Precedent Transaction Analysis

Precedent transaction analysis is best described as a valuation method that:

1. A.Projects the target's own future free cash flows and discounts them to present valueWrong. That describes discounted cash flow (DCF) analysis, not precedent transaction analysis.
2. B.Applies multiples observed in completed M&A deals for similar companies to the targetCorrect. This is the core method of precedent transaction analysis.
3. C.Relies solely on the target's own historical stock price performanceWrong. Precedent transaction analysis looks at other companies' deal multiples, not the target's own trading history.
4. D.Uses only the book value shown on the target's balance sheetWrong. Book value is an accounting figure, not a market-derived valuation multiple.

Why: Precedent transaction analysis derives valuation multiples from actual completed M&A deals for similar companies, applying those observed deal multiples to the target being valued.

"LTM EBITDA," as commonly used in a precedent transaction multiple, refers to:

1. A.The trailing twelve months of reported EBITDACorrect. LTM means "last twelve months" — trailing actual results.
2. B.The next twelve months of projected EBITDAWrong. That describes NTM (next twelve months), a forward-looking figure, not LTM.
3. C.The average EBITDA over the company's entire operating historyWrong. LTM is a specific trailing twelve-month window, not a full-history average.
4. D.The EBITDA reported in the company's most recent single fiscal quarterWrong. LTM covers twelve months, not a single quarter.

Why: LTM stands for "last twelve months" — the trailing twelve months of actual reported EBITDA as of the transaction (or analysis) date, as opposed to a forward-looking projection.

True or False: Precedent transaction analysis and comparable company analysis both rely on multiples derived from a peer set, but precedent transaction multiples are drawn from completed M&A deals while comparable company multiples are drawn from current public trading prices.

1. A.TrueCorrect. This accurately distinguishes the two methods' data sources.
2. B.FalseWrong. The statement correctly describes the distinction between the two methods.

Why: This correctly describes the core distinction: precedent transactions look backward at what acquirers actually paid to buy control of similar companies, while comps look at current minority trading prices for similar public companies.

A buy-side deal team produces preliminary stand-alone and pro forma valuations of the target using comparable company analysis, precedent transaction analysis and a DCF, rather than relying on just one method. What is the primary reason for using multiple methods rather than a single one?

1. A.Each method measures a different valuation perspective, and together they produce a defensible range rather than a single potentially misleading numberCorrect. This is the core rationale for using multiple valuation methods together.
2. B.FINRA rules require at least three valuation methods for every acquisitionWrong. There is no such FINRA numeric-method requirement; using multiple methods is standard practice, not a specific rule mandate.
3. C.Multiple methods are used only to double-check for arithmetic errors in a single calculationWrong. The methods are conceptually distinct, not simply redundant checks on the same math.
4. D.Only the DCF result is actually used; the other methods are performed for appearance onlyWrong. All the methods genuinely inform the valuation range and judgment, not just DCF alone.

Why: Each valuation method captures a different perspective — comps reflect current market sentiment, precedent transactions reflect control-premium deal pricing, and DCF reflects intrinsic value from projected fundamentals. Using several together produces a defensible valuation range and surfaces where the methods agree or diverge, rather than anchoring on a single, potentially misleading number.