For Economic and Financial Postgraduate Examination/Postgraduate Examination/Research
Reference: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson & John D. Stowe. Equity Asset Valuation (3rd edition) CFA Institute Investment Series

FINance / Financial Analysis and Valuation:

Part 5 Credit Analysis (continued)
1. Private Company Valuation
2. Discount Rate Estimation
3. Li & Solvency

1. Private Company Valuation

1.1. Normalized Earnings
1.2. Income Approach
1.3. Asset-Based Approach
1.4. Market Approach

1.4. Market Approach

The market approach values ​​an asset based on pricing multiples from sales of assets viewed as similar to the subject asset.

1.4.1. Major Variations
1.4.2. Valuation Discounts
1.4.3 . Comparable Analysis
1.4.4. Notes on M-A-Method
1.4.5. Characteristics of MAD
1.4.6. Example Illusration

1.4.1. Major Variations

Three major variations of the market approach exist:

Steps:

I. uses details from recent takeover transactions for comparable companies to make direct estimates of the target company's takeover value.

II. The first step in comparable transaction analysis is to collect a relevant sample of recenttakeover transactions. The sample should be as broad as possible but limited to companies in the same industry as the target, or at least closely related.

III. we compare the multiples actually paid for similar companies in other M&A deals and look at descriptive statistics, such as the mean, median, and range for the multiples.

1.4.4. Notes on M-A-Method

Factors considered in estimating a control premium:

i. Types of transaction: a financial transaction or a strategic transaction (focus on synergy).

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ii. Industry Factors

iii. Form of consideration (in form of cash or stock?)

Transaction based pricing multiplies:

i. Synergies

ii. Contingent consideration : represent potential future payments to the seller that are contingent on the achievement of certain agreed on occurrences.

iii. Noncash consideration

iv. Availability of transactions

v . Changes between transaction data and valuation date.

1.4.5. Characteristics of MAD

1) Advantage

It relies on data generated from actual market transactions.

2) Key Assumption

Transactions providing pricing evidence are reasonably comparable to the subject company.

3) Biggest Challenge

I) Finding comparable companies and accurately assessing their pricing.

II) Multiples reflect expected growth and risk. Therefore, public company multiples must be adjusted for company-specific and stock-specific factors that distinguish private companies.

4) Key Factor

Key factors for selecting guideline companies: Desire the same industry membership, operations, size, and life cycle.

1.4.6. Example Illusration

(continued)Reference: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson & John D. Stowe. Equity Asset Valuation (3rd edition) CFA Institute Investment Series

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For Economic and Financial Postgraduate Examination/Postgraduate Examination/Research

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