finance recruiting interview preparation session #1 · finance recruiting interview preparation...

This presentation is for informational purposes only, and is not an offer to buy or sell or a solicitation to buy or sell any securities, investment

products or other financial product or service, or an official confirmation of any transaction.

Finance Recruiting Interview Preparation

Accounting, Enterprise Value and Comps

Session #1

Introduction & Limestone Capital Offering

“Preparing for finance recruiting isn’t just skimming

The Vault anymore. Students should study for

recruiting like a course and do their homework,

because the final exam is the interview.”

– VP, Recruiter for Queen’s

Like a course, there should be:

“Homework:” regular readings are necessary

Practice (mock interviews)

Comprehensive, accessible resources for all

interested students

The most important “exam” of a finance student’s life

2

Finance Interview Preparation Workshops

4 Sessions: Customized curriculum to prepare you to answer any technical finance question that your recruiters may throw at you

1. Accounting, EV and Comps

2. Precedents & DCF

3. M&A Accretion/Dilution

4. Leveraged Buyouts

Limestone Capital Offering

Candidates differentiate themselves by knowing hard M&A and LBO questions

Queen’s needs to offer comprehensive resources to continue being competitive

You will not learn the required knowledge from class

It is insufficient to memorize an interview guide from WSO, WSP, M&I, Vault, walk into an interview, and hope you get the same questions

Start early!

Rationale

Financial Services Opportunities

3

Undergraduate Roles In…

Industry Groups:

Metals & Mining (BMO)

Financials

TMT (CIBC)

Real Estate (TD, Brookfield)

Healthcare

Consumer

Infrastructure

Diversified

Oil & Gas (Calgary)

Product Groups

M&A

Equity Capital Markets

Debt Capital Markets

Syndication

Restructuring

Equity ResearchSales & TradingInvestment Banking

Groups:

Equity

Fixed Income

Economic

Quantitative

Sovereign

Groups:

Equity

Fixed Income

Derivatives

Currencies

Automated Trading

Asset-Backed Securities

“Buy-Side”

Private Equity / Venture Capital

Pension Funds

Asset Management

Wealth Management

Limestone Capital’s Interview Preparation Workshops are catered towards students interviewing for Investment

Banking, and the “Buy Side”, but also contains crucial knowledge required for other career streams.

Summer Opportunities in Finance

Business Development & Strategy

Commercial Banking, Retail Banking

Unpaid/paid internships for portfolio managers, asset managers, investment advisors (CIBC Wood Gundy, RBC Dominion Securities, etc. See below.)

Oil & Gas Companies

4

First Years

DBRS – Credit Analysis

Granite Tower – Investment Banking (Mississauga)

Greentech – Investment Banking (New York)

National Bank Financial – Investment Banking (Toronto)

Paradigm Capital – Investment Banking (Toronto)

Resolute Funds – Asset Management (Toronto)

Armentum Capital Partners – Investment Banking (San Francisco)

***Sales & Trading***

Second Years

Wealth Management


5

The “Big 6” Canadian Banks “Bulge Bracket” or “Global” Banks

Firms That Do Not Recruit on Campus“Boutiques” and Other


6

The “Buy Side”: Private Equity, Pension Funds, Venture Capital, Asset Managers

• Firms listed above recruit undergraduate students, but do not necessarily come to Queen’s

• Only CPPIB, Birch Hill Equity Partners, ARC, OMERS, and ONCAP post positions and/or come to campus

• All “Big 6” Canadian Banks also recruit for their asset management divisions

• Advisory wings of “Big 4” accounting firms (Deloitte Financial Advisory, KPMG Corporate Finance, PwC Deals, E&Y

M&A Advisory) will have you do the exact same work as investment banks, but for smaller clients or transactions

Process, Interviewing, Offers

7

TIMELINE & DETAILS

Process

(Fall) Typically held during October / November

Process

(Winter) Typically held during January

Types of Questions

& Preparation

Fit / Behaviourial

Market

Technical Questions

Prep: Mock Interviews, Limestone Sessions, BIWS, Rosenbaum & Pearl

Interviews First Rounds: 30 minutes to 60 minutes, on-campus or phone

Second Rounds or “Superday”: 4 – 5 hours at the firms’ office

Offers

Non-expiring

Exploding

Firms may accelerate the process for you if you have an exploding offer

Game theory is necessary; know who you’re up against




Accounting

Session #1

Agenda

9

1

2

Accounting

Enterprise Value & Multiples

10

Income Statement

Income Statement

Depreciation (10)

Pre-Tax Income (10)

Tax rate 40%

Foregone tax 4

Net Income (6)

AccountingHow will $10 of additional depreciation affect the 3 financial statements?


