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Pillars of Wall Street ! Questions With Complete Solutions
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Pillars of Wall Street ! Questions With Complete Solutions
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Pillars of Wall Street ! Questions With Complete SolutionsDescription of Trading Comparable Analysis
Relative Valuation Methodology that uses trading multiples of comparable companies to value the target company
Key Trading Multiples
- EV/Sales
-EV/EBITDA
-P/E
Trading Comparable Analysis Pros
1. Market efficiency ensures that trading values reflect industry trends, business risks and market growth
2. Valuation based on easy to calculate inputs
3. Valuation methodology based on key statistics relevant to investors
Cons of Trading Comp Analysis
- Market based valuation can be skewed during severe market ups/downs
- Assumes peer group as a whole is correctly valued
-Truly comparable companies are rare
Steps for Trading Comps 1. Determine set of comparable companies
2. Calculate equity/enterprise value
3. Analyze historical and projected earnings
4. Derive valuation multiples, credit stats and operating metrics
5. Apply median or mean valuation multiples of comparable companies to target company to derive implied valuation
Transaction Comparable Analysis Description
Relative Valuation method based on multiples of M&A transactions in same industry. In general, produces a higher valuation than trading comps due to the premium paid for majority acquisition.
Pros of Transaction comps
Analysis based on actual acquisition multiples and control premiums. Recent transactions in M&A. Trends such as foreign purchasers or financial buyers may become clear.
Cons of Transaction Comps
Past transactions may not reflect market conditions.
Each transaction is unique, we do not know what went into formulation.
Steps of transaction Comparable Analysis
1. Determine set of comparable transactions
2. Calculate equity purchase prices and transaction enterprise values, as well as premiums paid
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