IB Studies

EV, EQV, Shares holder's equity - can be negative?

EV, EQV, Shares holder's equity - can be negative?

EQV Cannot be negative. It’s the market cap

EV could be negative due to large cash consumption or due to equity value drop.

S/E is negative due to: 1. Dividend Payout 2. Accounting loss 3. Shares buyback

What is Beta in Finance

Beta (β) measures the sensitivity of a security or portfolio of securities to systematic risk (i.e. volatility) relative to the broader securities market.

⁠What are the 3 common valuation methods and how do they rank between each other?

“Precedent transactions typically value a company higher than trading comps because buyers pay for control premium and may share some expected synergies with the seller. DCF can fall above or below either method depending on its assumptions, so there’s no universal ranking of all three.

What is WACC?

The cost of capital (WACC) for the company equals the expected return for investors in that company

Cost of capital is determined by the ”riskiness” of the company, and the risk comes: business risk + financial risk

Definition of Present Value

FCFn / (1+WACC)^n

Differences between Shareholders equity and Equity value

shareholders’ equity is the book or accounting value of equity, calculated as assets minus liabilities on the balance sheet.

Equity value typically means the market value of equity, calculated as share price × shares outstanding. It reflects what investors are currently willing to pay.

What does Beta do in terms of WACC

WACC analysis requires us to strip out the effect of leverage (financial risk) on the Betas of the comp set, find an average of the Unlevered Betas, then re-lever the Beta to the company’s capital structure

What’s terminal value

Terminal Value is the value of the business beyond the forecast projections.

This is used due to the impractical nature of having an extended forecast period e.g. 20 or 30 years

What’s levered beta

Levered Beta represents the volatility of this stock relative to the market as a whole, factoring in both intrinsic business risk and risk from leverage.

What’s beta?

Beta (β) measures the sensitivity of a security or portfolio of securities to systematic risk (i.e. volatility) relative to the broader securities market.

What about unlevered beta?

Also called Asset Beta - Strips out debt to show pure operational risk. Analysts unlever peer group betas, average them, and re-lever them to match the target company's specific capital structure

What are EV and EQV ?

Do you account for cash in enterprise value? Does enterprise value include cash, and why or why not?

Does EV include cash? No, EV excludes cash.

Does EV account for cash? Yes, by subtracting it in the calculation.

What would change if you did a levered DCF instead of unlevered?

Levered → Cost of equity → Equity value.> You get equity value direction

Unlevered → WACC → Enterprise value.

What’s Net Present Value

PV of these future cash flows - the upfront cost or “asking price” of the company.

If the NPV is positive, the company is worth more than its current price.

What does the “Discount Rate” mean?

opportunity cost or “targeted annualized return.

The Discount Rate represents the potential returns and the risk of other, similar opportunities.

If the Discount Rate is higher, both the potential returns and the risk are higher

Things impact DCF

• Revenue growth: Higher growth → more projected cash flow → higher value.

• Profit margins: Higher margins → more profit and cash flow → higher value.

• CapEx and working capital needs: More investment required → less free cash flow → lower value.

• Discount rate (WACC): Higher WACC → lower present value.

• Terminal growth rate or exit multiple: Higher assumptions → higher terminal value.

What’s Cost of Equity ?

Ke represents the risk-adjusted required return for equity investors

TV calculation method and why prefer one from another

“I’d prefer perpetuity growth for an intrinsic valuation of a stable business, and an exit multiple when reliable market comparables are available. I’d use both to cross-check the result.”

Why might two firms with the same EBITDA have different EV/EBITDA multiples?

Two companies with the same EBITDA can trade at different multiples because of differences in growth, risk, and cash flow conversion.

The same EBITDA today doesn’t mean the same future cash flows or risk. A company may command a higher EV/EBITDA multiple because it has:

• Higher expected growth → more future earnings.

• Lower risk → more predictable cash flows.

• Lower CapEx or working capital needs → more EBITDA converts into free cash flow.

A company issues $500M in debt and lets it sit in cash, how do EV and EqV change?

Neither EV nor equity value changes, assuming no other effects.

What’s equity value?