Start with the income statement

Depreciation expense goes up by $10

Pre-tax income goes down by $10

Ask for the tax rate, or state your tax rate assumption

Usually assume a tax rate of 40% for simplicity

If your company loses $10, then they won’t have to pay the 40% of tax

$4 less tax After tax, net income is only down by $10 - $4 = $6

You can also think of the depreciation expense as a tax shield Net income is down by $10 * (1-tax rate) = $10 * (100% – 40%) = $6

11

Income Statement

Income Statement

Depreciation (10)

Pre-Tax Income (10)

Tax rate 40%

Foregone tax 4

Net Income (6)


12

Step 2: Cash Flow Statement

Step 3: Balance Sheet

Go to balance sheet

Cash position has increased by $4, as mentioned previously

Accumulated depreciation (contra-asset) has gone up by $10

- Net assets gone down by $10

- Overall, assets have gone down by $6

Net income is linked to retained earnings on balance sheet

Therefore, retained earnings has gone down by $6

The Assets and the Liabilities and Shareholder’s Equity side

both go down by $6, so they balance

Go to cash flow statement

First line item is net income

Net income is down by $6, as established from before

Add back non-cash operating expenses

Depreciation of $10

Cash increase = NI increase (decrease) + depreciation

= ($6) + $10 = $4

Net income (6)

Add back:

Non-cash operating expenses

Depreciation 10

Increase (decrease) in cash position 4

Assets

Cash 4

Accumulated depreciation (10)

Total assets (6)

Shareholder's Equity and Liabilities

Retained earnings (6)


13

Income Statement Cash Flow Statement Balance Sheet

Net income flows to cash flow statement and retained earnings

Cash flow statement flows to cash position in balance sheet

Always go from income statement to cash flow statement to balance sheet

- Methodology of addressing income statement, then cash flow statement, then balance sheet should be applied to any accounting questions in your interviews.

- What happens to all three statements when inventory goes up by $10, assuming you pay for it with cash?

All 3 Statements Connected

Net income (6)

Add back:


Depreciation 10


Assets

Cash 4


Total assets (6)



Depreciation (10)

Pre-Tax Income (10)

Tax rate 40%

Foregone tax 4

Net Income (6)


14

$100 factory purchase with 50% debt, 50% cash. How does this affect all 3 financial statements?

Start by asking questions:

What is the interest rate?

- Assume 10%

What is the tax rate?

- Assume 40%

What is the depreciation rate?

- Assume 10%


Depreciation -

Interest expense -

Pre-tax income -

Tax rate 40%

Foregone tax -

Net Income -

Operating cash flows

Net income -

Add back:


Depreciation -

Investing cash flows

Investment in factory (100)

Financing cash flows

Debt financing 50

Increase (decrease) in cash position (50)

Assets

Cash (50)

PP&E 100

Accumulated depreciation -

Total assets 50


Debt 50

Retained earnings -

No Change Cash down $50 Debt up $50, PP&E up $100


15




- Assume 10%


- Assume 40%


- Assume 10%


Depreciation -

Interest expense -

Pre-tax income -

Tax rate 40%

Foregone tax -

Net Income -


Net income -

Add back:


Depreciation -




Debt financing 50


Assets

Cash (50)

PP&E 100


Total assets 50


Debt 50

Retained earnings -



16




- Assume 10%


- Assume 40%


- Assume 10%


Depreciation -

Interest expense -

Pre-tax income -

Tax rate 40%

Foregone tax -

Net Income -


Net income -

Add back:


Depreciation -




Debt financing 50


Assets

Cash (50)

PP&E 100


Total assets 50


Debt 50

Retained earnings -



17




- Assume 10%


- Assume 40%


- Assume 10%


Depreciation -

Interest expense -

Pre-tax income -

Tax rate 40%

Foregone tax -

Net Income -


Net income -

Add back:


