Category Archives: Corporate Development

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When evaluating a private equity acquisition, is it better to use forward or trailing multiples?

Trailing multiples are multiples driven off of past cash flows, such as EV / LTM (Last Twelve Months) EBITDA or P / E (LTM). In private equity, it’s often more appropriate to use trailing multiples because many of the companies being analyzed are private. Private companies will not have forecasts ...
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What type of multiples would you use for a company in the real estate sector?

P / FFO Per Share P / AFFO Per Share P / NAV Per Share FFO (Funds from Operations) = net income + D&A + losses on sale – gains on sale -interest income FFO captures the cash flows earned from the core business of renting out properties, while reversing the impact of non-core or […]...
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What type of multiples would you use for a company in FIG (Financial Institutions Group)?

We don’t use EBITDA here since interest expense is often part of the core business. For FIG companies, interest expense is often the cost of the capital which they will invest, almost like a cost of goods sold. They will try to achieve a higher return than their cost of capital, similar to how a [...
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What type of multiples would you use for a company in the consumer retail sector?

In addition to the usual multiples such as EV / EBITDA, P / E, EV / revenue, P / Book Value, and P / Tangible Book Value, a very common multiple to use in consumer retail is EV / EBITDAR. EBITDAR is EBITDA before rent expense. Since some companies will rent their stores and others […]...
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What type of multiples would you use for a company in the technology sector?

You would use common multiples such as P/E, EV / EBITDA and EV / Revenue. For many technology companies that are still growing and not experiencing positive EBITDA or earnings, EV / revenue may be a more relevant multiple. Also, it may make sense to focus on a variety of forward multiples; it is com...
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Why would you use EV/EBITDA over P/E?

EV / EBITDA is generally a better metric than P/E because EBITDA is a proxy for operating cash flow. EBITDA is also: Before interest, therefore capital structure neutral Before taxes, therefore tax jurisdiction neutral Before depreciation and amortization (D&A), therefore accounting policy neutr...
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How do options affect the enterprise value formula?

Options provide the right to buy a stock at a given exercise price. If the stock price is at the exercise price or higher, then they are in-the-money. If the stock price is at the exercise price or higher, then they are out-the-money. If the options are in-the-money, then using the treasury stock me...
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How do you account for convertible bonds in the enterprise value formula?

Convertible bonds are bonds that convert into equity after the stock price reaches the conversion price. If the stock price never reaches as high as the conversion price, then the convertible bonds will continue to be debt. If the convertible bonds are “in-the-money”, meaning that the stock pric...
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Why do companies issue preferred equity in the first place?

In practice, preferred equity is more similar to debt because it earns a fixed yield. However, it is technically classified as equity by the banks, so issuing preferred equity is a way to gain access to a debt-like instrument without hurting the company’s debt-to-equity ratio. It also offers maxim...
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Would shareholder’s equity ever be greater than market capitalization?

Yes, this is possible if the stock price has declined so much that the market capitalization, calculated as # of shares x stock price, is lower than the original book value of shareholder’s equity. The book value of shareholder’s equity is recorded at the amount of the initial investment. In oth...
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