CFI FMVA ACTUAL QUESTIONS WITH 100

CFI FMVA (ACTUAL / ) QUESTIONS WITH 100%

CORRECT ANSWERS

Premium vs synergies - ---Ans---share price pre deal assumes no synergies priced in => if premium is paid, often for synergies earned => value of synergies earned must be compared to premium paid

ACQUIRER IDEAL: PV of synergies > premium paid

If PV of synergies < premium paid, may have OVERPAID

Discount synergies @ WACC => Synergy cash flows occur @ mid-yr pt => Perpetual growth of synergies assumed = 0%

Calc Transaction Multiples - ---Ans---Transaction Comp = Value [All Eq to EntVal bridge adjustment must be made based on latest BS data available at announcement]/Value driver [LTM @ time of deal announcement] -- Value driver must be consistent w/ value #!

Forecast FCF - ---Ans---CFs "free" from impact of financing decisions/unlevered => EntValue

DCF & WACC 1 / 4

(1) DCF = CF forecast discounted to 'today's' value => 'intrinsic' not relative valuation tool => DCF = modeler's view of value EntValue {} Net debt & Eq.--- => WACC done on UNLEVERED basis [before any returns to finance providers] => WACC = (Cost of debt*Proportion of debt) + (Cost of equity*Proportion of equity) Done on basis of perpetuity, 1/(WACC - g) --- DCF} (+) Absolute value (+) Detailed modeling (+) Focus on cash

(-) Requires significant expertise (-) High sensitivity to assumptions -- - ---Ans---Terminal Value Now =>>> Infinity (1) Forecast period} FCFs => Yr 1 to 5 or Yr 1 to 10 (2) Steady state} Yr 6 to infinity or Yr 11 to infinity} Large portion of value & v sensitive to assumptions Growing perpetuity formula EntVal multiple

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FCFn(1+g)/(WACC - g)

TV => 2 Approaches - ---Ans---Growing Perpetuity => (1) Formula} TVn(GP) = FCFn*(1+g)/(w-g) => (2) Sense check EV multiple = TVn(GP --- Terminal EV multiple

DCF Steps - ---Ans---(1) Forecast FCFs to steady state (normally 5 or 10 yrs) (2) Calc WACC (3) Calc TV (4) Discount CFs to today (5) Walk from EntVal to implied share price using Eq-EntVal bridge -- SUMMARY} Free Cash Flow = EBIT * (1-Tax) + Depreciation - Capital Expenditure - Net Working Capital

Predict Future Cash Flow Values 5-10 years, requires a terminal value (use perpetuity method or terminal multiple method)

Use WACC to convert future cash flow values to present value

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Forecast FCF - ---Ans---FCF:

(1) EBIT} Adjusted Op. Prof (2) - Tax on EBIT [EBIT*LT Tax rate] (3) = NOPAT or EBIAT [Net Op. Prof after taxes] (4) + D&A} Non-cash item (5) - Capex (Investment in PP&E) (6) +/- Change in OWC (Cash used by extra investment in OWC) (7) +/- Other (Changes in other operating assets/liabilities) (8) = FCF (CF produced by ops)

NOPAT or EBIAT - ---Ans---Net operating prof after tax [or earnings before interest after tax]

TV => Company characteristics - ---Ans---TV => Company characteristics

Steady state:

• ETR approaches MTR
• Margins have stabilized
• Returns close to WACC
• LT capital structure achieved
• Growth approaches LT inflation
• High cash conversion
• Stable capex

DCF => Discounting

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