Depreciation -




Debt financing 50


Assets

Cash (50)

PP&E 100


Total assets 50


Debt 50

Retained earnings -



18




- Assume 10%


- Assume 40%


- Assume 10%


Depreciation -

Interest expense -

Pre-tax income -

Tax rate 40%

Foregone tax -

Net Income -


Net income -

Add back:


Depreciation -




Debt financing 50


Assets

Cash (50)

PP&E 100


Total assets 50


Debt 50

Retained earnings -



19


Depreciation -

Interest expense -

Pre-tax income -

Tax rate 40%

Foregone tax -

Net Income -


Net income -

Add back:


Depreciation -




Debt financing 50


Assets

Cash (50)

PP&E 100


Total assets 50


Debt 50

Retained earnings -




- Assume 10%


- Assume 40%


- Assume 10%

One year has passed

Start with income statement

$50 of debt x 10% interest rate = $5 interest expense

$100 of P&E * 10% depreciation = $10

Accounting Factory Acquisition Question, Part 2

Pre-tax income goes down by $10 + $5 = $15

40% tax rate

Foregone tax = $15 x 40% = $6

Net income goes down by $15 - $6 = $9

Can also be calculated as: $15 * (100% - 40%) = $9

20

Income Statement

Depreciation (10)

Interest expense (5)

Pre-tax income (15)

Tax rate 40%

Foregone tax 6

Net Income (9)

211

Income Statement

Depreciation (10)


Pre-tax income (15)

Tax rate 40%

Foregone tax 6

Net Income (9)

Pre-tax income goes down by

$10 + $5 = $15

40% tax rate

Foregone tax = $15 x 40% =

$6

Net income goes down by $15

- $6 = $9

• Can also be calculated

as: $15 * (100% - 40%)

= $9

Cash Flow Statement


Net income (9)

Add back:


Depreciation 10


Investment in factory -


Debt financing -



Start with net income decreasing

by $9

Add back depreciation of $10

Cash goes up by $1


22


Depreciation (10)


Pre-tax income (15)

Tax rate 40%

Foregone tax 6

Net Income (9)

Pre-tax income goes down by

$10 + $5 = $15

40% tax rate

Foregone tax = $15 x 40% =

$6

Net income goes down by $15

- $6 = $9

• Can also be calculated

as: $15 * (100% - 40%)

= $9


Net income (9)

Add back:


Depreciation 10


Investment in factory -


Debt financing -



Start with net income decreasing

by $9

Add back depreciation of $10

Cash goes up by $1

Assets

Cash 1

PP&E -


Total assets (9)


Debt -


Cash flow statement is

linked to balance sheet

Cash is up by $1 (as per

previous slide) in year 1

$10 of depreciation

decreases net assets by

$10

Net income down by $9

Retained Earnings down by

$9

Assets down by $9, S / E

down by $9


Income Statement

23

What if the factory blows up in a year and we default on the debt?



Pre-tax income is down by $80

from PP&E writedown

• 2 years of depreciation

already in effect

Pre-tax income goes up by $50

from debt writedown (no

accrued interest)

Pre-tax income is down $30

overall

Net income is down by: $30 x

(1 – tax rate) = $18

24


Income Statement

PP&E writedown (80)

Debt writedown 50

Pre-tax income (30)

Tax rate 40%

Foregone tax 12

Net Income (18)




from PP&E writedown


already in effect

Pre-tax income goes up by

$50 from debt writedown (no

accrued interest)


overall


(1 – tax rate) = $18

25


PP&E writedown (80)

Debt writedown 50

Pre-tax income (30)

Tax rate 40%

Foregone tax 12

Net Income (18)

Income Statement Cash Flow Statement

Net income (18)

Add back:

Writedown of PP&E 80

Less:

Writedown of Debt (50)



Start with net income down by $18

Add back (subtract) non-cash

expenses (revenues)

Add back $80 writedown of PP&E

Subtract $50 writedown of debt

Cash position increase = -$18 +

$80 - $50 = $12




from PP&E writedown


already in effect

Pre-tax income goes up by $50

from debt writedown (no

accrued interest)


overall


(1 – tax rate) = $18

26


PP&E writedown (80)

Debt writedown 50

Pre-tax income (30)

Tax rate 40%

Foregone tax 12

Net Income (18)