Equity Value: The value of EVERYTHING a company has (i.e., ALL its Assets), but only to EQUITY INVESTORS (i.e., common shareholders)

Cannot be negative

May be affected by financing events

What’s Enterprise Value

The value of the company’s CORE BUSINESS OPERATIONS - to ALL INVESTORS (Equity, Debt, Preferred, and possibly others).

Can be negative

Not affected by financing events

Can EQV impacted by the financing event? Can it be negative?

Yes / No

Can EV be affected by financing activities? can it be negative

No - EV is unchanged because financing activities don’t change the operating business itself. The changes cancel out. It’s not because EV uses EBITDA; it’s because the financing changes offset each other, assuming no other effects.

Yes

How do you go from UFCF to LFCF?

LFCF = UFCF − Interest Expense × (1 − Tax Rate) − Mandatory Debt Principal Repayments + new debt insurance

What’s working capital

Working Capital (specifically Operating Net Working Capital) measures the amount of cash a business must tie up in its day-to-day core operations just to keep running and growing

What’s Risk Free Rate?

The risk-free rate is the return on an investment assumed to have no default risk. It’s the baseline return investors require before adding a premium for risk

For a UK deal valued in British pounds, you would typically use the yield on a 10-year UK government bond—a gilt.

The key is the currency of the projected cash flows, not just the deal’s location: GBP cash flows use a GBP risk-free rate; USD cash flows typically use a US Treasury yield.

In CAPM:

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

You pay $10 in dividends to shareholders. How does this flow through the three financial statements?

Assuming the dividend is declared and paid in the same period:

Financial statement	Impact
Income statement	No impact. Dividends are distributions to shareholders, not expenses.
Cash flow statement	Cash flow from financing decreases by $10, so cash decreases by $10.
Balance sheet	Cash decreases by $10 and retained earnings decreases by $10. Assets and shareholders’ equity both decrease by $10, so it balances.

If the dividend was declared in a prior period, payment reduces dividends payable instead—retained earnings already decreased when it was declared.

Why UFCF minum CapEx?

CapEx is a required cash reinvestment in long-term assets to maintain and grow the business, so that cash is unavailable to investors

What are unlevered beta to levered beta?

Both can be understood from an equity investor’s perspective:

• Unlevered beta: Risk shareholders would face if the company had no debt—business risk only. (Asset Beta)

• Levered beta: Risk shareholders face with debt—business risk plus financial risk. (Equity Beta)

Which valuation method typically generates the highest value, and which generates the lowest?

Precedent transactions (because of the control premium) and LBO analysis, (Higher required return → larger denominator → lower price you can pay today.because the buyer must earn a high target return while using the company’s cash flow to repay debt. Paying a lower purchase price helps achieve that return..

When would precedent transaction generate a lower valuation than comps?

• Past deals occurred in a weaker market, at lower multiples than today.

• Targets were distressed or sellers were forced to sell, depressing purchase prices.

• Acquired companies had weaker growth, margins, or higher risk than the public peers.

Why would a strategic pay more for a company than a sponsor?

A strategic buyer can pay more because it can realize synergies—cost savings or additional revenue from combining the target with its existing business.

A financial sponsor typically values the target on a standalone basis and must meet a target investment return, limiting its purchase price.

How could you change a DCF to produce a higher valuation?

• Increase projected cash flows: Higher revenue growth or margins, lower CapEx, or less investment in working capital.

• Decrease WACC: A lower discount rate increases the present value of future cash flows.

• Increase terminal value: Use a higher perpetual growth rate or exit multiple.

What is a public company looking to communicate to its shareholders re: an acquisition

A public company wants to explain why the acquisition creates value for shareholders, including:

• Strategic rationale: How the target strengthens the business.

• Synergies: Expected cost savings or additional revenue.

• Financial impact: Whether the deal is EPS-accretive or dilutive, and its effect on cash flow and leverage.

• Purchase price: Why the price is justified.

• Integration: How and when benefits will be achieved, and the key risks.

What does an M&A banker look for when aquiring a company

An M&A banker advising a buyer looks for:

• Strategic fit: Does the target strengthen the buyer’s products, markets, or capabilities?

• Financial quality: Strong earnings, cash flow, growth, and manageable debt.

• Synergies: Achievable cost savings or additional revenue.

• Valuation and returns: A reasonable price that allows the acquisition to create value.

