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com/ru/news/valuation_interview_questions__answers_advanced_2_4_
2015

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#:~:text=Why%20might%20we%20discount%20the,the%20shares%20immediately
%20become%20illiquid.

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l_basic_2_4_2015#:~:text=Why%20would%20an%20acquisition%20be,effects%20of
%20issuing%20additional%20shares.

1.What does NPV mean?

NPV is the sum of the present values of all expected incremental cash flows if a project is
undertaken. A positive NPV project is expected to increase shareholder wealth, a negative NPV
project is expected to decrease shareholder wealth, and a zero NPV project has no expected
effect on shareholder wealth.

2.What does RRR (required rate of return) mean?

The expected return of an investment that is necessary to compensate for the risk of undertaking
the investment.

3.What does IRR mean?

The internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability
of potential investments. The internal rate of return is a discount rate that makes the net present
value (NPV) of all cash flows from a particular project equal to zero.

4.What does WACC mean?

The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which
each category of capital is proportionately weighted. All sources of capital, including common
stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

5.Why cost of debt is usually less than cost of equity?

The more riskier the asset the more profitable it is. Because debt is less riskier it has less return.
6.How do you calculate cost of equity?

Cost of Equity = Risk-Free Rate+Beta*Equity Risk Premium

The risk-free rate represents how much a 10-year or 20-year US Treasury should yield; Beta is
calculated based on the "riskiness" of Comparable Companies and the Equity Risk Premium is
the % by which stocks are expected to out-perform "risk-less" assets.

7.Walk me through CAPM

CAPM is a basic model for counting the cost of equity. The formula is the following: re=
rf+betta*(rm-rf), where rf- risk free rate (ussually for 10 year's government bond), rm- market
return (of market indexes, such as S&P), betta- measure the volatility of an individual stock
compared to the systematic risk of the entire market

8. What does risk-free rate mean?

The interest rate at which money can be borrowed or lent without risk over a given period.
Although no risk-free asset exist in reality, usually the yield to maturity on US government
bonds is considered to be risk-free interest rate.

9.What does beta mean?

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the

market as a whole.

10.How is ERP (equity risk premium) calculated?

The equity risk premium is calculated as the difference between the estimated real return on
stocks and the estimated real return on safe bonds—that is, by subtracting the risk-free return
from the expected asset return (the model makes a key assumption that current valuation
multiples are roughly correct). The U.S. Treasury bill (T-bill) rate is most often used as the risk-
free rate. The risk-free rate is merely hypothetical, as all investments have some risk of loss.
However, the T-bill rate is a good measure since they are very liquid assets, easy to understand,
and the U.S. government has never defaulted on its debt obligations.

Risk Premium is the % by which stocks are expected to out-perform "risk-less" assets.

11.Describe the difference between Asset beta and Equity beta

The asset beta (unlevered beta) is the beta of a company on the assumption that the company
uses only equity financing. In contrast, the equity beta (levered beta, project beta) takes into
account different levels of the company's debt. A company has one asset beta and, depending on
its debt-to-equity ratio, it can have many different equity betas.

12.What are examples of companies with negative beta?

Zoom (Video Communications), Capcom (Video Games), Virtu Financial (Financial Services),
Safehold (Real Estate Services), Polyus (Gold Mining)

13.How can we calculate cost of equity WITHOUT using CAPM?

There is an alternate formula: 

Cost of Equity = (Dividends per Share / Share Price) + Growth Rate of Dividends
 
This is less common than the "standard" formula but sometimes you use it for companies where
dividends are more important or when you lack proper information on Beta and the other
variables that go into calculating Cost of Equity with CAPM

14.Should cost of equity be higher for a $5 billion or $500 million market cap company?

It should be higher for the $500 million company, because all else being equal, smaller
companies are expected to outperform large companies in the stock market (and therefore be
"more risky"). Using a Size Premium in your calculation would also ensure that Cost of Equity is
кhigher for the $500 million company.

15.What about WACC – will it be higher for a $5 billion or $500 million company?

Trick question because it depends on capital structure. If cap structure is the same, WACC
higher for smaller company.

16.What is the relationship between debt and Cost of Equity?

More debt means that the company is more risky, so the company's Levered Beta will be higher -
all else being equal, additional debt would raise the Cost of Equity, and less debt would lower
the Cost of Equity.

17.How do you calculate WACC for a private company?

This is problematic because private companies don't have market caps or Betas. In this case you
would most likely just estimate WACC based on work done by auditors or valuation specialists,
or based on what WACC for comparable public companies is.

18.Provide Enterprise value (EV) calculation

Simple Formula:
• Enterprise Value = Equity Value + Debt + Preferred Stock + Non-controlling Interests - Cash

Advanced Formula:
• Enterprise Value = Equity Value + Debt + Preferred Stock + Non-controlling Interests +
Capital Leases + Unfunded Pension Obligations and Other Liabilities - Cash - NOLs -
Investments - Equity Investments

19.Provide EV to Equity value bridge

A key M&A concept to grasp is that transactions take place on a cash-free debt-free basis. This
essentially means that the seller of a business will extract all debt and cash from the business
prior to completion. This concept is illustrated through the enterprise value to equity value bridge

20.Should you use the book value or market value of each item when calculating Enterprise
Value?

Technically, you should use market value for everything. In practice, however, you usually use
market value only for the Equity Value portion, because it's almost impossible to establish
market values for the rest of the items in the formula - so you just take the numbers from the
company's Balance Sheet.

21.Could a company have a negative Enterprise value?

• Yes. It means that the company has an extremely large cash balance‚ or an extremely low
market capitalization (or both).
• You often see it w/ companies on the brink of bankruptcy‚ and sometimes also with companies
that have enormous cash balances

22.Could a company have a negative Equity value? What would that mean?

No. This is not possible b/c you cannot have a negative share count or a negative share price.

23.Why do we add Preferred stock to get to Enterprise value?

• Preferred Stock pays out a fixed dividend‚ and Preferred Shareholders also have a higher claim
to a company's assets than equity investors do. As a result‚ it is more similar to Debt than
common stock.
• Also‚ just like Debt‚ typically Preferred Stock must be repaid in an acquisition scenario.

24.How do you account for convertible bonds in the Enterprise value formula?

• If the convertible bonds are in-the-money‚ meaning that the conversion price of the bonds is
below the current share price‚ then you count them as additional dilution to the Equity Value (no
Treasury Stock Method required - just add all the shares that would be created as a result of the
bonds).