Income Statement Cash Flow Statement

Net income (18)

Add back:

Writedown of PP&E 80

Less:

Writedown of Debt (50)



Start with net income down by $18

Add back (subtract) non-cash

expenses (revenues)

Add back $80 writedown of PP&E

Subtract $50 writedown of debt

Cash position increase = -$18 + $80

- $50 = $12

Balance Sheet

Assets

Cash 12

Net PP&E (80)

Total assets (68)


Debt (50)


S / E and Liabilities (68)

Go to balance sheet

Cash goes up by $12

Net PP&E goes down by $80

Assets go down by $68

Debt goes down by $50

Retained earnings goes down by

$18

S / E + Liabilities go down by $68

Assets and S / E + Liabilities

balance


Other Accounting Questions

If you were stranded on a desert island, and you could only pick one financial statement to assess the health of a company, which statement would you choose and why?

Most people say income statement

But income is not cash flow

Can you really evaluate the health of a company just by looking at an accounting number?

Remember the issues with earnings

Ignores factors like CAPEX, changes in working capital

27

Q:

Correct answer is cash flow statement

When valuing a company, we care about its cash flows,

independent of its non-cash expenses

We can already get net income from the cash flow statement

anyways

Net income is typically stated at the beginning of a cash flow

statement

We can see important items like changes in working capital

and CAPEX

Growing CAPEX suggests expansion

Negative CAPEX suggests rationalization or restructuring

A:

If yes: choose income statement and balance sheet

Can find changes in non-cash operating expenses from Current Assets / Liabilities

Increase in accounts receivable, prepaids, accounts payable

Can derive investing cash flows (CAPEX) from Balance Sheet

Current year fixed assets - prior year fixed assets +

depreciation

Can find financing cash flows from Balance Sheet

Compare current year long term liabilities with prior year’s

Deriving equity financing is harder

B / S sometimes contains number of common shares

Assuming no secondary equity issuance…

Dividends paid = Net Income – R / E (current year) + R / E

(prior year)

A:

If you could only pick two statements…

Ask: do we assume that we have the balance sheet date for the current year and the prior year?

If yes: choose income statement and balance sheet

You can build the cash flow statement from these two

If no: choose cash flow statement and balance sheet

You can see net income on cash flow statement

Cash flow is more relevant for assessing value

Balance sheet is useful for assessing credit risk, ROA, etc.

Q:




Enterprise Value

Session #1

Agenda

29

1

2

Accounting

Enterprise Value & Multiples

Equity Net Debt

Preferred Shares Minority Interest

Enterprise Value

Two ways to think about Enterprise Value (EV)

Value of the firm entire capital structure / “value of the firm’s assets”: both debt and equity

Theoretical takeover price (no control premium)

Enterprise Value = Market cap. + Preferred Equity + Minority Interest + Debt - Cash

29

How is Enterprise Value Calculated?

Market cap. only measures the equity value

Ignores the rest of the capital structure

Enterprise value represents the value of the firm to both debt and equity holders

The market value of all capital invested in the business

Multiples using EV are more “comparable”

Why do we use Enterprise Value?Enterprise Value as “Slices of the Pie”

Enterprise Value

31

Why do we subtract cash from the capital structure in the EV calculation?

Enterprise Value

32

Why do we subtract cash from the capital structure in the EV calculation?

If a company only has $10 of debt and $10 of cash on its balance sheet, it has an Enterprise Value of zero

You can pay off the $10 of debt with $10 of cash; this company is worthless

Debt - Cash = Net Debt

Paying Off Debt with Cash

Imagine buying a company that consisted of the following:

Piggy bank with $99 inside

The “piggy” is worth $1

EV represents the theoretical takeover price

Let the owner keep the $99, pay $1 for the piggy

Buying cash with cash is redundant, so we net it out

Theoretical Takeover Price

Multiples

When we buy stock, we are paying to “own” a piece of a company’s cash flows

Although we don’t receive the cash, market price should adjust to reflect changes in expectations of these projected cash flows

Multiples: how much the market is valuing a company relative to the value stakeholders are receiving, e.g. how much cash that company is generating

33

What are multiples?

Assume price to earnings ratio of 5

Paying $5 for $1 of earnings

5 years before those earnings add up to original price paid

How long before I get my money back?

