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When Thinking About Valuation… Key valuation questions are: What is the company worth? What would another party pay? Remember that valuation involves not just the “science” of valuation math but also the “art” of using assumptions in the process Valuation includes an understanding of what drives value for a company and how that value can be impacted by various factors

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A Company’s Value May Differ For Different Parties An asset’s (firm’s) value may be different for different buyers and under different scenarios Value to seller vs value to buyer vs value to competitor Going concern value vs liquidation value Synergies from investment Tax implications Value of control vs minority interest – influence cash flows vs passive dividend stream Strategic value – unlock opportunities beyond the asset itself Source: Goldman Sachs

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Why do We Perform Valuation? Initial public offerings / secondary public offerings Debt offerings Equity Research Mergers & acquisitions Buy-side & sell-side advice Divestitures & restructurings Recapitalizations Leveraged buyouts

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We Can Calculate Two Levels of Valuation Enterprise value Also known as firm value or aggregate value Equals common equity + debt + preferred stock + non- controlling interest Equity value Also know as market capitalization Value of shareholders’ interests

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Valuation May Be Based On Accounting Data Sales EBIT Earnings before interest and taxes Measures performance before effects of financing and taxes Operating income typically approximates EBIT Net income Earnings per share

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Valuation May Also Be Based On Financial Data EBITDA Earnings before interest, taxes, depreciation and amortization Proxy for operating cash flow Does not equal actual cash flow Free cash flow EBIT * (1 – Tax Rate) + depreciation and amortization – change in net working capital – capital expenditures

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How Do We Calculate the Value of a Company? Public company comparables Acquisition comparables Discounted cash flows (Intrinsic Value) The above methods enable us to calculate an Imputed Valuation Range We might also see valuations based on: Merger consequences (debt capacity, credit rating impact, EPS impact, pro forma ownership) Leveraged buyout analysis (what can a financial sponsor afford to pay after borrowing 4.0-5.0x EBITDA)

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Public Company Comparables Allow For A Relative Value Comparison of similar companies Relative valuations based on key metrics Metrics may include Sales, EBIT, EBITDA, etc. Method is very easy to use and defend! If Company A trades at 12.5x projected EPS and Company B is in same industry and projects EPS of $4.00, at what price should Company B’s stock be valued? $4.00 x 12.5 = $50.00

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We Can Acquire Comparable Data From Many Sources Data sources: Capital IQ FactSet Value Line Bloomberg Thomson I/B/E/S Thomson First Call Zacks Standard & Poor’s Industry Surveys Proxy statements, 10-K’s, 10-Q’s, IPO prospectuses

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We Use Various Metrics To Calculate Value Price / EPS (known as PE multiple) Market Value / Net Income Market Value / Book Value PE / Growth Rate (known as PEG ratio) Enterprise Value / Sales Enterprise Value / EBITDA Enterprise Value / EBIT

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One Example Of Comparable Data Comes From Bloomberg Source: Bloomberg

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Acquisition Comparables Allow Us To Value Based On Recent Transactions Compares similar transactions using actual transactions Use recent data to best reflect current environment Main drivers of multiples are risk profile and growth prospects If Company A was recently acquired for 7.0x projected EBITDA and Company B is in same industry and projects EBITDA of $50,000,000, what is the enterprise value of Company B? $50,000,000 x 7.0 = $350,000,000

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We Can Also Acquire Acquisition Comparables From Various Sources Data sources: Thomson Financial Securities Data Capital IQ Dealogic Mergerstat / FactSet Industry newsletters M&A publications Note: compile data based on industrial classification using GICS, ICB, NAICS or SIC code screens

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Many Acquisitions Use One of The Following Multiples LTM (trailing 12 months) Sales LTM EBITDA Premium To Prior Stock Price

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A Third Method For Valuation Is Discounted Cash Flow Calculates an intrinsic value for a company Based on unlevered free cash flows Independent of capital structure Looks at cash flows available to all providers of capital Highly sensitive to changes in the following: Free cash flow projections Estimated terminal (horizon) value Discount rate applied to free cash flows Value of company equals the sum of : Present value of forecasted unlevered free cash flows Present value of projected terminal value of company

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Discounted Cash Flow Valuation Focuses On An Unlevered Scenario Free cash flow projections Typically forecasted for 5-10 years; not taken further into future due to impracticality of being accurate in later years All cash flows are calculated as if the company was not levered (i.e. capital structure is 100% common equity) Unlevered free cash flow = Tax-effected EBIT + depreciation and amortization +/- change in working capital

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Discounted Cash Flow Valuation Includes A Horizon Value Terminal value projection Represents the value of the company beyond the actual projection period Two methods to calculate: Growth perpetuity – calculate value of perpetual, growing cash flow beginning in year succeeding projection period Exit multiple – apply multiple to EPS, cash flow, etc. in year succeeding projection period Terminal value typically stated as a range based on range of discount rates as well as range of growth rates or exit multiples

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Projected Nominal Cash Flows Are Discounted To Arrive At A Present Value Discount rate Used to calculate present value of future cash flows and terminal value Rate represents the blended required return for equity and debt investors The return required by investors is based on the risk of the investments Weighted average cost of capital (WACC) represents the blended required return Typically stated as a range of values

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Using The Three Methodologies We Can Impute A Valuation Range Given results of public company comparables, acquisition comparables and DCF analysis, what is the company worth? Other considerations: Stock’s historical trading range Exclude outlier results Multiples are industry-dependent Valuations are typically presented as a range of values based on our assumptions for growth rates and discount rates

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Illustrative Valuation Summary Enterprise Value ($ in millions) Public Company Comparables Acquisition Comparables Discounted Cash Flow Analysis 230272 216 251308 289 Source: Goldman Sachs

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Our Valuation Task Be scientific Use existing rules and analytics in areas of accounting, finance and financial statement analysis to build and use a solid model Be artful and use good judgment Assumptions are subjective in nature; be prepared to defend all assumption as appropriate for the analysis Understand client’s industry and operating environment Recognize that timing may effect valuation/assumptions

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Our Valuation Task Focus on key drivers for projections Annual sales growth Margin trends Gross margin Operating income margin Develop an appropriate discount rate for use in the DCF model How will terminal value be determined: Growth rate to infinity Exit multiple

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