• If the Convertible Bonds are out-of-the-money‚ then you count the face value of the
convertibles as part of the company's debt.

25.What does Non-controlling interest mean? Why do you need to add the Non-controlling
interest toEnterprise value?

Non-controlling interest means

Whenever a company owns over 50% of another company, it is required to report the financial
performance of the other company as part of its own performance.

So even though it doesn't own 100%, it reports 100% of the majority-owned subsidiary's
financial performance.

-NI incl NCI – NCI = NI TO XYZ

In keeping with the "apples-to-apples" theme, you must add the Noncontrolling Interest to get to
Enterprise Value so that your numerator and denominator both reflect 100% of the majority-
owned subsidiary.

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26.Describe the difference between Unlevered (FCFF) and Levered (FCFE) free cash flows

The difference between levered and unlevered free cash flow is expenses. Levered cash flow is
the amount of cash a business has after it has met its financial obligations. Unlevered free cash
flow is the money the business has before paying its financial obligations. Operating
expenses and interest payments are examples of financial obligations that are paid from levered
free cash flow.

A business that wants to expand needs cash for equipment, inventory, increased staff and
additional space. Although some businesses can afford to finance smaller expansions on their
own, most businesses need to raise additional cash to make the expansion happen. Whether a
business opts to bring in investors or seek financing from a bank, the health of the business is
scrutinized. One of the things an investor considers is the free cash flow of the business.

Both the levered and unlevered free cash flow can appear on the balance sheet. Levered cash
flow is of interest to investors, because it indicates how much cash a business has to expand. The
difference between the levered and unlevered cash flow is also an important indicator. The
difference shows how many financial obligations the business has and if the business is
overextended or operating with a healthy amount of debt. It is possible for a business to have a
negative levered cash flow if its expenses are more than what the company earned. This is not an
ideal situation, but as long as it's a temporary issue, investors should not be too rattled.

27.How can we calculate FCFF and FCFE starting from NI, EBITDA and CFO?
FCFF = Net Income + NСС + Interest Expense * (1- Tax Rate) - CapEx - Investments in
Working Capital
FCFE = NI + NCC - CapEx - Investments in WC + Net Borrowing
FCFF = EBITDA*(1-Tax Rate) + Depreciation*Tax Rate - CapEx - Investments in WC
FCFE = EBITDA*(1-Tax Rate) + Depreciation*Tax Rate - Interest Expense * (1- Tax Rate) -
CapEx - Investments in WC + Net Borrowing
FCFF = CFO + Interest Exp*(1- Tax Rate) - CFI
FCFE = CFO - CFI + Net Borrowing

28.Why do you add back non-cash charges when calculating the Free Cash Flow?

For the same reason you add them back on the Cash Flow Statement: you want to reflect the fact
that they save the company on taxes, but that the company does not actually pay the expense in
cash.

Financial Statements
29.How do the three statements link together?
“To tie the statements together, Net Income from the Income Statement flows into Shareholders’
Equity on the Balance Sheet, and into the top line of the Cash Flow Statement. Changes to
Balance Sheet items appear as working capital changes on the Cash Flow Statement, and
investing and financing activities affect Balance Sheet items such as PP&E, Debt and
Shareholders’ Equity. The Cash and Shareholders’ Equity items on the Balance Sheet act as
“plugs,” with Cash flowing in from the final line on the Cash Flow Statement.”

30.If I were stranded on a desert island, only had one statement and I wanted to review the
overall health of a company – which statement would I use and why?

You would use the Cash Flow Statement because it gives a true picture of how much cash the
company is actually generating, independent of all the non-cash expenses you might have. And
that’s the #1 thing you care about when analyzing the overall financial health of any business –
its cash flow

31.Let’s say I could only look at two statements to assess a company’s prospects – which 2
would I use and why?
The most preferable are cash flow and income statements as they provide all necessary
information about cash flows of the company, which can help in calculating value of the
company. Cash flow statement shows the main sources of generating income. Income statement
provides EBIT, COGS, SG&A, D&A for calculating FCFF and FCFE.

32.What is the difference between capital leases and operating leases?

Operating leases are used for short-term leasing of equipment and property, and do not involve
ownership of anything. Operating lease expenses show up as operating expenses on the Income
Statement. Capital leases are used for longer-term items and give the lessee ownership rights;
they depreciate and incur interest payments, and are counted as debt.

A lease is a capital lease if any one of the following 4 conditions is true:

a) If there’s a transfer of ownership at the end of the term.

b) If there’s an option to purchase the asset at a bargain price at the end of the term.
c) If the term of the lease is greater than 75% of the useful life of the asset.
d) If the present value of the lease payments is greater than 90% of the asset’s fair market
value.
33.If you were buying a vending machine business, would you pay a higher multiple for a
business where you owned the machines and they depreciated normally, or one in which
you leased the machines? The cost of depreciation and lease are the same dollar amounts
and everything else is held constant

You would pay more for the one where you lease the machines. Enterprise Value would be the
same for both companies, but with the depreciated situation the charge is not reflected in
EBITDA – so EBITDA is higher, and the EV / EBITDA multiple is lower as a result. For the
leased situation, the lease would show up in SG&A so it would be reflected in EBITDA, making
EBITDA lower and the EV / EBITDA multiple higher.

34.What are major items in Shareholders’ Equity?

Shareholders' equity is the amount of money a company could return to shareholders if all its
assets were converted to cash and all its debts were paid off.
Four components that are included in the shareholders' equity calculation are outstanding shares,
additional paid-in capital, retained earnings, and treasury stock.
35.What is the difference between Basic and Diluted EPS?

EPS only takes into account a company's common shares, whereas diluted EPS takes into
account all convertible securities such as convertible bonds or convertible preferred stock, which
are changed into equity or common stock. EPS (basic)= (Net income- Dividends on preffered
stock)/Average outstanding shares; EPS (diluted)= (Net income- Dividends on preferred
stock)/(Average outstanding shares+Diluted shares)
36.What is the difference between authorized, issued, treasury and outstanding shares?

Authorized shares are defined as those available to issue to investors, and the total number is
established in a company's legal formation documents, known as the articles of incorporation.
There is no limit as to the total number of shares that can be authorized within these documents
for a larger company, while smaller companies that do not plan to expand or that have a set
number of shareholders are limited to the number of authorized shares that they designate. For a
company that does not have an authorized shares restriction, the articles of incorporation may
authorize one share or millions of shares. The number of authorized shares can be changed by
way of a vote from shareholders, typically during the annual shareholder meeting.