Enterprise Value (EV) / EBITDA: how much are stakeholders (both bondholders and shareholders) paying for $1 of EBITDA generation?

EV / EBIT

EV / Revenue

Enterprise Multiples

Price / Earnings: how much are shareholders paying for $1 of earnings?

Price / Book: how much are shareholders paying for $1 of equity book value?

Book represents book value of equity per share

Price / Tangible Book Value

Tangible Book Value does not include intangible assets like patents and Goodwill

Price / Cash Flow

Operating cash flow per share

Equity Multiples

Forward Multiples

Historical last twelve months (LTM) vs. projected next twelve months (NTM)

Historical multiples include EV / LTM EBITDA, EV / LTM Revenue, and Price / LTM EPS

Forward multiples include EV / NTM EBITDA, EV / NTM Revenue and Price / NTM EPS

Price / Earnings-to-Growth (PEG):

P/E Ratio / Annual EPS Growth

Most people prefer forward multiples because it accounts for projected growth

LTM results may be a poor proxy for projected growth because of:

One-time charges

Tax (NOLs)

Past ≠ Future circumstances have changed

Where do I get information to calculate multiples?

Enterprise Value

Calculate yourself using balance sheet figures from 10-K’s, 10-Q’s, Annual / Quarterly Reports

LTM EBITDA

Calculate yourself

Forward looking denominator figures (2014E EPS or EBITDA)

Bloomberg EEA / EEO screen

34

Valuing Future Growth vs. Historical Growth What do these mean?

0

2

4

6

8

10

12

14

16

EV / EBITDA Multiples – Technology Space

LTM 2013E 2014E

Intel: Comps make sense for a large-cap, stable, market-leader, as

analysts are projecting healthy growth in EBITDA

Qualcomm: Analysts are either predicting a decrease in EBITDA

between LTM and 2013E, or you messed up a calculation

Google: Not comparable to the rest of the universe, explaining its

high multiples

AMD: “nmf” represents negative LTM EBITDA

Apples-to-Apples

Numerator / Denominator must be “measuring value in the same way”

Dividing kilometers by miles is not meaningful

Apples-to-Apples vs. Apples-to-Oranges

Equity value metrics and enterprise value metrics are different

Value to shareholders vs. value to ALL stakeholders (shareholders, bondholders, preferred shareholders)

Price / Revenue is not meaningful

Price represents the market value of equityholder’sholdings

Revenue goes to ALL stakeholders

EV / Earnings is not meaningful

Enterprise value represents the value of the entire firm

Earnings represents value to shareholders since interest has been deducted

35

Multiples must be consistent

P / E is an equity metric, while EV / EBITDA is an enterprise metric

P / E only looks at equity portion, ignores debt / preferred shareholders

P / E is not capital structure neutral

P / E is highly dependent on leverage

More debt more risk to shareholders shareholders demand lower P / E

Even if debt is cheaper than equity, the P / E metric will penalize companies who choose to finance through debt

Using P / E to value companies violates M&M theory

EV / EBITDA is capital structure neutral

The mix of equity and debt does not change EV assuming similar cost of capital

Doesn’t matter how you “slice the pie”, total EV is the same

Why is EV / EBITDA generally better than P/E?

Earnings vs. EBITDA Multiples

Earnings are subject to manipulation, one-time charges, differing accounting policies, non-cash expenses, and ambiguity

e.g. Enron

36

What are some issues with using earnings?

EBITDA is more similar to cash flow and is capital structure neutral

Less room for manipulation

Ignores D&A, a non-cash expense

Ignores interest expense; EBITDA is available to shareholders, bondholders, and preferred shareholders

EBITDA is a proxy for cash flow available to all stakeholders

Why is EBITDA a more suitable metric??

Incomplete proxy for cash flow

Ignores change in working capital

Does not consider the amount of required reinvestment

Says nothing about the quality of earnings

Not suited for the analysis of many industries and ignores their unique attributes (Banks, O&G, RE)

Misleading measure of liquidity

Offers limited protection when used in indenture covenants

What are the drawbacks of using EBITDA?

