Hi, Regarding GPCM, when do we add the control premium?
Given the following example:
- MV Debt: 1 100 000
- Normalized EBITDA: 12 800 000
- Average MVIC/EBITDA = 8
- The company we are valuing is more risk, so we deflate the multiple by 20%
- Adjusted multiple: 8 x (-0.2) = 6.4
- Vo = 6.4 x 12 800 000 = 81 920 000
- Ve = 81 920 000 - 1 100 000 = 80 820 000
- Lets assume that the transaction I was comparing with was for a non controlling interest and I was taking a controlling interest. And the Control Premium is 10%. Would I then simply add 10% to the equity part at the end of my calculation?
- Ve = 80 820 000 x 1.10 = 88 902 000
- Vo = 88 902 000 + 1 100 000 = 90 002 000
- If I was comparing with a company that was acquired for a controlling interest and I was looking at it from a minority shareholder would I then deduct the control premium at the end? Control Premium is 10%.
- Ve = 80 820 000 x 0.90 = 72 738 000
- Vo = 72 738 000 + 1 100 000 = 73 838 000
Is this the correct way of doing it?
what was the answer to this example?
from my experience in Topic Tests, the control premium is simply added/subtracted to the MVIC/EBITDA multiple under GCM.
Under GTM however, control premium usually is already included in the stated MVIC/EBITDA.
For comparable method, you will need to add the premium. For the transaction method, you dont need to add any premium
Thanks for the reply guys. So is it correct to add it in the end which I did?
Would it be advisable to skip the private co. valuation chapter, by any chance?
where did you get that example? if you come up with the numbers yourself, well, from my experience in Topic Tests, the control premium of 10% is added to the multiple of MVIC/EBITDA.
Therefore, in your case, the MVIC/EBITDA multiple is 8 x 0.8 (where is this 20% discount coming from) x 1.1 or 7.04
and then you find MVIC
and then you deduct market value of debt from MVIC to find market value of equity
with normalized ebitda at 12,800,000 and a multiple of 7.04, MVIC is 90,112,000
and your example suggests that market value of debt is 1,100,000
so market value of equity is 89,012,000
A lot of questions in the topic tests are on that chapter. Not advisable to skip, specially when Equity could be up to 25% of the exam.
shouldn’t you use discount for lack of control when calculating the value for non controlling interest?