Shares that are issued or sold to investors from the available number of authorized shares are
known as outstanding shares. The number of outstanding shares is set by the investment
bank that implements a company’s initial public offering (IPO), but the number can change.
A secondary stockmarket offering can increase the number of outstanding shares, as can
payment of employee stock options. Outstanding shares decrease when a company repurchases
its own stock. The total number of outstanding shares cannot be greater than the total number of
authorized shares as laid out in a company's articles of incorporation.

37.Assume equity (common stock) increased by $10. How will it affect three statements?

No affect on the income statement.

On the cash flow statement, there will be a cash inflow of $10 on cash from financing activities.
On the balance sheet, there will be an increase in common stock of $10 and thus shareholder's
equity will be up $10 and therefore cash will also be up by $10--balancing it out.
38.Stock-based compensation. Describe Treasury stock method. What is a difference
between call and put option? Does equity-based compensation usually provided in form of
call or put option?

Share-based compensation plans can take several forms, including stock options and outright
share grants. They have the advantages of serving to motivate and retain employees as well as
being a way to reward employees with no additional outlay of cash.
Shares or options may be granted with contingencies. In these cases, the estimated expense may
be spread over a period of time. For example, if shares are granted, but cannot be sold for a
period of time, the compensation expense recorded is spread over the period of time from the
grant date until the date on which they can be sold by the employee. The overall principle here is
that the compensation expense should be spread over the period for which they reward the
employee, referred to as the service period.
The treasury stock method assumes that the funds received by the company from the options
would be used to hypothetically purchase shares of the company’s common stock in the market
at the average market price. The net increase in the numbers of shares outstanding is the number
of shares created by exercising the options less the numbers of shares hypothetically repurchased
with the proceeds of exercise.
Call option gives a right to purchase the underlying asset, put option – to sell.
Equity-based compensation is usually provided in form of call option.

39.Describe the difference between LIFO and FIFO

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40.Assume Inventory INCREASED by $10. How will it affect three statements?

No changes to the Income Statement.

On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from
Operations – it goes down by $10, as does the Net Change in Cash at the bottom.

On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the
changes cancel out and Assets still equals Liabilities & Shareholders’ Equity.
41.What is the difference between ETR (effective tax rate) and MTR (marginal tax rate)?
Which one would you use for valuation purposes?

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affect-three-statements

The effective tax rate is the average rate at which its pre-tax profits are taxed. A marginal tax rate
is the rate at which tax is incurred on an additional dollar of income.
If the same tax rate has to be applied to earnings every period, the safer choice is the marginal
tax rate because none of the reasons noted above can be sustained in perpetuity. As new capital
expenditures taper off, the difference between reported and tax income will narrow; tax credits
are seldom perpetual; and firms eventually do have to pay their deferred taxes. There is no
reason, however, why the tax rates used to compute the after-tax cash flows cannot change over
time. Thus, in valuing a firm with an effective tax rate of 24% in the current period and a
marginal tax rate of 35%, you can estimate the first year’s cash flows using the effective tax rate
of 24% and then increase the tax rate to 35% over time. It is critical that the tax rate used in
perpetuity to compute the terminal value be the marginal tax rate.

42.What is DTA and DTL?

If the income as per books is more than taxable income then it means that we have paid less tax
as per book’s income and we have to pay more tax in future or if tax expenses are more than
accounting expenses thus recorded as Deferred Tax Liability (DTL). Similarly if income as per
books is less than taxable income then it means we have to paid more tax and has to pay less tax
in future or if tax expenses are less than accounting expenses this will be a Deferred Tax Asset
(DTA).

43.What is Loss carryforward?

Loss Carryforward is an accounting concept related to net operating loss. It is simply the
procedure by which a net operating loss is carried forwards to a future period to reduce the
amount of tax due.

For example, if a company has a net operating loss in 2011 but expects to be profitable in 2012,
it can carryforward the 2011 loss to reduce the tax it has to pay in 2012.

44.What are prepaid expenses?

A prepaid expense is a type of asset on the balance sheet that results from a business making
advanced payments for goods or services to be received in the future. Prepaid expenses are
initially recorded as assets, but their value is expensed over time onto the income statement.
Unlike conventional expenses, the business will receive something of value from the prepaid
expense over the course of several accounting periods.
For example, assume ABC Company purchases insurance for the upcoming twelve month
period. It pays $120,000 upfront for the insurance policy. ABC Company will initially book the
full $120,000 as a debit to prepaid insurance, an asset on the balance sheet, and a credit to cash.
Each month, an adjusting entry will be made to expense $10,000 (1/12 of the prepaid amount) to
the income statement through a credit to prepaid insurance and a debit to insurance expense. In
the twelfth month, the final $10,000 will be fully expensed and the prepaid account will be zero.

45.What is the difference between accounts receivable and deferred revenue?

Accounts Receivable = money owed to you from a sale that took place on one date but the
customer will be paying you at a later time. So they bought now and will pay you later. It’s
considered an asset
Deferred Revenue = you are paid in advance of performing any work or delivering any product.
So it’s the customer paying you now for services or products you’ll be providing at a later time.
It’s considered a liability because you have the legal and financial obligation to performing the
services for which you’ve been paid

46.Types of financial investments reported in Balance sheet

securities Held to maturity(debt) Trading d+e Available for sale d+e
measure Amortized market market
Unrealized gains/loss income statement income statement Other comrehprehens
income
Financial assets include investment securities (stocks and bonds), derivatives, loans, receivables.
Financial instruments are measured at historical cost, amortized cost or fair value. Financial
assets measured at cost include unquoted equity investments (whereby fair value cannot be
reliably measured) and loans to and receivables from other entities.
Financial assets measured at amortized cost are known as held-to-maturity securities.
Held-to-maturity securities are debt securities acquired with the intent to be held to maturity.
Amortized cost is equal to the original issue price minus any principal payments, plus any
amortized discount or minus any amortized premium, minus any impairment losses. Subsequent
changes in market value are ignored.
Financial assets measured at fair value, also known as mark-to-market accounting, include
trading securities, available -for-sale securities, and derivatives.
Trading securities (also known as held-for-trading securities) are debt and equity securities
acquired with the intent to profit over the near term. Trading securities are reported on the
balance sheet at fair value, and the unrealized gains and losses (changes in market value before
the securities are sold) are recognized in the income statement. Unrealized gains and loses are
also known as holding period gains and losses. Derivative instruments are treated the same as
trading securities.
Available-for-sale securities are debt and equity securities that are not expected to be held to
maturity or traded in the near term. Like trading securities, available-for-sale securities are
reported on the balance sheet at fair value. However, any unrealized gains and losses are not
recognized in the income statement, but are reported in other comprehensive income as a part of
shareholder’s equity.
For all three classifications of securities, dividend and interest income and realized gains and
losses (actual gains or losses when the securities are sold) are recognized in the income
statement.

