I need help on EV/EBIDTA
I have a mock M&A modeling to do as part of an assignment in the recruiting process for an IB.
It's a pretty basic accretion analysis. They provided the Excel spread sheet and I have to fill it out.
From the outset, I have to enter a median EV/EBIDTA ratio (just have to find it on their scorecard) into one cell and enter the EBIDTA into another. The enterprise value is the product of the the two right? (In the spreadsheet it's called "purchase price of X.")
And now here comes my question.
The next two cells are:
Less: Cash X Plus : Debt X
and the result is an "aggregate purchase price."
Isn't the "purchase price of X" the implied Enterprise Value already?
The adjustments
Less: Cash X Plus : Debt X
are to determine the enterprise value from the market cap, right?
Am I missing something?
If I'm not, is this a trick?
Thanks for your help!
Most buyouts are done on what is a called a "debt-free cash-free" basis. This means the acquiring entity will acquire no cash (outside of cash included in working capital) and assume no debt of the target. I would assume, therefore, that you can leave those two cells blank unless you have a good reason to do otherwise.
EBITDA * Multiple = Enterprise Value (firm as a whole)
EV (-) Debt (+) Cash = Equity Purchase Price (or what you're calling your market cap)
Debt (-) Cash = Net Debt Refinanced
Yes businesses are acquired on a "cash free debt free" basis but the structure is still modeled in the Uses and Sources so the buyer can see what exactly he's offering the equity and if it's a realistic structure.
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