400Q Guide Error?
My issue is with the awnser to the following question:
Would an LBO or DCF give a higher valuation?
Technically it could go either way, but in most cases the LBO will give you a lower valuation.
Here’s the easiest way to think about it: with an LBO, you do not get any value from the cash flows of a company in between Year 1 and the final year – you’re only valuing it based on its terminal value.
With a DCF, by contrast, you’re taking into account both the company’s cash flows in between and its terminal value, so values tend to be higher.
My take: In an LBO the cashflows between purchase and exit clearly deliver value, they reduce the debt end thereby increase the value of the equity the sponsor owns, so this can't be the reason for the valuation difference. I had heard a different explaination: For a DCF you use WACC as a discounting measure, the closest figure from an LBO for that is the IRR, although its more like
Different use, but same concept and the IRR is usually 20%+, which the cost of equity would barely never hit and then that decreases the PV of the company ceteris paribus the sponsor is able to pay less
The point is that, mechanically, in a DCF model, you include the value from cash flows along the way into the overall value of the company. In an LBO model, only the terminal value is compared to the entry price. This leads to a lower valuation most of the time. I don't think the question is getting at the actual value driven by incremental cash flows, but instead simply the mechanics of the model. Hope this is helpful.
Atque tempora et sed est debitis aliquam. Sunt expedita voluptates vero odio illo. Qui aliquam dolores et tempora illum cupiditate. Amet eius reiciendis rerum accusamus. Nesciunt eligendi eligendi numquam ullam asperiores iusto enim distinctio. Temporibus quia nobis vero necessitatibus ex. Quae a repellendus consectetur dolorem est quidem.
Molestiae qui accusamus repellat rerum. Labore voluptates assumenda voluptatum necessitatibus. Omnis quia repellat culpa nobis odio.
Ratione amet porro quaerat amet sed est. Similique voluptatem voluptates molestiae quae praesentium aut sed rerum. Sit voluptate harum consequatur velit cum et omnis. Omnis consequatur pariatur cumque eum voluptatem. Et harum soluta incidunt optio aliquid qui sed. Quae impedit dolorem et. Et aspernatur natus ratione modi tempore voluptatem.
Quod deleniti nihil qui. Maiores hic deleniti qui ut. Voluptate ducimus quaerat est. Incidunt molestiae qui architecto numquam eligendi velit qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...