47.Describe Equity method approach used for investments in associates / JVs

The equity method is used to value a company's investment in another company when it holds
significant influence over the company it is investing in.
The threshold for "significant influence" is commonly a 20-50% ownership.
Under the equity method, the investment is initially recorded at historical cost and adjustments
are made to the value based on the investor's percentage ownership in net income, loss, and
dividend payouts.
Net income of the investee company increases the investor's asset value on its balance sheet,
while the investee's loss or dividend payout decreases it.
The investor also records its percentage of the investee's net income or loss on its income
statement.

48.Walk me through key components of Operating / Investing / Financing cash flow

CFO consists of the inflows and outflows of cash resulting from transactions that affect a firm’s
net income:
 Net Income
 Non-cash charges
  Changes in Working capital
CFI consists of the inflows and outflows of cash resulting from acquisition or disposal of long-
term assets and certain investment:
 Purchase/Sale of long-term investments
 CapEx
 Purchase of Intangibles
CFF consists of the inflows and outflows of cash resulting from transactions affecting a firm’s
capital structure:
 Common Stock Issuance/Repurchase
 Dividend Issued
 Issue/Payoff of Debt

49.Provide me with examples of non-recurring charges

 Gains and losses from asset sales
 asset write-downs
 provisions for future losses
 changes in accounting estimates

50.How to calculate NWC (Net working capital)?

Working Capital = Current Assets – Current Liabilities.

If it’s positive, it means a company can pay off its short-term liabilities with its shortterm assets.
It is often presented as a financial metric and its magnitude and sign (negative or positive) tells
you whether or not the company is “sound.”Bankers look at Operating Working Capital more
commonly in models, and that is defined as

(Current Assets – Cash & Cash Equivalents) – (Current Liabilities – Debt).

51.What does negative Working capital mean? Is that a bad sign?

Not necessarily. It depends on the type of company and the specific situation – here are a few
different things it could mean:

1. Some companies with subscriptions or longer-term contracts often have negative Working
Capital because of high Deferred Revenue balances.
2. Retail and restaurant companies like Amazon, Wal-Mart, and McDonald’s often have negative
Working Capital because customers pay upfront – so they can use the cash generated to pay off
their Accounts Payable rather than keeping a large cash balance on-hand. This can be a sign of
business efficiency.

3. In other cases, negative Working Capital could point to financial trouble or possible
bankruptcy (for example, when customers don’t pay quickly and upfront and the company is
carrying a high debt balance).

52.If Depreciation is a non-cash expense, why does it affect the cash balance?

Although Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash

expense, Depreciation affects cash by reducing the amount of taxes you pay.

53.Where does Depreciation usually show up on the Income statement?

It could be in a separate line item, or it could be embedded in Cost of Goods Sold or Operating
Expenses – every company does it differently. Note that the end result for accounting questions
is the same: Depreciation always reduces Pre-Tax Income.

54.Assume Depreciation increased by $10. How will it affect three statements?

Income Statement: Operating Income would decline by $10 and assuming a 40% tax rate, Net
Income would go down by $6.

Cash Flow Statement: The Net Income at the top goes down by $6, but the $10 Depreciation is a
non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $4.
There are no changes elsewhere, so the overall Net Change in Cash goes up by $4.

Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side because of
the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.

Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders’ Equity on the
Liabilities & Shareholders’ Equity side is down by $6 and both sides of the Balance Sheet
balance.

Note: With this type of question I always recommend going in the order: 1) Income Statement 2)
Cash Flow Statement 3) Balance Sheet
This is so you can check yourself at the end and make sure the Balance Sheet balances.
Remember that an Asset going up decreases your Cash Flow, whereas a Liability going up
increases your Cash Flow.

55.What is the main difference between IFRS/US GAAP and RAS (Russian accounting
standards) in terms of financial disclosure?

Under Russian standards, costs and revenues are recorded only if they are confirmed, i.e. when
related primary documentation is available. This requirement does not allow quick recording of
all operations performed in a certain period hence the 3 months allocated for preparation of
annual financial statements. There is no possibility under RAS to recognise the good-will as an
intangible asset in the balance sheet of a company. This has a major consequence when a
company is sold. Indeed, if a company (or part of it) is sold at a higher value than its book value
(i.e. to account for the good-will value), the selling party need to pay tax at the relevant profit tax
rate (20% in 2013) on the difference in value between selling and accounting value and the buyer
has no possibility to amortize the cost and deduct it from present and future revenues.
Transactions are accounted for in accordance with their legal form rather than their substance.
For example lease accounting is based on a contract terms rather than on transfer of substantially
all risks and rewards.

56.What does calendarization mean? How can you calculate TTM (LTM) revenue?
The process of standardizing the reporting time periods of financial statements is called
calendarization. To make comparable companies “equal,” the financial data of each company
must be standardized so that there is a fair basis for comparison. For example, if you are
examining a set of companies with fiscal years ending March 31, June 30, and September 30 and
the company you are analyzing follows a fiscal year ending on June 30, you must calendarize
based on the company you are valuing. In this case, you must adjust the other companies’ fiscal
years so that they end on June 30 for ease of comparison.

Valuation
57.What do you actually use a valuation for?

Usually you use it in pitch books and in client presentations when you’re providing updates and
telling them what they should expect for their own valuation. It’s also used right before a deal
closes in a Fairness Opinion, a document a bank creates that “proves” the value their client is
paying or receiving is “fair” from a financial point of view.

Valuations can also be used in defense analyses, merger models, LBO models, DCFs (because
terminal multiples are based off of comps), and pretty much anything else in finance.

58.Describe three main business valuation methods

Comparable Companies, Precedent Transactions and Discounted Cash Flow Analysis.

