How to estimate the market value of a tanker?

Hi there,

You can have two scenarios for a question like “What’s the value/price of XYZ”, depending on whether the target product/service generates revenues or not.

OPTION 1: TARGET GENERATING REVENUES

For questions like “How much would you pay for XYZ?”, where XYZ can generate revenues directly for the buyer (eg Golden Gate Bridge, parking area), you can use valuation methods.

You will often have to use DCF of the estimated cash flow (normally simplified with profit) of the target.

If you have to estimate a bid price to purchase the target, given this method will give you the maximum amount you should pay, you could consider to:

• Bid a lower amount so that you will receive a return of investment comparable to the opportunity cost you may have (eg 10%).
• Try to estimate the possible bids of competitors (very difficult).

Alternatively, you may use the other valuation methods. But they don’t work well for very unique assets without comparable options:

• Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
• Computation from asset value – identify the equity value as the fair value of total assets minus net debt. This is usually going to give you the minimum price you could pay for the target, as it considers assets in isolation.

OPTION 2: TARGET NOT GENERATING REVENUES

When you have to define the price of products that can’t generate revenues directly for the buyer (eg a headache pill bought by the final customer), you have to use a structure based on three data points/ranges:

• Competitor-based
• Value-based
• Cost-based

Then you have to choose based on what is going to give you a quantitative result as close as possible to the goal of the client.

Hope this helps,

Francesco

Dear candidate,

great question. For project valuation the common approach is typically a discounted cash flow calculation that computes the net present value. For businesses it varies by size and age, it is usually a multiple of EBITDA (alternatively you can also use an NPV-value/business case type calculation or a product portfolio valuation or in some cases an asset valuation), for public companies there is the market price. For a tanker I would here also include the obvious, in case the candidate forgets:

1. For actual value estimate the value the product has to the customer - this is most of the time the best approach (find out who the customer segments are and what the value is for each)
2. Alternatively use the willigness to pay of the customer, irrespective of the product’s value, which is closely related (sometimes used interchangeably) but sometimes there can be variances so for example the theoretical value can be much greater than what the customer is willing to pay
3. For a quick range:
   1. Check actual prices: competitive prices
   2. Check also cost pricing (also this is not really related to value but it can provide an estimate of a lower bound)
   3. Use supply-demand curve
4. Consider also re-sale value

Generally I would use the value for which the client can sell the tanker. Typically for a tanker if bought brand new it would be much higher on the day before purchase than on the day after purchase (just like with cars). For resale, the resell price would be affected by similar quantities as for cars such as  milage used, general condition, guarantee availability etc.

Hi there,

You'll really get the most out of this exercise if you try it yourself first! Why don't you post your thinking and then we can provide feedback?

Market Sizing

Remember that there's rarely a "best" answer with market sizing. What's important is that you break down the problem the way it makes sense to you. Importantly, break it down so that the assumptions you make are the ones you're most comfortable in.

For example, do you know all the major brands? Great go with that. Do you understand all the segments of that country's population (either age or wealth or job breakdown)? Go with that. Do you know the total market size of the tourism (or hotel) industry? Then break it down that way.

Some tips:

1. Just like in a case, make sure you understand the question - what are you really being asked to calculate
2. Decide whether a top-down or bottom-up approach is best
3. Figure out what you know you know, and what you know you don't know, but could estimate
   1. This helps you determine how to split out buckets
4. Stay flexible - you can start with a "high-level" market sizing, but gauge your interviewers reaction....if it looks like they want you to do more...then go along level deeper in terms of your splits

Take a look here for some additional practice/guidance: https://www.preplounge.com/en/management-consulting-cases/brain-teaser/intermediate/taxis-in-manhattan-market-sizing-229

In theory, the value of something depends on the cash flows it generates or saves for the owner. You take that cash flow and you discount them at the proper cost of capital. 

In practice, there are simpler approaches such as using comparable transactions. 
For a car or a tanker you just have to figure out what the value of “similar” goods exchanged in some market was. Once identified those transactions you have to adjust for the kind of good, the market in which they have been negotiated, and the context (e.g., the value of a used car two years ago was much less than it is now that we have difficulties ordering a new one).


 

Its always better to post ideas alongside questions to truly learn how to answer it.

In general there are a few approaches you can take

• Calculate the intrinsic value of the item - so what is the cash flow that an item generates and you can then discount it using standard market rates
• Benchmark to past sales - what have similar items sold for in the recent past and use those ratios to see what your item is worth
• Willingness to pay - if your item has some unique features (owned by a celebrity etc.) then you can add a premium to the value for that and charge a price accordingly.

Best,

Udayan

Hello!

I would always recommend you to give it a shot and then post it here, this would help you the most. 

Have you looked in PrepL´s library for similar pricing cases? Since all cases have tags, it´s great for filtering. 

Best,

Clara