Valuation questions

Discounted cash flow, which values the business on the cash it will produce. Trading comparables, which price it against what similar public companies trade at. Precedent transactions, which price it against what acquirers actually paid.

The first is intrinsic and the other two are relative. A fourth, the LBO analysis, is really a floor: the price a financial buyer could pay and still hit their return target.

Project unlevered free cash flow for five to ten years: revenue, operating margin, tax on EBIT, add back D&A, subtract capex and the increase in working capital.

Discount each year at WACC, saying whether you use the mid-year convention. Calculate a terminal value, either by growing the final year forever or by applying an exit multiple, and discount it back the full number of years.

Sum for enterprise value, subtract net debt and other claims for equity value, divide by diluted shares.

Equity value is what the shares are worth. Enterprise value is what the operations are worth, independent of how they were funded.

Enterprise value equals market cap plus debt minus cash, plus minority interest and preferred stock. Debt is added because buying the equity means inheriting it; cash is subtracted because an acquirer would use it to retire debt on day one.

Because unlevered free cash flow is what the business generates for everyone who funded it, before any of them is paid. Deducting interest pays one group before measuring what belongs to all of them.

The cost of debt is already inside WACC, and the tax benefit shows up there as the after-tax cost of debt. Deducting interest and discounting at WACC counts it twice.

Weight the cost of equity and the after-tax cost of debt by their market values. Cost of equity comes from CAPM: risk-free rate plus beta times the equity risk premium.

Cost of debt is the yield the company's bonds trade at today, not the coupon on debt issued years ago, multiplied by one minus the tax rate.

Equity, because it is last in line and its return is not contractual. So the cost of equity is always above the cost of debt.

Adding debt lowers WACC initially, because debt is cheaper and interest is deductible. Beyond a point the rising probability of distress raises both costs and WACC turns back up.

Business model first, then size, then geography, then growth and margin profile. Industry codes are a starting point rather than an answer.

The test is whether an investor choosing between the two would treat them as alternatives.

When EBITDA is negative or too volatile to compare, which is common for early-stage or cyclical businesses at the bottom of a cycle.

It only means something across companies with similar margins, because it is silent on whether the revenue is profitable.

Because enterprise value is about the operations and the future, not this year's bottom line. A company can be loss-making after interest and depreciation and still generate operating cash.

It can also be worth something for its assets, its market position, or a business that becomes profitable at scale.

Roughly nothing. Cash falls and market cap falls by about the same amount, so enterprise value is broadly unchanged. The operations did not change.

Equity value per share may rise, because the same earnings are spread across fewer shares.