If you run an LBO analysis and private equity firm’s return is too low. What drivers to the model will increase the return?

March 18, 2011

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Reduce the purchase price that the PE firm has to pay for the company (reduce the entry multiple) Increase the amount of leverage (debt) in the deal (generally depends on the market conditions and availability as well as debt service ability of the firm) Increase the price for which the company sells when the PE […]

Posted in: LBO Valuation

Is 10 a high P/E ratio?

March 18, 2011

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The answer to this or any question like this is, “it depends.” P/E ratios are relative measurements, and in order to know whether a P/E ratio is high or low, we need to know the general P/E ratios of comparable companies. Generally, higher growth firms will have higher P/E ratios because their earnings will be […]

Posted in: Equities, Ratios

What is a bond’s “Yield to Maturity”?

March 18, 2011

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A bond’s yield to maturity is the yield that would be realized through coupon and principal payments if the bond were to be held to the maturity date.

Posted in: Bonds

How much would you pay for a Zero Coupon Perpetual Bond?

March 16, 2011

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Zero..Yes, Nothing. The fact that the bond has no coupons and at the same time is perpetual, means that you never get paid eat all. Why would you pay anything for it then.

Posted in: Bonds, General

Walk me through an LBO (Leveraged Buyout) analysis

March 16, 2011

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To begin with, we need to make some transaction assumptions – What is the purchase price (based on an EBITDA multiple for example) and how will the deal be financed?  Given this information, we can create the table of Sources and Uses of cash. Uses of cash includes the amout of money needed to effectuate the transaction – […]

Posted in: LBO Valuation

What is goodwill and how is it calculated?

March 16, 2011

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Goodwill, a type of intangible asset, more correctly it is an indefinite life intangible asset. Goodwill is created in an acquisition, and from an accounting point of view, reflects the value of a company that is not attributed to its other assets and liabilities.  Goodwill is calculated by subtracting the target’s book value (once they are written […]

Posted in: M&A, Valuations

What factors can lead to the dilution of EPS in an acquisition?

March 15, 2011

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The main factors that can lead to dilution in an acquisition are as follows: 1) The target has negative Net Income 2) The target P/E is greater than the acquiror P/E ratio 3) Resulting from the increased interest expense as a result of the new debt issued to finance the transaction 4) Resulting from the […]

Posted in: M&A, Valuations