If interest is a part of a company’s cost of doing business

Banks, financial institutions

Mortgage lenders

If companies in the industry have negligible debt

Tech companies

Junior mining companies

Volatile businesses (e.g. startups)

If you are valuing a minority investment

Equity investments with <50% ownership

No control over enterprise, therefore enterprise multiples are inappropriate

P / E is easier to calculate than EV / EBITDA

When is P/E better than EV / EBITDA?

Minority Interest

Also known as “non-controlling interest”

If we own more than 50% of a subsidiary, we consolidate our financial statements with the subsidiary’s

Even if we own only 51% of Company S, 100% of Company S’s income statement line items are added to our income statement line items

However, only 51% of Company S’s balance sheet line items are added to our balance sheet items

The other 49% of Company S’s assets go into one item: “minority interest”

Minority interest is the part of a subsidiary that we don’t own

Found in equity section of balance sheet (IFRS)

37

What is minority Interest?

Graphical Representation of Consolidation / Minority Interest Accounting

ParentCo.

• Income Statement

• Balance Sheet

SubCo.

• Income Statement

• Balance Sheet

Consolidated Entity

(Reported by Parent Corporation)

• Combined Balance Sheet, line-by-line

• Combined Income Statement, line-by-line

• Eliminate things like

• Inter-company gains and losses

• Inter-company balances (Assets/Liabilities)

• Parent’s investment in the subsidiary company

• Minority interest reported (the percent of the subsidiary not owned by the parent) on both statements

Minority Interest

EV = Market Cap + Preferred Equity + Debt – Cash + Minority Interest

In enterprise multiples, EV is the numerator, and an income statement line item is often the denominator

APPLES TO APPLES

Denominator: Income statement line items are consolidated and include 100% of the subsidiary’s (Company S) income statement line items

Numerator: Market Cap + Preferred Equity + Debt accounts for 51% of Company S

The 49% we don’t own is not factored into the prices of the parent’s stock, bonds, or preferred shares

To make the numerator consistent with the denominator, we add in the 49% of Company S we don’t own (minority interest)

38

Graphical Representation of EV / EBITDA Multiple Mechanics

Add the portion of the subsidiary that ParentCo does not own so numerator and denominator are consistent

EV = Market Capitalization + Minority Interest + Preferred Equity + Debt - Cash

ENTERPRISE VALUE

EBITDASubsidiary consolidated from

accounting rules

Subsidiary consolidated by

adding minority interest

Why do we add minority interest to get EV?

Equity Method & Short / Long-term Investments

Use the Equity Method

Proportionate Consolidation: If we bought 20% of Company E, we get 20% of Company E’s net income on our Income Statement

Ignore Company E’s stock price

Company E is worth $100, we pay $20

Balance sheet item: Asset (Investment in Company E: $20)

If Company E reports $10 of net income, we get 20% of that = $2

Investment in Company goes up by $2 (Debit)

Investment income goes up by $2 (Credit)

39

What if we only own 20 – 50% of a company?

Short-term investments with less than 20% control

Also known as investments held for trading

Mark-to-market

Unrealized gains or losses flow straight to Net Income

Short Term Investments

Long-term investments with less than 20% control

Also known as investments available for sale

Unrealized gains or losses flow through Other Comprehensive Income (OCI)

Only flows through net income after investment is sold

Long Term Investments




Comparable Companies Analysis

Session #1

Overview

Looking at similar companies and seeing how they are valued on a multiples basis

Common multiples include EV / EBITDA, EV / Revenue, P / B

Taking the average (median) multiple

e.g. 6.0x EV / EBITDA

Apply to target company’s metric to get implied valuation

Target company’s EBITDA is $5 mm

6.0 x $5 mm = $30 mm implied enterprise value

Overview A Visual

IssuesValuing a House

41Source: SEC Filings

Are mansions comparable to a shack?

Size must be comparable

What other features might affect how much houses are worth?

Number of garage doors?

Number of bedrooms? Bathrooms?

Furnished?

Should price-to-square-feet be the only multiple?

Similar to valuing a house

Look at how much surrounding houses are worth relative to square feet (or other metric)

Find median price-to-square feet multiple

Apply this multiple to number of square feet in target house to get implied valuation

Comparable Company Analysis

Operational Characteristics

Industry

Products

Business Segments – is this a pure play?

Location – different tax codes

Listing Market – U.S.? Canada? Shanghai?

