Question 1

If the market leader in an industry has a $300 million market value and a 30% market share, the market is valuing each percentage point of market share at $10 million. If a target company in the same industry has a 20% market share, the market value of the target company is $200 million.

Accepted Answer

The market values each percentage point of market share at $10 million (derived from the market leader's valuation). Therefore, a company with a 20% market share would be valued at 20 x $10 million = $200 million.

Question 2

The capitalization rate is equivalent to the discount rate when the firm's revenues are not expected to grow.

Accepted Answer

The capitalization rate is used in the discounted cash flow analysis to find the present value of future cash flows. When the firm's revenue is expected to remain stable or not grow, the capitalization rate represents the rate of return required by investors, which is also known as the discount rate.

Question 3

Market-based valuation measures are meaningful only for firms with a stable earnings, cash flow, or sales history.

Accepted Answer

Market-based valuation measures rely on historical data to assess a firm's value, and stable earnings, cash flow, or sales history provide a reliable basis for these assessments.

Question 4

The comparable recent transactions method is usually considered less reliable than the comparable companies' valuation method.

Accepted Answer

The comparable recent transactions method is considered more reliable than the comparable companies' valuation method as the transactions are more specific and relevant to the company being valued.

Question 5

Price-to-earnings ratios of comparable companies provide an excellent means of valuing the target firm at any point in the business cycle.

Accepted Answer

Price-to-earnings ratios can vary significantly across different stages of the business cycle, affecting their reliability for valuing a target firm consistently at any point. Factors such as economic conditions, industry performance, and company-specific events can lead to fluctuations in earnings, making P/E ratios less stable and potentially misleading for valuation purposes without considering the broader context.

Question 6

Book values are maligned as measures of value, because they represent historical rather than current market values.

Accepted Answer

Book values reflect the historical cost of an asset rather than its current market value, which can lead to undervaluation or overvaluation of the asset. As a result, they are often criticized by investors and analysts as insufficient measures of value.

Question 7

Valuations of target firms based on the comparable companies and recent transactions methods must be adjusted to reflect control premiums.

Accepted Answer

The answer of Valuations of target firms based on the...

Question 8

The replacement cost approach to valuation of a target firm ignores value created by operating the assets in combination as a going concern.

Accepted Answer

The replacement cost approach only considers the cost of replacing the assets of a firm, and does not take into account the value created by operating those assets as a functioning business. This can result in an undervaluation of the target firm's worth.

Question 9

Based on the information given in the case, how would you estimate the value of Twitter at the time of the IPO based on a simple average of comparable firm enterprise to EBITDA multiples based on projected 2014 EBITDA?

Accepted Answer

The answer of Based on the information given in the...

Question 10

Tangible book value is the value of shareholders' equity less net fixed assets.

Accepted Answer

Tangible book value is calculated as the total shareholders' equity minus intangible assets and goodwill, not net fixed assets.

Question 11

Break-up value assumes that individual businesses can be sold quickly without any material loss of value.

Accepted Answer

Break-up value is based on the assumption that the assets or individual businesses of a company can be sold separately and quickly without significant loss in their value, aiming to estimate the net value if the company were to be liquidated.

Question 12

The principal limitation to the comparable companies' valuation approach is the difficulty in finding companies that are truly comparable to the target firm.

Accepted Answer

The statement is true as finding truly comparable companies can be challenging due to differences in size, industry, geographic location, growth potential, and other factors. This can lead to inaccuracies in the valuation.

Question 13

Scenario analysis involves valuing businesses based on different sets assumptions about the future. What are the advantages and disadvantages of applying this methodology in determining an appropriate purchase price using relative valuation methods to estimate firm value?

Accepted Answer

The answer of Scenario analysis involves valuing businesses based on...

Question 14

Liquidation value provides an estimate of the minimum value of the target firm.

Accepted Answer

Liquidation value is the estimate of the minimum value that a company would receive if it were to sell off its assets and pay off all its debts. Therefore, it provides an estimate of the minimum value of the target firm.

Question 15

Asset oriented approaches to valuation involve the use of tangible book value, liquidation value, discounted cash flows, and break-up values.

Accepted Answer

Asset-oriented approaches to valuation primarily involve the use of tangible book value, liquidation value, and break-up values, but not discounted cash flows, which is a cash flow-oriented valuation method.

Question 16

The valuation estimates in the preceding two questions are substantially different. What are the key assumptions underlying each valuation method? Be specific. How can an analyst combine the two valuation estimates assuming she believes that the enterprise to EBITDA ratio is twice as reliable as the valuation based on a revenue multiple?

Accepted Answer

The answer of The valuation estimates in the preceding two...

Question 17

Liquidation value is the projected sale value of a firm's assets.

Accepted Answer

The answer of Liquidation value is the projected sale value...

Question 18

The comparable companies' valuation method uses the discounted value of a firm's free cash flow.

Accepted Answer

The comparable companies' valuation method involves comparing the target company to similar companies based on metrics such as P/E ratio, EBITDA multiples, and other financial ratios, rather than discounting the firm's free cash flow.

Question 19

If the tangible book value of a firm significantly exceeds its market value for an extended period of time, it can become an attractive takeover target.

Accepted Answer

When the tangible book value of a firm significantly exceeds its market value, it means that the firm's assets are worth more than its market capitalization. This can be an attractive target for potential acquirers who can potentially acquire the company for a lower price than its actual worth. Therefore, the statement is true.

Question 20

Based on the information given in the case, how would you estimate the value of Twitter at the time of the IPO based on a simple average of comparable firm revenue multiples based on projected 2014 revenue?

Accepted Answer