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Professor Francisco L.

Quintero

Final Exam – Private Equity

1.- According to Mr. Buffet's quote, "Price is what you pay, value is what you get", price and value are not the same
thing. What are the factors that determine the value of any asset? How do you explain the difference (or potential
difference) between price and value?
Factors that determine the value of any asset and future expectation of price, Cash flow and risk
Difference. Value: present value of all future cash flow at fair discount rate
Price: Amount traded in the market can be overprice or underprice
The value of the fair price but fair price according to specific perspective which have many methods to calucate the
fair price
2.- Can you define enterprise value and equity value? What is the difference between enterprise value minus equity
value?
Enterprise value: present value of all future free cash flow at discount rate (WACC )
Many factors included in the enterprise value which include future perspective, industry analysis and another factors.
Equity: present value of all future dividends at discount rate (equity) difference between enterprise value minus
equity value= net debts
3.- Consider a scenario where a company's enterprise value is less than the book value of its debt. What can be
inferred from this situation?
Negative equity which means there is high risk in the organization from loans and interest rate can impact the
company net profit and may be ability to continue
4.- Can you explain why diversification reduces a portfolio’s risk?
Diversity of portfolio reduce the risk since one stock are exposure to risk more than two and one sector exposed to
risk more than one market. The increase diversification makes the portfolio performance approach to markets
indicators.Some indicators like S&P500 represent indicators of global economy where the biggest 500 companies
value are enrolled in the indicator which play vital role in global economy.
5. - Please, calculate the EV/EBITDA of a company with the following financial parameters:
 Number of outstanding shares: 54 million shares
 Share price: 34€ per share
 EBITDA: 204 million €
 Debt: 609 million €
 Cash: 109 million €
Equity 34*54 1,836
Debt +609
Cash -109
EV =2,336
EBITDA /204
EV/EBITDA =11.45

6.- Please, list and explain causes of a low EV/EBITDA multiple:


Low EV (low debts or equity or high cash)
Professor Francisco L. Quintero

Higher EBITDA

7.- A company has a net positive balance of accounts receivable and accounts payable [meaning its accounts
receivable are worth more than its accounts payable]. If this company´s revenue grows, how will the net balance of
accounts receivable and accounts payable impact the company's cashflow?
It depends on the type of grow and equity source but in general both receivable and payable accounts will grow but
cash flow will be impacted by fund type and expansion business model.

8.- Identify and explain the three main factors that contribute to the value creation of a buyout fund. Would a buyout
fund be interested in acquiring a company with a high β? Explain your reasoning for or against this option.
Buyout funds make acquisitor of another using borrowed money. High beta company needs more analysis because it
includes high risk and high return. The analysis aims to reduce the risk much as possible. The difference between
free risk and market is the profit or loss if the company does not met market value.

9.- What is the reason that transaction multiples tend to be greater than trading multiples?
Transaction multiple depends on industry mainly but both transaction and trading multiples are valuation methods
where first one focus on discounted cash flow and second on scenario different situations.

10.- Does the MARR of an investor indicate how profitable an investment is? and the hurdle rate?
Yes because industries have different MARRs and interest rate also impact the marr positively or negatively
11.- What is the reason for US limited partnership agreements to have a claw back provision?
12.- Two investment funds have reached the same value of MOIC. Does this mean that both funds have the same
IRR?
13.- What criteria do lenders typically use to determine the amount of debt in a leveraged buyout?
14.- What does the term “build up strategy” usually mean in the Private Equity sector?
15.- Can you explain why, if markets are integrated, the return of a business is, in real terms, independent of the
market where the business operates?
16.- Please, calculate the expected spot exchange rate in January 2026 between the currency of Country A and the
currency of Country B, if in January 2023:
 Yield of government bonds of Country A = 2.4%
 Yield of government bonds of Country B = 3.5%
 1 A Dollar = 1.11 B Dollar
=1.11*(1.035/1.024)= 1.12

17.- Two countries have the same credit rating but use different currencies. Please, state if the following statements
are true or false, and give the reason:
- The spread between the two countries´ CDS must be small (True/False).
- They can have different sovereign spreads (True/False).
- Exchange rate between their currencies will not change in time (True/False).
Professor Francisco L. Quintero

18. - Can you explain why there is an increase of the project´s value when, in project finance, the asset is
commissioned?
19.- When we use free cashflows to estimate the value of a business, how do we account for tax shields?
20.- Why mezzanine debt and preferred stock can be very similar from a financial point of view in LBOs?

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