Question

In multiple analysis, which of the following is sometimes called the "investment bankers' shortcut to valuation"?

1) Discounted Cash Flow (DCF) analysis
2) Comparable Company Analysis
3) Precedent Transaction Analysis
4) Leveraged Buyout (LBO) analysis

Answer 1

The 'investment bankers' shortcut to valuation' in multiple analysis is the Comparable Company Analysis. It allows for quick valuation based on the financial metrics of similar companies. This method is distinct from others like DCF, Precedent Transaction Analysis, or LBO analysis which involve more in-depth financial modeling or historical transaction considerations.

Step-by-step explanation:

In multiple analysis, the technique sometimes called the "investment bankers' shortcut to valuation" is the Comparable Company Analysis. This valuation method involves looking at the metrics of similar companies in the industry and using them to derive the value of the company in question. It's considered a shortcut because it relies on readily available market data rather than more complex financial modeling such as the Discounted Cash Flow (DCF) analysis.

Early-Stage Corporate Finance

1. Very small companies tend to raise money from private investors since the costs and regulatory requirements of an Initial Public Offering (IPO) are prohibitive for them.
2. Young companies might prefer an IPO to obtain a larger amount of capital, enhance their public profile, and provide an exit strategy for existing investors.
3. Venture capitalists typically have better information about the potential profitability of a small firm versus a potential bondholder because they are more closely involved in the business and have access to internal company information.

Bonds vs. Bank Loans

From a firm's perspective, both bonds and bank loans are ways to raise capital through debt. They are similar in that they both require the firm to make periodic interest payments and eventually pay back the principal. However, they differ in terms of the loan terms, security requirements, and implications for the company's balance sheet and financial flexibility.

Home Equity Calculation

Fred's equity in his new house is calculated by subtracting the amount he owes on the mortgage from the purchase price of the house. With a 10% down payment on a $200,000 house, Fred's down payment is $20,000, which is also his initial equity in the home.