Financial Analysis and Valuation Flashcards

A CFC calculates a client's business has an EV/EBITDA multiple of 6x. If EBITDA is $2 million, the implied enterprise value is:

Answer: $12 million

Enterprise value equals the EBITDA multiple times EBITDA: 6 × $2,000,000 = $12,000,000.

Which valuation method is typically most appropriate for capital-intensive industries like utilities or real estate?

Answer: Asset-based (net asset value) approach

Asset-based valuation is most relevant when a company's value is closely tied to its tangible assets, such as in utilities, real estate, or holding companies.

A sensitivity analysis in financial modeling tests how the output value changes when:

Answer: One or more key assumptions are varied systematically

Sensitivity analysis systematically varies one or more input assumptions (e.g., growth rate, discount rate) to understand how much the valuation output depends on each driver.

Return on equity (ROE) can be decomposed using the DuPont framework into:

Answer: Net profit margin × asset turnover × equity multiplier

The DuPont formula breaks ROE into profitability (net profit margin), efficiency (asset turnover), and leverage (equity multiplier = assets/equity).

When a CFC values a privately held business for a buy-sell agreement, a 'discount for lack of marketability' (DLOM) is applied because:

Answer: Private company shares cannot be quickly sold in a liquid public market

DLOM reflects the reduced value of an ownership interest that lacks a ready, liquid market for sale, as private shares typically cannot be sold as quickly or easily as public stock.

Which financial metric best measures management's efficiency at generating profit from total assets regardless of capital structure?

Answer: Return on assets (ROA)

ROA measures net income divided by total assets, capturing how effectively management uses the entire asset base to generate profits, unaffected by financing mix.