Was doing an M&A case and I was asked to estimate the valuation of the company. I was little stuck and unsure on the method to do so - e.g. DCF with y1r cash flow/WACC or alternative.
I have the below data available from the case:
- yearly revenue: 14.95m
- yearly profit: 6.32m
Any help would be great
Hi there,
Q: I was little stuck and unsure on the method to do so - e.g. DCF with y1r cash flow/WACC or alternative.
Most likely you had to use DCF method in that case, as you would have needed more information to use the other methods (eg a multiple or asset value).
The usual valuation methods in case interviews are the following:
1) DCF. Often used in case interviews. To use, you are normally going to apply the perpetuity formula
Where
For a more detailed answer, you can check the following:
▶ How to Find the Net Present Value of a Company
2) Multiples. Sometimes used in case interviews. To use, 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).
3) Asset Valuation. Rarely used in case interviews. To use, calculate the value as the fair value of assets minus liabilities. You will normally consider assets in isolation, doing so should give you the minimum price you could pay for the target (ie the value in case the target would be dismissed as an alternative to the sale).
Best,
Francesco
Hi there,
There are a few ways to do an M&A case/valuation.
The most common is going to be NPV into perpetuity. In that case the formula is $ / (discount rate - growth of $).
$ can be profit, EBITDA, cash flow, net income etc.
discount rate can be WACC, Cost of equity, discount rate, etc.
Some other cases may have you do NPV annuity, ROI, or breakeven.
It's either that the company is a "going-concern", meaning that it will have the above numbers forever, or that there will be some growth/decrease in cash flows.
In the first case, assuming that net profit is a proxy of free cash flow (quite disputable, but here we are in a simplified setting), you can just divide net profit by WACC. A WACC of 10% for a “normal” business is fine. If the business is complex, volatile, and uncertain, a higher WACC is better.
Alternatively, you can go back to EBITDA or EBIT and calculate the valuation by applying a multiple.
Based on the data you provided, it is not possible to give you a definite answer.
However, assuming that the yearly profit that you have provided (i.e. 6.32M/yr) can be considered to be a stable cash flow (meaning that the profit in y_1 = y_2 = y_3 = y_4 = y_n) then the value of the company can be calculated based on the NPV perpetuity formula:
Value of company = Cash flow (or net annual profit) / (WACC - growth rate)
WACC can be assumed to be 5% for a low-risk acquisition, 10% for a medium-risk acquisition and 20% for a high-risk acquisition
(edited)
Hello!
It's very normal, most of us aren't familiar with those concepts when coming into consulting from non-economic backgrounds.
It can be both, but you would need more info in any case. In these cases, best is to ask the interviewer: “I could use x and y, for which I would need data xx and yy. Any preference about the methodology, or shall I just follow what I consider best?”
Hope it helps!
Cheers,
Clara