• Risks: Integration challenges, customer concentration, legal issues, and regulatory approval.

• Deal feasibility: Can the buyer finance the purchase, and is the seller willing to transact?

Deferred Revenue is a liablity or asst? , Accrued Expenses ?, Prepaid Expenses?

Deferred Revenue (Liability), Accrued Expenses (Liability), Prepaid Expenses (Asset)

Prepaid expense of 20$ utility bills 1 month ahead, what is the 3 statement in first month, what about a month later when electricity is used

Cash flow statement:

Operating activities	Amount
Net income change	−$16
Decrease in prepaid expenses	+$20
Change in cash	+$4

Two companies, same revenue / EBITDA / Industry, one funded by 100% EQ, one funded by 50-50 debt-EQ, would their EV be the same? Argument against that / which one is higher?

“All else equal, I’d initially expect the same enterprise value because financing changes the allocation between debt and equity. With taxes, the leveraged company could have a higher EV due to the interest tax shield. But if distress costs outweigh that benefit, it could have a lower EV. The financing mix alone isn’t enough to determine which is higher.”

The argument for the company with debt having a higher EV: interest is generally tax-deductible. The resulting tax savings can lower WACC and increase the present value of the business, provided it can use those deductions.

The argument for the company with debt having a lower EV: excessive debt creates financial distress risk, refinancing costs, and restrictions that can prevent the company from making valuable investments. Those costs can outweigh the tax benefits.

Also, the same revenue, EBITDA, and industry do not guarantee the same EV. Growth, capital expenditures, working capital needs, and operating risk could still differ.

10k share, 20$ share price, 100 option at 10$, 50 RSU, 100 convertible bonds, 100 conversion price, 100 par value, calculate diluted EQV

What happens to cost of equity when you increase leverage? What about WACC?

Cost of equity generally rises as leverage increases—even at first. More debt means more interest payments must be paid before shareholders get anything, making shareholders’ returns riskier. They therefore demand a higher return.

WACC: Initially, adding debt can lower WACC: debt is generally cheaper than equity, and interest payments often provide a tax benefit. Those benefits can outweigh the rising cost of equity.

At high leverage, WACC can rise: financial distress becomes more likely, so both lenders and shareholders demand higher returns.

As leverage increases…	Typical effect
Cost of equity	Rises
WACC	May fall initially, then rise

in the idealized Modigliani–Miller model with no taxes or distress costs, WACC stays constant. The rising cost of equity exactly offsets the benefit of using cheaper debt.

You purchased an asset for $200m in the last fiscal year financed with 75% cash and 25% debt. The asset is depreciated over 10 years with no residual value and generates $40m in EBITDA. Assume a 20% tax rate and 10% cost of debt. Walk me through how this flows through the 3 financial statements the next year.

The purchase happened last year, so the $200 asset purchase, $150 cash payment, and $50 debt issuance are already in the opening balance sheet.

1. Income statement

Item	Impact
EBITDA	$40
Depreciation: $200 ÷ 10 years	($20)
EBIT	$20
Interest: $50 debt × 10%	($5)
Pretax income	$15
Taxes: $15 × 20%	($3)
Net income	$12

2. Cash flow statement

Start with $12 of net income and add back $20 of noncash depreciation, giving $32 of cash flow from operations.

There’s no additional purchase or debt activity, so investing and financing cash flows are both zero. Cash increases by $32.

3. Balance sheet

• Cash increases by $32.

• Net PP&E decreases by $20 due to depreciation.

• Debt stays unchanged at $50.

• Retained earnings increase by $12, assuming no dividends.

The balance sheet balances: assets increase by $12 net ($32 − $20), matching the $12 increase in equity.

What happens to enterprise value when you use $100m of cash on hand to pay down debt?

Enterprise value stays unchanged.

Using EV = Equity Value + Debt − Cash, paying down $100m of debt with cash:

• Debt decreases by $100m → EV decreases by $100m.

• Cash decreases by $100m → EV increases by $100m.

The effects offset. Net debt is unchanged, and equity value remains unchanged mechanically.

What happens to enterprise value when you now use that $100m of cash to pay a dividend?

When you pay a $100m cash dividend:

• Cash decreases by $100m.