1. Asset-Based Approaches
Also referred to as cost-based methods, asset-based approaches are designed to estimate the
value of a business as the total cost required to create another business of the same economic
utility. This business valuation method can be performed on a going concern or on a liquidation
basis. When performed on a going concern, the business’s liability values are subtracted from its
net balance sheet asset value. With a liquidation asset-based approach, the net cash is determined
after all assets are sold and liabilities are paid off.
Asset-based business valuation can be highly useful when determining an estimated business
sale price allocation and when building a business deal. Under the asset approach, there are two
central methods including asset accumulation method and excess earnings method. If you have a
sole proprietorship, know that using the asset-based approach can be more challenging. When
you have a corporation, the assets are owned by the business and would generally be included in
the business sale. However, assets in a sole proprietorship remain in the owner name and
separating assets from personal and business use can often be difficult.

2. Earning Value Approaches

Earning value approaches are based on the idea that a business’s ultimate value is in its ability to
produce future wealth. One of the most common types of earning value approaches is known as
capitalizing past earning. This approach involves a valuator who determines a level of expected
cash flow based on a company’s prior earnings. This information is then normalized for unusual
expenses or revenue, and multiplied by a capitalization factor. This capitalization factor can tell
you what rate of return the average buyer would expect on the investment, in addition to the
level of risk.
Another type of earning value approach is called discounted future earnings. This approach
determines an average of the trend of potential earnings in the future instead of an average of
past earnings. The average is then divided by the capitalization factor. It is important to note that
valuation of any type of sole proprietorship in relation to prior earnings can be challenging, as
loyalty from customers often comes with an association with the business owner. Existing
customers often expect the new owner to deliver the same quality of products or services than
the previous owner.

3. Market Value Approaches

In market value approaches, the value of your business is established by comparing your
business to other businesses similar to yours that have recently sold. While this approach can be
fairly useful, there has to be an ample number of similar businesses sold to get great results. It
can be especially difficult to assign a value to a sole proprietorship as they are individually
owned and locating public information on past sales is not always easy. Today, the earning value
approach is no doubt one of the most popular business valuation methods. However, most
businesses find success when combining this method with other business valuation methods.
Professional business appraisals often include different market valuation methods, such as the
comparative transaction method and the guideline publicly traded company method. Each of
these valuation methods require the comparison of the subject business to other businesses sold
recently in the same or a similar industry. For privately owned firms, transactions that involve
small capitalization public companies are generally used as evidence of business value.
Determining business fair market value usually requires the use of valuation firms that are
derived from comparable business sales. If non-competition clauses are involved in the
agreements for a sale of a business, know that these can affect valuation.

59.What other valuation methodologies are there?

Other methodologies include:

• Liquidation Valuation – Valuing a company’s assets, assuming they are sold off and then
subtracting liabilities to determine how much capital, if any, equity investors receive

• Replacement Value – Valuing a company based on the cost of replacing its assets

• LBO Analysis – Determining how much a PE firm could pay for a company to hit a “target”
IRR, usually in the 20-25% range

• Sum of the Parts – Valuing each division of a company separately and adding them together at
the end

• M&A Premiums Analysis – Analyzing M&A deals and figuring out the premium that each
buyer paid, and using this to establish what your company is worth
• Future Share Price Analysis – Projecting a company’s share price based on the P / E multiples
of the public company comparables, then discounting it back to its present value

60.When would a Liquidation valuation produce the highest value?

This is highly unusual, but it could happen if a company had substantial hard assets but
the market was severely undervaluing it for a specific reason (such as an earnings miss
or cyclically).
As a result, the company's Comparable Companies and Precedent Transactions would
likely produce lower values as well - and if its assets were valued highly enough,
Liquidation Valuation might give a higher value than other methodologies.
This is most common in bankruptcy scenarios and is used to see whether equity shareholders will
receive any capital after the company’s debts have been paid off. It is often used to advise
struggling businesses on whether it’s better to sell off assets separately or to try and sell the
entire company.

61.When would you use Sum of the parts analysis?

This is most often used when a company has completely different, unrelated divisions – a
conglomerate like General Electric, for example. If you have a plastics division, a TV and
entertainment division, an energy division, a consumer financing division and a technology
division, you should not use the same set of Comparable Companies and Precedent Transactions
for the entire company.

Instead, you should use different sets for each division, value each one separately, and then add
them together to get the Combined Value.

62.When do you use LBO analysis as a part of your valuation?

Obviously you use this whenever you’re looking at a Leveraged Buyout – but it is also used to
establish how much a private equity firm could pay, which is usually lower than what companies
will pay.

It is often used to set a “floor” on a possible Valuation for the company you’re looking at.

63.How do you apply three valuation methodologies to actually get a value for the company
you’re looking at?
Sometimes this simple fact gets lost in discussion of Valuation methodologies. You take the
median multiple of a set of companies or transactions, and then multiply it by the relevant metric
from the company you’re valuing.

Example: If the median EBITDA multiple from your set of Precedent Transactions is 8x and
your company’s EBITDA is $500 million, the implied Enterprise Value would be $4 billion.

To get the “football field” valuation graph you often see, you look at the minimum, maximum,
25th percentile and 75th percentile in each set as well and create a range of values based on each
methodology

64.How would you present these valuation methodologies to a company or its investors?

Usually you use a "football field" chart where you show the valuation range implied by each
methodology. You always show a range rather than one specific number.

As an example, see page 10 of this document (a Valuation done by Credit Suisse for the
Leveraged Buyout of Sungard Data Systems in 2005):

http://edgar.sec.gov/Archives/edgar/data/789388/000119312505074184/dex99c2.htm

65.How do you value a private company?

You use the same methodologies as with public companies: public company comparables,
precedent transactions, and DCF. But there are some differences:

• You might apply a 10-15% (or more) discount to the public company comparable multiples
because the private company you’re valuing is not as “liquid” as the public comps.

• You can’t use a premiums analysis or future share price analysis because a private company
doesn’t have a share price.

• Your valuation shows the Enterprise Value for the company as opposed to the implied per-
share price as with public companies.

• A DCF gets tricky because a private company doesn’t have a market capitalization or Beta –
you would probably just estimate WACC based on the public comps’ WACC rather than trying
to calculate it.

66.How do you value banks and financial institutions differently from other companies?
You mostly use the same methodologies, except:

• You look at P / E and P / BV (Book Value) multiples rather than EV / Revenue, EV / EBITDA,
and other “normal” multiples, since banks have unique capital structures.

• You pay more attention to bank-specific metrics like NAV (Net Asset Value) and you might
screen companies and precedent transactions based on those instead.

• Rather than a DCF, you use a Dividend Discount Model (DDM) which is similar but is based
on the present value of the company’s dividends rather than its free cash flows.

