The WACC, or Weighted Average Cost of Capital, is an enterprise level discount rate used in capitalizing debt-free income measures and in terminal value calculations for DCF methods. There is virtually no readily available market evidence regarding WACC. On the other hand, there is substantial relative and comparative information available regarding EBITDA multiples. This video post discusses how to convert a WACC, which most market participants and appraisers know little about, into an EBITDA multiple for a company based on its own unique circumstances. And, as promised, we do so in three easy steps.
Businesses are financed with debt, equity and sometimes, preferred stock. We will not consider preferred stock in this discussion, because few private companies have it. The discount rate for developing MVTC, or Market Value of Total Capital, is called the Weighted Average Cost of Capital (WACC). In this post, we will discuss the concept of the WACC and its use as an investment tool, illustrate how to develop it, and then show how it can be used to develop indications of MVTC.
The relationship between EBITDA and EBIT for any company over time is one measure of the capital intensity of that business. The greater EBITDA is relative to EBIT, the more depreciation and amortization (D&A) that is required to replace existing plant, equipment, and other acquired assets.
Given the transaction and valuation emphasis on EBITDA, it is important for business owners, advisers, and appraisers to develop a better understanding of the relationship between EBITDA and EBIT for individual companies at a point in time and over time, as well as in comparison to other companies.
The Tax Cuts and Jobs Act of 2017 was signed into law by President Trump on December 22, 2017. President Trump calls the bill the biggest tax cut in American history, and there were substantial reductions in both corporate and personal income tax rates. The tax reduction act will impact C corporations as well as pass-through entities. This post focuses only on C corporations and looks at the marginal impact of the change.
We continue the series today with the topic of Corporate Finance, which is about maximizing the value of a firm or business. The three parts of the corporate finance decision tree for public and private businesses are: an investment (or reinvestment decision), also called capital budgeting; the financing decision, also called capital structure; and the dividend or distribution decision. By addressing each of these decisions, corporate managers and boards determine what will be done with available cash flows. The effectiveness with which they make these decisions determines, in large measure, the success of value creation for private firms.
Did you ever wonder where EBITDA multiples for private companies come from? Everyone talks about transaction pricing in terms of multiples of EBITDA. Transactions in many industries for attractive private businesses often occur in the range of 4.0x to 6.0x EBITDA, plus or minus a bit. Why? Every business owner should have an idea.
In the last post, we talked about the basic valuation equation. This equation is derived from something called the Gordon Model (and a couple of other names). We said before that valuation is a combination of art and science. It is time for a bit of the science. We’ll introduce a few equations in support of the basic valuation equation, so don’t let this bother you. After we see the “science” underlying this equation and understand a few more things about valuation, we can talk about more interesting questions.
With the election of Donald Trump as the 45th President of the United States, the stock market has rallied in what has come to be called the Trump Rally. The Trump Rally has been fueled in part by the anticipation of cuts in corporate taxes, which was a campaign and early-presidency goal. Something is happening with the multiples of earnings placed on public shares. So what is likely to happen to multiples for successful private companies if the Trump tax cut is implemented? Let’s take a look.
I have used this blog (and my former blogs) as a place to develop new materials. In late 2014, I began a series of posts to develop a means of building multiples of EBITDA using what I call the Adjusted Capital Asset Pricing Model. After peer review, I was encouraged to submit an article to the Business Valuation Review, which readers of this blog can obtain convenient access to.
Dell Inc. engaged in a management buyout (“MBO”) in October 2013 that effectively took the Company private, leaving Michael Dell in control (75% of its stock) with a financial sponsor (25% of its stock). The majority of shareholders tendered their shares, and received the offered consideration. Certain shareholders dissented, setting in motion an appraisal proceeding in […]