• Equity value decreases by $100m, because that cash leaves the company and goes to shareholders.

• Debt stays unchanged.

Using EV = Equity Value + Debt − Cash, the $100m decrease in equity value offsets the $100m decrease in cash.

Shareholders now hold $100m less in stock value and $100m more in cash, so their total wealth is unchanged, ignoring taxes and market reactions.

What happens to enterprise value when you use $100m of cash to purchase a productive asset?

Enterprise value increases by $100m, assuming you purchase the asset at fair value.

• Cash decreases by $100m.

• Equity value stays unchanged: you exchanged $100m of cash for an operating asset worth $100m.

• Debt stays unchanged.

Using EV = Equity Value + Debt − Cash, the decrease in cash increases EV by $100m.

The intuition: cash is excluded from enterprise value, but a productive operating asset is included. You’ve moved $100m from cash into the operating business.

how does raising preferred equity impact the 3 statements

Assume the company issues $100m of preferred equity for cash, with no issuance fees, and the preferred stock is classified as equity.

• Income statement: No impact. Raising capital isn’t revenue.

• Cash flow statement: Cash flow from financing increases by $100m, so cash increases by $100m.

• Balance sheet: Cash increases by $100m and preferred equity increases by $100m. The balance sheet balances.

If the company later pays preferred dividends, those generally don’t reduce net income—they reduce net income available to common shareholders. The payment is a financing cash outflow under US GAAP and reduces cash and retained earnings.

buy factory for 1000 (60% debt, 40% cash) + pay down 50% debt at end of y1, 10% interest, residual value $200, useful life 4 years, 20% tax - 3 financial statements impact

Assume the factory is purchased at the start of Year 1, uses straight-line depreciation, and generates no specified operating income. Also assume the company can use the tax deductions against other income.

Key calculations:

• Debt raised: $1,000 × 60% = $600

• Existing cash used: $1,000 × 40% = $400

• Annual depreciation: ($1,000 − $200) ÷ 4 = $200

• Year 1 interest: $600 × 10% = $60

• Year-end debt repayment: $600 × 50% = $300

Because repayment occurs at year-end, interest is based on the full $600.

1. Income statement

Item	Year 1 impact
Depreciation	−$200
Interest expense	−$60
Pretax income	−$260
Tax expense reduction: $260 × 20%	+$52
Net income	−$208

The $300 principal repayment isn’t an expense, so it doesn’t affect net income.

2. Cash flow statement

Item	Year 1 impact
Net income	−$208
Add back depreciation	+$200
Operating cash flow	−$8
Factory purchase—investing	−$1,000
Debt issuance—financing	+$600
Debt repayment—financing	−$300
Net change in cash	−$708

This uses US GAAP classification for interest paid.

3. Balance sheet

Relative to before the purchase:

Item	Year-end change
Cash	−$708
Net PP&E: $1,000 − $200 depreciation	+$800
Total assets	+$92
Debt: $600 raised − $300 repaid	+$300
Retained earnings	−$208
Total liabilities + equity	+$92

The balance sheet balances: assets and liabilities plus equity both increase by $92.

To go from revenue to unlevered free cash flow (UFCF):

Step	Calculation
Revenue	Starting point
− COGS and operating expenses, excluding D&A	= EBITDA
− Depreciation & amortization	= EBIT
− Taxes on EBIT: EBIT × tax rate	= NOPAT
+ Depreciation & amortization	Add back noncash expenses
− Capital expenditures	Cash invested in long-term assets
− Increase in net working capital	Cash tied up in operations
= UFCF	Cash available to debt and equity investors

UFCF = EBIT × (1 − Tax Rate) + D&A − CapEx − ΔNWC

UFCF TO LFCF

Levered FCF = UFCF − Interest × (1 − Tax Rate) − Debt Repayments + New Debt Raised or (net borrowing =New Debt Issued - Mandatory Debt Principle Repayment)

Why do you takeout Capex (different scenarios for diff types of capex and do you take it out still or no? )

You subtract CapEx because it’s a real cash outflow that isn’t fully deducted on the income statement when spent. It gets capitalized on the balance sheet and expensed gradually through depreciation.

In free cash flow, you add back noncash depreciation and subtract actual CapEx.