Cyclicality

Customers

Distribution channels

Financial Characteristics

Size (Market Capitalization / EV)

Leverage (Debt)

Projected growth

Risk profile

Shareholder base

42

Step 1: Selecting the Universe

Process of pulling comparable company data, from sources such as

Bloomberg

Capital IQ

U.S. Companies: 10-K, 10-Q, MD&A

Canadian Companies: Annual / Quarterly Reports, MD&A, AIF

Oil & Gas Companies: NI 43-101

Mining Companies: NI 51-101

Financial Institutions: OSFI website

Issues with quick & dirty sources (Bloomberg & CapIQ)

EV calculation almost always “wrong”

Step 2: “Spread the Comps”

Step 3: Establishing the Multiple Range Step 4: Finding Implied Valuation

See upcoming slides for step 3 and 4

P/E EV/EBITDA EV/Revenue Revenue Growth

Equity Value Enterprise Value LTM 2015E 2016E LTM 2015E 2016E LTM 2015E 2016E 2015E 2016E

Traditional Software Companies

Symantec Corporation $16,636 $14,991 12.7x 12.9x 12.5x 9.0x 6.8x 6.5x 2.2x 2.3x 2.3x (2.3%) (0.9%)

CA Technologies $14,568 $13,145 10.7x 13.3x 13.2x 8.7x 7.9x 8.0x 2.9x 3.1x 3.1x (5.2%) (1.7%)

Citrix Systems $10,195 $10,843 19.3x 17.5x 15.7x 17.1x 10.9x 9.9x 3.5x 3.3x 3.1x 5.6% 6.7%

Red Hat Software $12,747 $12,437 46.6x 44.1x 37.7x 40.6x 25.4x 22.1x 8.1x 7.0x 6.1x 16.2% 13.5%' ' ' ' ' ' ' ' ' ' ' ' '

Traditional Software Adj. Average 22.3x 21.9x 19.8x 18.8x 12.7x 11.6x 4.2x 3.9x 3.7x 3.6% 4.4%

Large Cap Tech Companies

Apple $733,336 $737,276 19.5x 14.6x 13.5x 12.2x 9.6x 9.0x 4.0x 3.3x 3.1x 23.4% 5.4%

Oracle $195,021 $182,744 15.5x 15.4x 14.6x 10.3x 9.2x 9.0x 4.8x 4.7x 4.6x 1.0% 2.2%

Intel $148,284 $147,941 13.6x 14.0x 12.7x 6.2x 6.3x 5.8x 2.6x 2.7x 2.5x (0.2%) 4.7%

Qualcomm $115,535 $97,747 13.3x 13.9x 12.9x 11.2x 10.0x 9.2x 3.7x 3.6x 3.4x 2.7% 4.7%

Hewlett-Packard $60,488 $67,027 8.9x 9.1x 8.7x 5.8x 4.9x 4.9x 0.6x 0.6x 0.6x (5.4%) (0.4%)

EMC Corporation $53,082 $51,885 14.1x 13.4x 12.1x 8.8x 6.8x 6.6x 2.1x 2.0x 1.9x 6.6% 6.2%

Texas Instruments $62,075 $63,176 22.2x 19.6x 17.9x 12.2x 11.3x 10.7x 4.8x 4.6x 4.4x 5.1% 5.2%' ' ' ' ' ' ' ' ' ' ' ' '

Large Cap Tech Adj. Average 15.2x 14.3x 13.2x 9.8x 8.4x 7.9x 3.5x 3.2x 3.1x 3.0% 4.4%

Overall Adjusted Average 18.8x 18.1x 16.5x 14.3x 10.6x 9.8x 3.8x 3.6x 3.4x 3.3% 4.4%

Microsoft Corporation $351,778 $289,837 16.1x 17.1x 14.7x 8.8x 9.3x 8.4x 3.3x 3.1x 2.9x 8.3% 4.8%

43Source: Bloomberg, SEC Filings

Microsoft Universe

Comparable Companies AnalysisSample Output: Microsoft and Peers

(in US$ millions, except per share data)

Why is the company we are trying to analyze not in the comps set average?

What would “nmf” mean?

