help with some technicals please

tarnationify

1. What determines how long we should project cash flows for in a DCF? is it market positioning? I've thought that it depends on market positioning in the sense that a stronger positioning and less competition makes it easier for us to project future cash flows. Inversely, it's more difficult to project out cash flows for a company that is experience more competition and doesn't have a strong foothold within the market.

You're more or less correct. The industry convention is to project out five years because to say that management (or you) has any idea what their business will be like further than that is unlikely. For some companies/industries, such as infrastructure assets (e.g., a toll road), which generally has multi-decade contracts with set pricing escalators, your DCF could go out several decades.

2. I realize that a company can have great free cash flow but still go bankrupt due to a large amount of debt and being unable to pay off the interest expense/principal. But can someone help me intuitively understand why?

Not sure what you're asking to clarify, since you state the answer to your question. Say a company produces $100M of FCF a year. Sweet! But then this year they have a $1B term loan maturity and only $500M in cash on the balance sheet. So $500M balance sheet cash + $100M FCF $1B of term loan maturity. In practice, it is unlikely (at least in these market conditions), that the company will go bankrupt. Instead, term loans typically get refinanced or extended. Meaning, the company takes on a new loan to paydown the old one or extends the maturity.

3. How are some ways you can increase your internal rate of return and why do those ways work?

I'll assume you're asking from a private equity investor's point of view. If you're asking about IRR from a different perspective, let me know. There are several levers you can pull to increase IRR. To simplify an LBO transaction, all you're doing is using a combination of equity/debt and buying a company at a price and selling it a few years later at a (hopefully) higher price. So you can raise IRR by: 1) investing less equity and borrowing more debt to finance the transaction, 2) paying a lower price for the company, 3) receiving dividends during your ownership (remember that the net present value of cash makes the money worth more the sooner you receive it), 4) paying down debt during your ownership, 5) operational improvements such as growing revenue or increasing margins, 6) selling for a higher EBITDA multiple (called multiple expansion) than what you bought it for. Options #1 and #2 essentially reduce the price you pay. Option #3 gives you back cash faster. Options #4-6 increase the price you get when you sell the company.

4. Why are precedent transactions used more often when a company wants to sell itself or spin off a subsidiary and why are comparable companies used more often when a company is looking to go public?

I suppose the answer to your question is that it's because you're comparing the company to what previous/companies did/are doing in the same situation. For instance, if you're selling a company, you look to see what previous companies have sold for. If you want to list your company publicly, you look at what current public companies are trading at.

5. Why cant i use Ev/eps as a multiple?

It's because enterprise value is the value of the company to all stakeholders (debtholders and equityholders) because remember, Enterprise Value = Debt + Equity - Cash. In contrast, EPS relates to earnings available for equityholders (because Earnings, in this case, refers to Net Income which is after interest payments related to debt is paid). So you should use EV/EBITDA instead to keep it apples-to-apples.

6. Why is it dilutive when we acquire a company with a higher P/E? and why is it Accretive when we acquire a company with a lower P/E?

For this question, I'll just quote IBankingFAQ: "Other things being equal, if the Price to Earnings ratio (P/E) of the acquiring company is lower than the P/E of the target, then the deal will be dilutive to the acquiror’s Earnings Per Share (EPS). This is because the acquiror has to pay more for each dollar of earnings than the market values its own earnings. Hence, the acquiror will have to issue proportionally more shares in the transaction. Mechanically, proforma earnings, which equals the acquiror’s earnings plus the target’s earnings (the numerator in EPS) will increase less than the proforma share count (the denominator), causing EPS to decline."