Whether you subtract different types depends on the metric:

Type / scenario	Subtract it?
Maintenance CapEx—replacing worn-out equipment	Yes. It’s needed to sustain operations.
Growth CapEx—building another factory or expanding capacity	Yes, in standard UFCF. Growth spending still uses cash.
Discretionary CapEx—projects the company could postpone	Yes, if incurred or included in the forecast. Optional doesn’t mean free.
Debt-financed CapEx	Yes. Subtract the investment in UFCF; account for borrowing separately when calculating FCFE.

You might exclude growth CapEx when calculating a specifically defined maintenance-only or normalized cash flow metric. But you can’t include the cash flows from future growth while ignoring the investment required to generate them.

UFCF to LFCF

LFCF = UFCF − Interest × (1 − Tax Rate) + Net Borrowing

Where Net Borrowing = New Debt Raised − Principal Repaid.

* If company has operations in US and UK, how do you consider risk free rate

Cost of equity = Risk-free rate + Beta × Mature-market equity risk premium + Weighted country risk premium

Choose the risk-free rate based on the currency of your projected cash flows—not where the company operates.

• If you forecast both US and UK operations in USD, use a US Treasury yield for the risk-free rate.

• If you forecast everything in GBP, use a UK government bond (gilt) yield.

• If you value the operations separately in their local currencies, use a USD discount rate for USD cash flows and a GBP discount rate for GBP cash flows. Then convert the resulting values into one currency and add them.

LBO - MOIC (Multiple on Invested Capital) - Definition? What does 2X MOIC mean?

Measures how many times your invested money is worth or returned. A 2.0× MOIC means $1 invested becomes $2. It ignores time.

MOIC = how much; IRR = how much per year

LBO - IRR (Internal Rate of Return) - What’s the definition

Measures your investment’s annualized return, accounting for the timing of investments and distributions. Technically, it’s the discount rate that makes the investment’s NPV equal to zero.

MOIC = how much; IRR = how much per year

Synergies - Which synergy would you prefer – Rev vs cost vs Capex

Synergy ranking -

Cost synergies usually rank first because they often produce recurring savings and immediately improve earnings. CapEx savings may be one-time and mainly improve cash flow.

How could you change a DCF to produce a higher valuation?

• Higher cash flows: Increase revenue growth or margins; reduce CapEx or working capital investment.

• Lower WACC: Increases the present value of future cash flows.

• Higher terminal value: Increase the perpetual growth rate or exit multiple, depending on your method.

An M&A banker advises the buyer on whether the target is a good strategic and financial acquisition.

Remember: Fit, financials, price, synergies, risks.

• Strategic fit: Does it add products, customers, capabilities, or geographic reach?

• Financial quality: Growth, margins, cash flow, and how sustainable earnings are.

• Valuation: Is the purchase price justified?

• Synergies: Realistic revenue gains, cost savings, and CapEx savings.

• Deal impact: Financing needs, leverage, returns, and EPS accretion/dilution.

• Risks: Integration, customer concentration, management, and regulatory issues.

What is LBO?

An LBO (Leveraged Buyout) is when a private equity firm acquires a company using significant debt and its own equity, operates it for several years, and then exits with the goal of earning a profit. The acquired company’s assets typically serve as collateral for secured debt, while its cash flows fund interest and debt repayments. Financing may also include a revolver to cover short-term cash shortfalls.

What are steps for company’s LBO

In DCF, how does CapEx and D&A change over time?

“In a growing company, CapEx generally exceeds D&A because the company invests in new assets. D&A follows with a lag, as those investments are depreciated over their useful lives.

As growth slows and the business matures, CapEx and D&A often move closer together, although they don’t have to be equal.

If CapEx stays constant, D&A can initially rise as investments accumulate, then level off as older assets become fully depreciated. D&A can temporarily exceed CapEx if the company reduces spending after a period of heavy investment.

Is it possible/ when does D&A go over CapEx? (Imagine straight line CapEx and increasing D&A)

Yes- Possible

D&A can exceed CapEx when:

• Past investment was higher: A company completed a major factory and now spends less, while continuing to depreciate it.

• The company cuts investment or shrinks: Current spending falls below depreciation on existing assets.

• Amortization is substantial: Acquired intangible assets create amortization without equivalent current CapEx.