You need to use these methodologies and multiples because interest is a critical component of a
bank’s revenue and because debt is part of its business model rather than just a way to finance
acquisitions or expand the business.

67.Provide me with examples of revenue and expenses forecast for retail company
Sales forecasts for existing and new stores are based on the following indicators: target average
ticket per store inflated for the CPI growth in Russia; store openning forecasts.
Personnel expenses forecasts are based on the assumption that salaries will increase at the same
rate as store sales, other personnel expenses are based on the average share in sales.
Administrative expenses are based on the assumption that salaries will increase at the same rate
as store sales.
Capex forecast is conneting with finding standard level of costs to open 1 new store, which
should be indexed for the CPI.

68.What types of discount rate are generally used in financial models? When do you use
cost of equity instead of WACC as a discount rate in DCF analysis?

Ususally there are 2 discount rates, which are used in financial models: WACC and return on
equity. In calculating FCFF analysts use WACC, in FCFE- return on equity.

69.Describe mid-year convention adjustment

The typical way to handle such situations is to discount the cash flows as if they occurred in the
middle of the year. This calls for just one simple adjustment to your discounted cash flow
valuation result, multiplication by this factor: (1+D)^(1/2)
where D is the firm’s discount rate. You can calculate the equity discount rate by using the
Build-Up model. If the company is financed by both debt and equity capital, use the weighted
average cost of capital (WACC) iterative procedure

70.Describe growing perpetuity and Exit multiple approaches to Terminal value

calculation

Perpetuity growth assumes that cash flows growth with the constant rate in the future. Terminal
value is calculated by dividing the last cash flow forecast by the difference between the discount
rate and terminal growth rate. The terminal value calculation estimates the value of the company
after the forecast period. The formula of TV: (FCFF*(1+g))/(r-g). If investors assume a finite
window of operations, there is no need to use the perpetuity growth model. This often implies
that the equity will be acquired by a larger firm, and the value of acquisitions are often calculated
with exit multiples.
Exit multiples estimate a fair price by multiplying financial statistics, such as sales, profits or
EBITDA by a factor that is common for similar firms that were recently acquired. The terminal
value formula using the exit multiple method is the most recent metric (i.e. sales, EBITDA, etc.)
multiplied by the decided upon multiple (usually an average of recent exit multiples for other
transactions).

71.What is an appropriate growth rate to use when calculating the Terminal value?

Normally you use the country’s long-term GDP growth rate, the rate of inflation, or something
similarly conservative. For companies in mature economies, a long-term growth rate over 5%
would be quite aggressive since most developed economies are growing at less than 5% per year.

72.Why would you use Gordon Growth rather than the Multiples method to calculate the
Terminal value?

In banking, you almost always use the Multiples Method to calculate Terminal Value in a DCF.
It’s much easier to get appropriate data for exit multiples since they are based on Comparable
Companies – picking a long-term growth rate, by contrast, is always a shot in the dark.

However, you might use Gordon Growth if you have 1) no good Comparable Companies or if
you have reason to believe that 2) multiples will change significantly in the industry several
years down the road. For example, if an industry is very cyclical you might be better off using
long-term growth rates rather than exit multiples.

73.How do you select the appropriate exit multiple when calculating Terminal value?

Normally you look at the Comparable Companies and pick the median of the set, or something
close to it. As with almost anything else in finance, you always show a range of exit multiples
and what the Terminal Value looks like over that range rather than picking one specific
number.So if the median EBITDA multiple of the set were 8x, you might show a range of values
using multiples from 6x to 10x.

74.How do you know if your DCF is too dependent on future assumptions?

The "standard" answer: if significantly more than 50% of the company's Enterprise Value comes
from its Terminal Value, your DCF is probably too dependent on future assumptions.
 
In reality, almost all DCFs are "too dependent on future assumptions" - it's actually quite rare to
see a case where the Terminal Value is less than 50% of the Enterprise Value.
 
But when it gets to be in the 80-90% range, you know that you may need to re-think your
assumptions.

75.Which has a greater impact on a company’s DCF valuation – 10% change in revenue or
1% change in the discount rate?

You should start by saying, “it depends” but most of the time the 10% difference in revenue will
have more of an impact. That change in revenue doesn’t affect only the current year’s revenue,
but also the revenue/EBITDA far into the future and even the terminal value.

76.What about 1% change in revenue vs. 1% change in the discount rate?

In this case the discount rate is likely to have a bigger impact on the valuation, though the correct
answer should start with, “It could go either way, but most of the time…”

77.Walk me through sensitivity analysis

Sensitivity analysis is a financial model that determines how target variables are affected based
on changes in other variables known as input variables. This model is also referred to as what-if
or simulation analysis. It is a way to predict the outcome of a decision given a certain range of
variables. By creating a given set of variables, an analyst can determine how changes in one
variable affect the outcome. The sensitivity analysis is based on the variables that affect
valuation (WACC, cost of debt, EBIT margin, perpetuity growth, tax rate etc.). The sensitivity
analysis isolates these variables and then records the range of possible outcomes.

78.Walk me through DDM (Dividend discount model)

• The setup is similar: you still project revenue and expenses over a 5-10 year period, and you
still calculate Terminal Value.
• The difference is that you do NOT calculate FCF - instead, you stop at NI and assume that
Dividends Issued are a percentage of NI, and then you discount those Dividends back to their
present value using the Cost of Equity.
• Then, you add those up and add them to the present value of the Terminal Value, which you
might base on a P/E multiple instead.
• Finally, a Dividend Discount Model gets you the company's Equity Value rather than its
Enterprise Value since you're using metrics that include interest income and expense.

If FCFE is less than the dividend payment and the cost to buy back shares, the company is funding with
either debt or existing capital or issuing new securities. Existing capital includes retained earnings made
in previous periods.

This is not what investors want to see in a current or prospective investment, even if interest rates are
low. Some analysts argue that borrowing to pay for share repurchases when shares are trading at a
discount, and rates are historically low is a good investment. However, this is only the case if the
company's share price goes up in the future.

