Technicals - Which company yields higher valuation?

Lets get some more TOUGH technical questions in here, I will update that top post in the thread when I see some posted below.

For the EV/EBITDA one, wouldn't it depend on how much debt and cash you have? So what's a good answer for this?

My opinon the first - I'd rather be a secured lender to the consulting firm because I assume my debt is secured by inventory in the manufacturer and receivables in the consulting firm. In the event of default and I have to take possession of assets securing my debt, I'd rather have a claim on receivables than on inventory which I would have to pay to carry and try and sell (probably at a discount). Receivables easier to turn to cash quickly and cheaply than inventory.

Consultancy is likely to have higher EBITDA margins and be less capex intensive which should leave more cash for amortisations (debt repayment) and deleveraging. As stated by Boothorbust, good quality receivables are likely to be worth more than inventory and plant specific PP&E in the event of default. Only downside to the consultancy would be "key man risk" and I would need to see lockin's for the top guys and would like to see management holding a sizeable equity interest in the firm.

Couple more, take 'em or leave 'em

Describe the impact of default probability on WACC. How would you measure/quantify this?

Name six major factors that can cause dilution to an acquirors EPS in an M&A context?

If Company A acquires Company B in an all stock transaction and Company A P/E > Company B P/E, is the transaction accretive or dilutive to acquiror's EPS?

What is minority interest and why is it added into the EV equation?

Should you subtract "restricted" cash when computing EV?

An insurance company loses money on the profits it writes, has no extraordinary income or loss, but has positive next profit - how is this possible and is it sustainable in the long run?

You are lending (term bank loan) to an unrated company. Walk through proper pricing of the loan assuming the Bank's cost of funds is L+50 and required return on equity is 15%. What other assumptions do you need? How could you tell if this loan was competitive in the market?

You are valuing a segment of an existing company. What discount rate do you use? What is the best valuation methodology?

Stabs at the nymagic's - I"m sure some of these are wrong.

1) Default probablility will manifest itself in the market price of the debt used to calculate WACC, lowering market debt price (increasing yield) and increasing WACC. 2) Issuing new shares, integration costs . . . .. ? 3) Accretive as the acquirer has to give up less of their stock to get more of B's earnings 4) MI is a controlling interest in a consolidated sub not owned by the parent. Add it to EV because the owners of minority interest are suppliers of capital which supports earnings consolidated into the financials. EV should be a measure of what the company is worth considering all sources of capital 5) No - because you can't pocket 'restricted' cash or use it to retire debt/equity after the acquisition 6) Positive return on float? 7) Find ratings of companies with similar risk/return profiles and benchmark the yield to these? 8) You should use a discount rate relevant to ther risk/return profile of the segment. If you can find comparable stand-alone companies in the market and find their respective WACCs, you could use DCF or use multiples of these companies?

Very interesting technicals guys! If you could provide the answers too would be awesome! Thanks!

If the price reduces to half the EV/EBITDA will come down, but if the price is cut to half, as if by stock split, the ratio remains same

I would prefer consulting firm. Reasons: • Higher Dep/amort for the manufacturing firm leading to the lower NI/FCF • Manufacturing firms are generally leveraged leading to higher business risk (higher beta and thus higher WACC) and higher interest expense (leading to lower NI and FCF)

I don't think there are many lenders on this from so it is understandable why one would chose the consulting firm. I would question the the quality of the receivable, the service firms typically have to complete the job for the receivable to be collectible. Service firms are not capital intensive all you need is people/office/computers. There will be an issue with assets coverage. Secured lenders typically like to have at least two sources of repayment. First one is typically cash flows of the company, and second one is usually sale of collateral. Consulting firm in this case would have only one source of repayment because the collateral quality most likely to be questionable from a secured lending point of view. hope this helps.