## Calculation of Key Financial Statistics and Ratios

In this section, we outline the calculation of key financial statistics, ratios, and other metrics in accordance with the financial profile framework introduced in Step I. Size (Market Valuation equity value and enterprise value and Key Financial Data sales, gross profit, EBITDA, EBIT, and net income) Profitability (gross profit, EBITDA, EBIT, and net income margins) Growth Profile (historical and estimated growth rates) Return on Investment (ROIC, ROE, ROA, and dividend yield) Credit Profile...

## Step Iii Spread Key Statistics Ratios And Trading Multiples

Once the necessary financial information for each of the comparables has been located, it is entered into an input page (see Exhibit 1.5).27 This sample input page 27For modeling data entry purposes, manual inputs are typically formatted in blue font, while formula cells (calculations) are in black font (electronic versions of our models are available on our website, www.wiley.com go investmentbanking). In this book, we use darker shading to denote manual input cells. EXHIBIT 1.5 Sample...

## Lbo Financing Structure

In a traditional LBO, debt has typically comprised 60 to 70 of the financing structure, with the remainder of the purchase price funded by an equity contribution from a sponsor (or group of sponsors) and rolled contributed equity from management. Given the inherently high leverage associated with an LBO, the various debt components of the capital structure are usually deemed non-investment grade, or rated 'Bal' and below by Moody's Investor Service and 'BB+' and below by Standard and Poor's...

## Public Targets

Proxy Statement In a one-step merger transaction,2 the target obtains approval from its shareholders through a vote at a shareholder meeting. Prior to the vote, the target provides appropriate disclosure to the shareholders via a proxy statement. The proxy statement contains a summary of the background and terms of the transaction, a description of the financial analysis underlying the fairness opinion(s) of the financial advisor(s), a copy of the definitive purchase sale agreement (definitive...

## ValueCo Corporation

Enterprise Value Implied Equity Value Enterprise Value Implied Equity Value Implied Enterprise Value LTM EBITDA Implied Enterprise Value LTM EBITDA PV of Terminal Value as of Enterprise Value PV of Terminal Value as of Enterprise Value We then performed a series of sensitivity analyses on WACC and exit multiple for several key outputs, including enterprise value, equity value, implied perpetuity growth rate, implied EV LTM EBITDA, and PV of terminal value as a percentage of enterprise value...

## Step IVa Build Debt Schedule

The debt schedule is an integral component of the LBO model, serving to layer in the pro forma effects of the LBO financing structure on the target's financial statements.15 Specifically, the debt schedule enables the banker to complete the pro forma income statement from EBIT to net income complete the pro forma long-term liabilities and shareholders' equity sections of the balance sheet complete the pro forma financing activities section of the cash flow statement As shown in Exhibit 5.27,...

## Identify Key Characteristics of the Target for Comparison Purposes

A simple framework for studying the target and selecting comparable companies is shown in Exhibit 1.3. This framework, while by no means exhaustive, is designed to determine commonality with other companies by profiling and comparing key business and financial characteristics. EXHIBIT 1.3 Business and Financial Profile Framework Products and Services Customers and End Markets Distribution Channels Geography Profitability Growth Profile Return on Investment Credit Profile Companies that share...

## Step V Calculate Present Value and Determine Valuation Calculate Present Value

ValueCo's projected annual FCF and terminal value were discounted to the present using the selected WACC midpoint of 11 see Exhibit 3.54 . We used a mid-year convention to discount projected FCF. For the terminal value calculated using the EMM, however, we used year-end discounting. EXHIBIT 3.54 Present Value Calculation Unlevered FCF2009e x Discount Factor 79.0 million x 0.95 Exit Year EBITDA x Exit Multiple 189.5 million x 7.0x Unlevered FCF2009e x Discount Factor 79.0 million x 0.95 Terminal...

## Screen for Comparable Companies

Once the target's basic business and financial characteristics are researched and understood, the banker uses various resources to screen for potential comparable companies. At the initial stage, the focus is on identifying companies with a similar business profile. While basic financial information e.g., sales, enterprise value, or equity value should be assessed early on, more detailed financial benchmarking is performed in Step IV. Investment banks generally have established lists of...

## Step IIIc Estimate Cost of Equity re

Cost of equity is the required annual rate of return that a company's equity investors expect to receive including dividends . Unlike the cost of debt, which can be deduced from a company's outstanding maturities, a company's cost of equity is not readily observable in the market. To calculate the expected return on a company's equity, the banker typically employs a formula known as the capital asset pricing model CAPM . Capital Asset Pricing Model CAPM is based on the premise that equity...

## Instructor Teaching Aids

To accompany the chapters, we have included a test bank of over 300 questions and answers for classroom and other instructional use. The test bank can be accessed by instructors in Microsoft Word format at www.wiley.com go investmentbanking. The test bank is also available in interactive format to facilitate online testing. The website includes the following files Chapter 1 .Comparable Companies Analysis_Q amp A.doc Chapter 2_Precedent Transactions Analysis_Q amp A.doc Chapter 3_Discounted Cash...

## SEC Filings 10K 10Q 8K and Proxy Statement

As a general rule, the banker uses SEC filings to source historical financial information for comparable companies. This financial information is used to determine historical sales, gross profit, EBITDA, EBIT, and net income and EPS on both an annual and LTM basis. SEC filings are also the primary source for other key financial items 15First Call and Institutional Brokers' Estimate System IBES provide consensus analyst estimates for thousands of publicly traded companies. Both First Call and...

## Supplemental Financial Concepts and Calculations

Calculation of LTM Financial Data U.S. public filers are required to report their financial performance on a quarterly basis, including a full year report filed at the end 47Ratings agencies provide opinions, but do not conduct audits. 48 Ratings are assessed on the issuer corporate credit ratings as well as on the individual debt instruments facility ratings . of the fiscal year. Therefore, in order to measure financial performance for the most recent annual or LTM period, the company's...

## Step I Select the Universe of Comparable Companies

Study the Target Our first task was to learn ValueCo's story in as much detail as possible so as to provide a frame of reference for locating comparable companies. As ValueCo is a private company, for the purposes of this exercise we assumed that it is being sold through an organized M amp A sale process see Chapter 6 . Therefore, we were provided with substantive information on the company, its sector, products, customers, competitors, distribution channels, and end markets, as well as...

## Ryan Drook Deutsche Bank

We are deeply indebted to the numerous colleagues and peers who provided invaluable guidance, input, and hard work to help make this book possible. Our book could not have been completed without the sage advice and enthusiasm of Steve Momper, Director of Darden Business Publishing at the University of Virginia. Steve believed in our book from the beginning and supported throughout the entire process. Most importantly, he introduced us to our publisher, John Wiley amp Sons, Inc. Special thanks...