• High growth — CapEx ≫ D&A: The company invests heavily in new PP&E to expand, while D&A reflects its smaller historical asset base.

• Steady state / terminal year — CapEx ≈ D&A: Growth slows to a sustainable long-term rate, and investment shifts toward replacing worn-out assets. Continued growth and inflation may still require CapEx to exceed D&A.

What do you need to be mindful of doing a DCF?

• Realistic forecasts: Revenue growth, margins, CapEx, and working capital assumptions should reflect the business’s history and outlook.

• Reasonable terminal value: The company should reach stable growth by the terminal year. Avoid overly aggressive growth rates or exit multiples. g must below WACC

• Sensitivity to assumptions (Range): Small changes in WACC and terminal assumptions can significantly change valuation, so present a range rather than one precise number.

When valuing a company using multiples, when is Revenue preferred over EBITDA?

EV/Revenue is preferred when EBITDA is negative or near zero, making EV/EBITDA meaningless or misleading.

This is common for young, high-growth companies that generate revenue but aren’t yet profitable—such as software companies investing heavily in expansion

The drawback: Revenue ignores profitability, so you should compare companies with similar business models, growth, and long-term margin potential

I’d use EV/Revenue when EBITDA is negative or too small to be meaningful, particularly for early-stage, high-growth companies. However, I’d consider differences in growth and potential profitability when selecting comparable multiples.

Which metric sounds off? EV/EBITDA, EV/Revenue, EQV/EBITDA, EQV/NI

EQV/EBITDA is the mismatch. Equity value belongs only to shareholders, while EBITDA is before interest, so it reflects earnings before payments to debt investors. The numerator and denominator must represent the same investor group

Before interest → EV. After interest → Equity Value.

Does having debt in your capital structure decrease your WACC?

Generally, adding some debt lowers WACC—but adding too much can increase it.

• Initially: Debt is cheaper than equity, and interest generally provides a tax shield, lowering WACC. BIWS

• At high leverage: Financial distress risk increases, so lenders and shareholders demand higher returns. These higher costs can outweigh debt’s benefits and raise WACC. WSP

Interview answer: “Debt generally reduces WACC up to a point because it’s cheaper than equity and offers tax benefits. Beyond the optimal debt level, increased financial risk pushes WACC higher.”

Why do we add noncontrolling interest when calculating enterprise value

We add noncontrolling interest to match the ownership represented in enterprise value with the earnings used in the multiple.

If a parent owns 80% of a subsidiary, its consolidated EBITDA still includes 100% of the subsidiary’s EBITDA. But the parent’s equity value only reflects its own 80% stake.

Adding NCI—the outside investors’ 20% stake— makes EV reflect the full subsidiary too, keeping EV/EBITDA consistent

Using the merger-model shortcut, the cost of equity is the inverse of P/E: 1 ÷ 20 = 5%, equal to the pretax cost of debt. However, debt is cheaper after taxes because interest is generally tax-deductible. At a 25% tax rate, its after-tax cost is 5% × (1 − 25%) = 3.75%.

How does the terminal value calculation change when we use the mid-year

convention?

Switching to mid-year convention	Gordon Growth	Exit Multiple
Calculated TV before discounting	Unchanged	Unchanged
TV discount period in a 5-year DCF	5 → 4.5	Stays 5
Present value of TV	Increases	Unchanged

What are the differences between an all-debt deal and an all-stock deal?

“In an all-debt deal, the buyer borrows cash to pay the seller. It avoids diluting existing shareholders’ ownership, but increases leverage, interest expense, and repayment risk.

In an all-stock deal, the buyer issues shares to the seller. It avoids new acquisition debt, but dilutes existing shareholders’ ownership, and the seller shares in the combined company’s future upside and downside.

Either can be EPS-accretive or dilutive: debt adds interest expense, while stock adds shares.”

n M&A, an all-debt deal uses borrowed cash to pay the seller; an all-stock deal pays the seller with newly issued buyer shares.

	All-debt deal	All-stock deal
Seller receives	Cash	Buyer’s shares
Buyer’s shareholders	Keep their ownership percentage	Ownership percentage is diluted
Financial impact	Higher debt and interest expense	Higher shares outstanding
Main trade-off	Greater leverage and repayment risk	Shares future upside and control with sellers
EPS accretion shortcut	Target’s earnings yield exceeds after-tax debt cost	Buyer’s P/E exceeds target’s purchase P/E

ROE, ROA, ROIC ? Which one is impacted by the capital structure?