If the company's dividend payment funds are significantly less than the FCFE, then the firm is using the
excess to increase its cash level or to invest in marketable securities. Finally, if the funds spent to buy
back shares or pay dividends is approximately equal to the FCFE, then the firm is paying it all to its
investors.

https://www.investopedia.com/terms/f/freecashflowtoequity.asp

79.Walk me through multiples approach to valuation

A multiple is simply a ratio that is calculated by dividing the market or estimated value of an
asset by a specific item on the financial statements. The multiples approach is a comparables
analysis method that seeks to value similar companies using the same financial metrics.
An analyst using the valuation approach assumes that a particular ratio is applicable and applies
to various companies operating within the same line of business or industry. In other words, the
idea behind the multiples analysis is that when firms are comparable, the multiples approach can
be used to determine the value of one firm based on the value of another. The multiples approach
seeks to capture many of a firm's operating and financial characteristics (e.g., expected growth)
in a single number that can be multiplied by a specific financial metric (e.g., EBITDA) to yield
an enterprise or equity value.
Enterprise value multiples and equity multiples are the two categories of valuation multiples.
Enterprise value multiples include the enterprise-value-to-sales ratio (EV/sales), EV/EBIT, and
EV/EBITDA. Equity multiples involve examining ratios between a company's share price and an
element of the underlying company's performance, such as earnings, sales, book value, or
something similar. Common equity multiples include price-to-earnings (P/E) ratio, price-
earnings to growth (PEG) ratio, price-to-book ratio and price-to-sales ratio.

80.How do you select Comparable companies / Precedent transactions?

The 3 main ways to select companies and transactions:

 1. Industry classification
 2. Financial criteria (Revenue, EBITDA, etc.)
 3. Geography
 
For Precedent Transactions, you often limit the set based on date and only look at transactions
within the past 1-2 years.
 
The most important factor is industry - that is always used to screen for companies/transactions,
and the rest may or may not be used depending on how specific you want to be.
 
Here are a few examples:
 
Comparable Company Screen: Oil & gas producers with market caps over $5 billion
 
Comparable Company Screen: Digital media companies with over $100 million in revenue
 
Precedent Transaction Screen: Airline M&A transactions over the past 2 years involving
sellers with over $1 billion in revenue
 
Precedent Transaction Screen: Retail M&A transactions over the past year

81.Why would a company with similar growth and profitability to its Comparable
companies be valued at a premium?

This could happen for a number of reasons:

• The company has just reported earnings well-above expectations and its stock price has risen
recently.
 
• It has some type of competitive advantage not reflected in its financials, such as a key patent or
other intellectual property.
 
• It has just won a favorable ruling in a major lawsuit.
 
• It is the market leader in an industry and has greater market share than its competitors.

82.How do you take into account a company’s competitive advantage in a valuation?

1. Look at the 75th percentile or higher for the multiples rather than the Medians.
 
2. Add in a premium to some of the multiples.
 
3. Use more aggressive projections for the company.
 
In practice you rarely do all of the above - these are just possibilities.

83.Do you always use the median multiple of a set of public company comparables or
precedent transactions?

There's no "rule" that you have to do this, but in most cases you do because you want to use
values from the middle range of the set. But if the company you're valuing is distressed, is not
performing well, or is at a competitive disadvantage, you might use the 25th percentile or
something in the lower range instead - and vice versa if it's doing well.

84.Why is P/S (Price-to-Sales) bad multiple?

The P/S ratio doesn’t take into account whether the company makes any earnings or whether it
will ever make earnings.

85.Why is P/B (Price-to-Book) multiple can be negative?

The book value of equity can become negative if a firm has a sustained string of negative
earnings reports, leading to a negative price-book value ratio.

86.Provide the most common multiples examples

Telecommunications: EV/Access lines, EV/Subscriber;

oil&gas: EV/EBITDAX, EV/Population, EV/Reserves;
Real estate: EV/Square footage, Equity/Cash available for distribution;
financial institutions: Equity/BV, Equity/Net Asset Value

87.Give advantages and disadvantages of multiples

What are the advantages and disadvantages of the multiples analysis?

The simplicity of using multiples in valuation is both an advantage and disadvantage. It is a
disadvantage because it simplifies complex information into just a single value or a series of
values. This effectively disregards other factors that affect a company’s intrinsic value such as
growth or decline. However, this simplicity allows a financial analyst to make quick
computations to assess a company’s value.

Meanwhile, using the multiples analysis can also lead to difficulty in comparing companies or
assets. This is because companies, even when they seem to have identical business operations,
may have different accounting policies. As such, multiples may be easily misinterpreted and
comparisons are not as conclusive. They need to be adjusted for different accounting policies.

Multiples analysis also disregards the future point in time – it is static. It only considers the
company’s position for a certain time period and fails to include the company’s growth in its
business operations. However, there are certain multiples that look at “leading” ratios.

88.Describe industry multiples

Technology (Internet): EV / Unique Visitors, EV / Pageviews

Retail / Airlines: EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization
& Rent)
Energy: P / MCFE, P / MCFE / D (MCFE = 1 Million Cubic Foot Equivalent, MCFE/D = MCFE
per Day), P / NAV (Share Price / Net Asset Value)
Real Estate Investment Trusts (REITs): Price / FFO, Price / AFFO (Funds From Operations,
Adjusted Funds From Operations)
Technology and Energy should be straightforward - you're looking at traffic and energy reserves
as value drivers rather than revenue or profit.
For Retail / Airlines, you often remove Rent because it is a major expense and one that varies
significantly between different types of companies.
For REITs, Funds From Operations is a common metric that adds back Depreciation and
subtracts gains on the sale of property. Depreciation is a non-cash yet extremely large expense in
real estate, and gains on sales of properties are assumed to be non-recurring, so FFO is viewed as
a "normalized" picture of the cash flow the REIT is generating.

89.Two companies have the exact same financial profiles and are bought by the same
acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other
transaction – how could this happen?

1. One process was more competitive and had a lot more companies bidding on the target.
2. One company had recent bad news or a depressed stock price so it was acquired at a discount.
3. They were in industries with different median multiples.

90.How far back and forward do we usually go for public company comparable and
precedent transaction multiples?

Usually you look at the TTM (Trailing Twelve Months) period for both sets, and then you look
forward either 1 or 2 years. You're more likely to look backward more than 1 year and go
forward more than 2 years for public company comparables; for precedent transactions it's odd to
go forward more than 1 year because your information is more limited.

91.Why might we discount the public company comparable multiples but not the precedent
transaction multiples? – Мы оцениваем private company

 There's no discount because with precedent transactions, you're acquiring the entire
company - and once it's acquired, the shares immediately become illiquid.
  But shares - the ability to buy individual "pieces" of a company rather than the whole
thing - can be either liquid (if it's public) or illiquid (if it's private).
 Since shares of public companies are always more liquid, you would discount public
company comparable multiples to account for this.

