable companies analyses (public trading comparables analyses) - ✔✔- most common types of relative valuation
  • these methods allow investors to compare valuation of similar companies by comparing similar ratios most common public trading comparable ratios - ✔✔1. EV/EBITDA
  1. EV/Revenue
  2. Net income/Earnings (share price/earnings per share) assume a company has $5M of EBITDA and two public companies most similar to the company trade at 6.0x and 7.0x EBITDA, what might you conclude - ✔✔- Ex: 7.0 = x/5 ; 6.0 = x/
  • can conclude that EV for the company should be between 30 - 35 million what happens when a company trades at a multiple that is a premium or a discount to the industry average - ✔✔investors will dig in to understand the rationale
  • not affected by capital structure
  • doesn't include interest expense why is tax-effected EBIT used rather than net income - ✔✔- the valuation should not depend on capital structure
  • applying the tax-rate directly to EBIT without subtracting interest expense eliminates the impact of capital structure to cash flow cash flow is projected out in the projection period which is typically... - ✔✔ 5 years but could be 10 years for startups the analyst should end the model with a financial year representative of a... - ✔✔steady state to ensure the analysis does not over or understate total valuation first component of determining the present value of a company is - ✔✔calculate each unlevered FCF's PV by discounting them using the discount rate (cost of capital) two methods for determining terminal value - ✔✔1. perpetuity method
  1. EBITDA exit multiple method perpetuity method assumes that the FCF in the last year of the projection period... - ✔✔will grow into perpetuity at an annual rate of growth (2-3%)

in practice, you would typically expect to see perpetuity growth do what when a company matures - ✔✔decline to calculate the terminal value under the perpetuity growth method, what model is used - ✔✔Gordon- Growth Model the Gordon-Growth Model rests on the assumption that... - ✔✔CF of the last period will stabilize and continue at the same rate of growth forever perpetuity growth rate represents - ✔✔an average growth rate perpetuity growth rate can't exceed what - ✔✔local inflation rate because that would signify that the company would eventually grow to be larger than the entire domestic economy EBITDA exit multiple assumes... - ✔✔that the company is sold in the last year of the projection period at a multiple of EBITDA what will investors do with these two methods - ✔✔use one method and back into an implied value for the other method as a check if a 12.0x EBITDA exit multiple implies a 5% perpetuity growth rate, what can be said - ✔✔the exit multiple could be considered unrealistic formula for PV of projection period - ✔✔PV = FV/(1+r)^N

1. E

2. D

3. V

4. E/V

5. D/V

  1. Re
  2. Rd
  3. T - ✔✔1. market value of equity
  4. market value of debt
  5. total enterprise value (E+D)
  6. % of financing that is equity
  7. % of financing that is debt
  8. cost of equity
  9. cost of debt
  10. corporate tax rate Capital assets pricing model (CAPM) - ✔✔- used to calculate cost of equity
  • rate of return equity owners expect CAPM formula - ✔✔Re = Rf + B (Rm - Rf) Rf - ✔✔risk free rate (10 year bond)

B - ✔✔Beta (how volatile the stock is in comparison to the market) Rm-Rf - ✔✔market risk premium (expected return on the market - risk free rate) what does a leveraged buyout analysis tell you - ✔✔how much a private equity firm could afford to pay for a business private equity firms target a higher or lower return? - ✔✔higher which means they use higher leverage for publicly traded companies, the purchase price assumes what? - ✔✔a premium to the stock price to incent a change in ownership premium typically ranges between... - ✔✔ 20 - 40% transaction value determined by... - ✔✔adding net debt to the purchase price transaction value represents... - ✔✔total value that must be financed to acquire the company sources and uses reflect what - ✔✔sources and uses of capital to finance the acquisition sources include - ✔✔1. debt

  1. equity

senior debt - ✔✔- has first claim in bankruptcy

  • amortized (paid back) over the life of the loan causing it to have lower interest rates subordinated debt - ✔✔- requires interest payments only with the ability to voluntarily pay down principal with any excess cash flow
  • higher interest rates due to additional default risk typical debt/EBITDA - ✔✔2.0x-4.0x typical total debt/EBITDA - ✔✔4.0x-6.0x the financial sponsor's equity investment makes up - ✔✔- any remaining capital needed to finance the transaction value
  • 20 - 40% of total sources most commonly used measures of return - ✔✔1. cash-on-cash return
  1. internal rate of return (IRR) both measures take into account - ✔✔the relationship of capital invested by the financial sponsor vs. capital returned over the life of the investment the IRR unlike the cash-on-cash take into account - ✔✔- TVM
  • produces annualized rate or return

target IRR's range from - ✔✔ 20 - 30% IRR - ✔✔annualized effective compounded return rate that makes NPV = 0 IRR formula - ✔✔IRR = (cash returned to sponsor/initial equity invested)^1/N - 1 if an investor receives a 15% IRR over the life of an investment... - ✔✔investment increased on avg 15% per year cash-on-cash multiple - ✔✔how much an investor receives in proceeds upon exiting the investment compared to its initial investment (doesn't matter when the exit actually occurs) cash-on-cash formula - ✔✔cash returned to sponsor/initial equity invested if an investor gets a cash-on-cash multiple of 2.5x... - ✔✔they received $2.50 for every $1 invested