Comparable Companies AnalysisEstablishing the Multiple Range

44

HighLow

4.0x

Closest

Comparable A

5.0x

Closest

Comparable C

6.0x

Closest

Comparable B

6.5x

Median Mean

Selected Multiple Range

45Source: Bloomberg, BMO Equity Research

Comparable Companies: Farmland Partners

Comparable Companies AnalysisImplied Valuation

P/FFO P/AFFO P/NAV

(US$ millions, except per share data) Price Equity Value Enterprise Value LTM 2015E 2016E LTM 2015E 2016E

Farming REITS

Gladstone Land Corporation $9.29 $84 $194 38.7x 21.3x 17.5x 20.2x 21.1x 18.2x 0.7x

Micro REITS #N/A Invalid Security

Terreno Realty Corporation $19.98 $860 $1,173 23.2x 21.6x 18.3x 30.7x 26.2x 21.9x 0.9x

Cedar Realty Trust $6.27 $533 $1,390 12.3x 11.7x 10.9x 11.6x 14.6x 13.3x 0.8x

Monmouth Real Estate Investor $9.54 $581 $1,108 16.7x 16.6x 14.3x 16.4x 16.9x 14.6x 1.0x' ' ' ' ' ' ' ' ' '

Farming and Micro REIT Weighted Average 33.4x 20.2x 16.8x 20.0x 20.6x 17.8x 0.7x

Farmand Partners $10.18 $119 $226 46.3x 44.3x 23.4x 39.2x 18.6x 16.9x 0.8x

Multiple Implied Share Price Implied Return

Metic Lower Limit Mean Upper Limit Metric Lower Limit Mean Upper Limit Lower Limit Mean Upper Limit

P/FFO LTM 15.6x 33.4x 27.1x $0.22 $3.44 $7.35 $5.96 (66.2%) (27.8%) (41.4%)

P/FFO FY1 15.4x 20.2x 21.4x $0.23 $3.55 $4.63 $4.92 (65.2%) (54.5%) (51.7%)

P/FFO FY2 13.5x 16.8x 17.7x $0.44 $5.86 $7.30 $7.71 (42.4%) (28.3%) (24.2%)

P/AFFO LTM 15.2x 20.0x 22.8x $0.26 $3.96 $5.21 $5.94 (61.1%) (48.8%) (41.7%)

P/AAFO FY1 16.4x 20.6x 22.4x $0.55 $8.96 $11.31 $12.27 (12.0%) 11.1% 20.5%

P/AFFO FY2 14.3x 17.8x 19.1x $0.60 $8.63 $10.76 $11.56 (15.2%) 5.7% 13.5%

P/NAV 0.8x 0.7x 0.9x $12.96 $10.43 $9.71 $12.26 2.5% (4.7%) 20.4%

Average $8.00 $9.25 $10.50 (21.4%) (9.2%) 3.2%

• Finding an implied value• Take median multiple (e.g. EV / LTM

Sales, EV / ‘13E EBITDA)

• Multiply with Farmland’s corresponding metric (e.g. LTM Sales, ’13E EBITDA)

• Valuation typically presented in a range (low & high)

• “Low” does not mean taking

the minimum• How would I find an implied valuation from

an EV multiple?

Comparable Companies AnalysisEstablishing the Multiple Range

Energy

Consumers / Retail

Healthcare / Pharma / Biotech

Financial Institutions

Metals & Mining

Real Estate

Technology, Media, Telecom

EV / EBITDAR

EV / Researchers or Scientists

EV / mboe / d (production) P / NAV

EV / 2P Reserves P / DACF

Price to Book EV / AUM

P / Tangible Book

EV / tonnes / d (production) P / NAV

EV / Reserves

P / FFO P / NAV

P / AFFO

EV / tonnes / d (production) P / NAV

EV / Reserves

Natural Resources

P/NAV: used in in mining and energy

NAV is a DCF on each company’s assets using a different discount rate for each project

EV / Production Measured in BOE / day (barrels of oil

equivalent) or Tons / day (metric tons)

EV / Reserves EV / Proven Reserves (1P) EV / Proven & Probable (2P)

1P 90%, 2P 50%, 3p 10%

FIG & Real Estate

P/B and P/E for banks

EV / AUM for asset management firms

AUM = Assets Under Management

P / FFO for REITS

FFO = Funds from Operations

Net Income + D&A P / AFFO

AFFO = Adjusted Funds

from Ops Net Income + Rent

Increases + Certain CAPEX

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