Consolidated Accounting
92.What does Goodwill mean?

Goodwill is an intangible asset that arises as a result of the acquisition of one company by

another for a premium value. The value of a company’s brand name, solid customer base, good
customer relations, good employee relations and any patents or proprietary technology represent
goodwill. Goodwill is considered an intangible asset because it is not a physical asset like
buildings or equipment. The goodwill account can be found in the assets portion of a
company's balance sheet. (Investopedia)

93.Why do Goodwill & Other intangibles get created in an acquisition?

These represent the value over the "fair market value" of the seller that the buyer has paid. You
calculate the number by subtracting the book value of a company from its equity purchase price.
More specifically, Goodwill and Other Intangibles represent things like the value of customer
relationships, brand names and intellectual property - valuable, but not true financial Assets that
show up on the Balance Sheet.

94.Normally Goodwill remains constant on the Balance sheet – why would it be impaired
and what does Goodwill Impairment mean?

Goodwill impairment is an earnings charge that companies record on their income statements
after they identify that there is persuasive evidence that the asset associated with the goodwill
can no longer demonstrate financial results that were expected from it at the time of its purchase.
U.S. generally accepted accounting principles (GAAP) require companies to review their
goodwill for impairment at least annually at a reporting unit level. Events that may trigger
goodwill impairment include deterioration in economic conditions, increased competition, loss
of key personnel, and regulatory action. The definition of a reporting unit plays a crucial role
during the test; it is defined as the business unit that a company's management reviews and
evaluates as a separate segment. Reporting units typically represent distinct business lines,
geographic units, or subsidiaries.
Goodwill impairment is identified in two steps. First, a company must compare the fair value
of a reporting unit to its carrying value on the balance sheet. Because observable market
values are rarely present to determine the fair value of a reporting unit, management teams
typically use financial models for fair value estimation. If the fair value exceeds the carrying
value, no impairment exists. Companies are not allowed to write up their goodwill, as goodwill
can only be recognized on the purchase of a company. If the fair value is less than the carrying
value, the company must perform the second step by applying the fair value to the identifiable
assets and liabilities of the reporting unit. The excess balance of the fair value is the new
goodwill, and the carrying value of the goodwill must be reduced by booking a goodwill
impairment charge.

95.Why would an acquisition be dilutive?

An acquisition is dilutive if the additional amount of Net Income the seller contributes is not
enough to offset the buyer's foregone interest on cash, additional interest paid on debt, and the
effects of issuing additional shares.
Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
 
96.A company with a higher P/E acquires one with a lower P/E – is this accretive or
dilutive?

Trick question. You can't tell unless you also know that it's an all-stock deal. If it's an all-cash or
all-debt deal, the P/E multiples of the buyer and seller don't matter because no stock is being
issued.
Sure, generally getting more earnings for less is good and is more likely to be accretive but
there's no hard-and-fast rule unless it's an all-stock deal.

97.Walk me through an example of how to calculate revenue / cost synergies

"Let's say that Microsoft is going to acquire Yahoo. Yahoo makes money from search
advertising online, and they make a certain amount of revenue per search (RPS). Let's say this
RPS is $0.10 right now. If Microsoft acquired it, we might assume that they could boost this RPS
by $0.01 or $0.02 because of their superior monetization. So to calculate the additional revenue
from this synergy, we would multiply this $0.01 or $0.02 by Yahoo's total # of searches, get the
total additional revenue, and then select a margin on it to determine how much flows through to
the combined company's Operating Income."
94.Why are deferred tax liabilities (DTLs) and deferred tax assets (DTAs) created in M&A
deals?

These get created when you write up assets - both tangible and intangible - and when you write
down assets in a transaction. An asset write-up creates a deferred tax liability, and an asset write-
down creates a deferred tax asset.
You write down and write up assets because their book value - what's on the balance sheet -
often differs substantially from their "fair market value."
An asset write-up creates a deferred tax liability because you'll have a higher depreciation
expense on the new asset, which means you save on taxes in the short-term - but eventually
you'll have to pay them back, hence the liability. The opposite applies for an asset write-down
and a deferred tax asset.

IPO and M&A

98.Provide few examples of strategic and financial rationale of M&A transaction
Synergy: the combined company can often reduce its fixed costs by removing duplicate
departments or operations, lowering the costs of the company relative to the same revenue
stream, thus increasing profit margins;
economy of scale: managerial economies such as the increased opportunity of managerial
specialization; another example is purchasing economies due to increased order size and
associated bulk-buying discounts;
taxation: A profitable company can buy a loss maker to use the target's loss as their advantage
by reducing their tax liability. In the United States and many other countries, rules are in place to
limit the ability of profitable companies to "shop" for loss making companies, limiting the tax
motive of an acquiring company;
market share: A large corporation bids to acquire a major competitor in order to capture
additional market share and establish greater pricing power;
cross-selling: a corporation acquires another entity which sells complementary products to
benefit from advantages such as bundling and to create more customer value for its product
offerings

99.What is the difference between IPO, SPO and ABO?

The secondary public offer (SPO) is the sale by a shareholder (the initiator of SPO) of the shares
belonging to him to an unlimited number of investors on the stock exchange. SPO, unlike IPO,
does not affect the size of the company’s share capital. But at the same time, such placement still
makes the company public, that is, whose shares are freely traded on the securities market. In
addition, the number of shareholders will increase, which makes the shares liquid.
SPO is a proposal of already existing shares belonging to someone taken from the secondary
market. As a rule, the SPO sells its securities to the company’s founders, that is, the original
shareholders.
Accelerated bookbuilding is a form of offering in which companies offer shares during a very
small time window, generally lasting between 24 hours to 48 hours, to institutional investors.
The share of accelerated bookbuilds has increased over the years because they allow firms to
raise capital quickly, while dividing risk between them and underwriters.

100. Recent / largest IPOs and M&As in Russia / EMEA / Global

101. What is included in a pitch book?

It depends on the type of deal the bank is pitching for, but the most common structure is:

1. Bank “credentials” (similar deals they’ve done to “prove” their expertise).

2. Summary of a company’s options (“strategic alternatives” in banker-speak).

3. Valuation and appropriate financial models (for example, if you’re pitching for

an IPO you might show where the IPO proceeds would go).

4. Potential acquisition targets (buy-side M&A deal) or potential buyers (sell-side

M&A deal). This is not applicable for equity/debt deals.

5. Summary and key recommendations

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