ROE & ROA , but NOPAT is not an official metricsl,

Why would a company pursue a dilutive deal? Follow-up: What are some additional analyses you would use or strategic reasons you would highlight??

Short-term dilution can be acceptable if the deal creates long-term value.

A company may pursue a dilutive deal because lower near-term EPS doesn’t necessarily mean lower long-term value. The acquisition could provide new technology, customers, or markets, and growth or synergies may take time to materialize. Initial dilution could also reflect one-time integration costs or noncash amortization

the follow-up, I’d highlight:

• DCF / NPV: Do the acquired cash flows and synergies justify the purchase price and integration costs?

• Returns analysis: Does the acquisition’s return exceed its cost of capital?

• Multi-year EPS and cash flow: Is dilution temporary, and when does the deal become accretive?

• Downside scenarios: What happens if synergies are delayed or growth disappoints?\

what’s a pitch book - what’s in the pitch book

A pitch book is a presentation an investment bank uses to win a client’s business by recommending a transaction and explaining why the bank should advise on it. The client can be a buyer or a seller.

• Bank credentials: Team, relevant experience, and past deals.

• Company and industry overview: Business performance and market trends.

• Strategic alternatives: Buying, selling, raising capital, or remaining independent.

• Valuation and financial analysis: Comps, precedents, DCF, and potential deal impact.

• Recommendation and execution plan: Potential buyers or targets, deal structure, risks, timeline, and next steps.

If interest rates go up, would the valuation of a mature company or a startup be more affected?

“A startup would generally be more affected because more of its value comes from cash flows further into the future. Higher interest rates increase the discount rate, reducing the present value of those distant cash flows more than the near-term cash flows of a mature company.”

Interest goes up, WACC & DCF impact

Tax goes down, WACC & DCF impact

“Lower taxes generally increase valuation by increasing free cash flow, although the reduced interest tax shield provides an offset. Higher interest rates generally decrease valuation by increasing WACC, assuming operating cash flows remain unchanged.”

1. Tax rate goes down → generally higher DCF valuation.

\[ UFCF=EBIT(1-T)+D\&A-CapEx-\Delta NWC \]

• Lower taxes → higher after-tax operating profit → higher UFCF → higher valuation.

• However, a lower tax rate reduces the interest tax shield, increasing the after-tax cost of debt and pushing WACC upward. This partially offsets the cash-flow benefit, so the final impact depends on both changes. (BIWS, WSP)

2. Interest rates go up → generally lower DCF valuation.

• Higher rates → higher cost of debt and cost of equity → higher WACC → lower present value of cash flows and terminal value.

• In an unlevered DCF, you don’t subtract the higher interest expense from UFCF; the financing effect enters through WACC. (BIWS, WSP)

P/S Dividends, and C/S dividends, will do what to EQV?

both Common and Preferred . Dividends flow into Common Shareholders’ Equity on the Balance Sheet. But Preferred Stock issuance does not affect Common Shareholders’ Equity!

EV, EQV, NOA, NA

EV= NOA (Net Operating Asset) = Core Business Ops to all investors; EQV= Net Assets to Equity Investors

What are the advantages and disadvantages of TEV / EBITDA vs. TEV / EBIT vs. P / E?, which one is better? and why

TEV / EBITDA is better when you want to ignore the company’s CapEx and capital structure

completely.

TEV / EBIT is better when you want to ignore capital structure but partially factor in CapEx (via

the Depreciation, which comes from CapEx in previous years).

So, TEV / EBITDA is more about normalizing companies and is more useful in industries where

CapEx is not a huge value driver, while

The P / E multiple is affected by different tax rates, capital structures, non-core business

activities, and

Should you add back Stock-Based Compensation to calculate Free Cash Flow? It’s a noncash

add-back on the Cash Flow Statement.

No! You should consider SBC a cash expense in the context of a valuation because it creates

additional shares and dilutes the existing investors. So, it’s not just a simple “timing difference”

line item like CapEx and D&A.