Using this in a case: what to ask, what to calculate, what to say
Turn the finance ideas into a case answer: the questions that matter, the four calculations, a fully worked deal question, and a drill set with exact answers.
Key takeaways
- In a case, finance turns "is this a good business, or a good deal?" into numbers you can defend: the cash it really generates, the return it earns against what its capital costs, and the price against what it is worth.
- Private equity and acquisition cases put all of this together: cash flow, return on capital, and price against value.
- The strong answer leads with a decision, backs it with the two numbers that decide it, separates the quality of the business from the price, and names the one risk to check.
- Common mistakes in a case: Answering a "should we buy" question with EBITDA alone.
Key idea
In a case, finance turns "is this a good business, or a good deal?" into numbers you can defend: the cash it really generates, the return it earns against what its capital costs, and the price against what it is worth.
What to ask
- How much cash does the business generate after capex and working capital, not only EBITDA?
- Is capex this year normal, or is the company delaying spending that will be needed later?
- How many days of receivables, inventory and payables, and are they moving?
- How much capital is invested in the business, and what return does it earn on it?
- What do lenders and owners expect to earn (the cost of capital)?
- For a price: what multiple does it imply, and what growth must you believe to justify it?
What to calculate, in this order
- 1Free cash flow: EBIT after tax, plus depreciation, minus capex, minus the increase in working capital.
- 2ROIC against WACC: NOPAT divided by invested capital, compared with the cost of capital.
- 3The price as a multiple: price divided by EBITDA, compared with peers.
- 4The growth the price needs: discount rate minus (free cash flow divided by price).
Worked case
Should a fund pay PLN 600 million for a packaging maker?
The prompt
A private equity fund asks whether to pay PLN 600 million for a family-owned packaging maker in Poland (fictional; the business has no debt). Last year it had EBITDA of PLN 80 million, depreciation of 20 million and capex of 25 million, and working capital rose by 5 million. Tax is 20 percent (illustrative). Invested capital is PLN 400 million. The fund's cost of capital is 9 percent. Is the price sensible?
The structure
- Is the price below what the cash is worth? Value = free cash flow / (cost of capital minus growth), compared with PLN 600 million (this comes from the question)
- Free cash flow today
- Quality of the business: ROIC against the 9 percent cost of capital
- The price as a multiple of EBITDA
- The growth the price assumes, and the value at a cautious growth rate
Working it through
1. NOPAT
EBIT of 80 minus 20 is 60; keep 80 percent after tax.
NOPAT (PLN millions):(80 - 20) × 0.8 = 482. Free cash flow
NOPAT 48, plus depreciation 20, minus capex 25, minus 5 of working capital.
Free cash flow (PLN millions):48 + 20 - 25 - 5 = 383. ROIC
NOPAT divided by invested capital of 400.
ROIC (percent):48 ÷ 400 × 100 = 124. Price multiple
Price divided by EBITDA.
Price divided by EBITDA:600 ÷ 80 = 7.55. Free cash flow yield
Free cash flow divided by the price.
Free cash flow yield (percent):38 ÷ 600 × 100 = 6.336. Growth the price needs
Price = cash flow divided by (9 percent minus growth), so growth = 9 minus the yield.
Growth needed forever (percent a year):9 - 38 ÷ 600 × 100 = 2.677. Value at 2 percent growth
Next year's cash flow, 38 times 1.02, divided by 0.09 minus 0.02.
Value at 2 percent growth (PLN millions):38 × 1.02 ÷ (0.09 - 0.02) = 554
The recommendation
The fund should want this business but not at PLN 600 million unless it can confirm growth: at that price it needs free cash flow to grow about 2.7 percent a year forever, while at a more cautious 2 percent the business is worth about PLN 554 million. The business itself is good: it earns a 12 percent return on capital against a 9 percent cost, and turns about 38 million of its 80 million EBITDA into free cash. The risk is that capex of 25 million, only a little above depreciation of 20, may be too low to keep the machines up to date, which would cut future cash. As a next step, review five years of capex and customer contracts, and open the bidding nearer PLN 550 million.
Risks: Capex may be held low before a sale, flattering free cash flow; One or two large customers may account for much of the volume.
The interviewer asks: "So, is PLN 600 million a fair price?"
A label, not an answer
It looks fair, because 7.5 times EBITDA is a normal multiple and the company is profitable.
Answer first, with numbers
Not quite. At 600 we need cash flow to grow about 2.7 percent a year forever; at a more cautious 2 percent it is worth about 554. It is a good business, with a 12 percent return against a 9 percent cost of capital, so I would bid around 550 and check whether capex has been kept artificially low.
Why the stronger answer wins: The strong answer leads with a decision, backs it with the two numbers that decide it, separates the quality of the business from the price, and names the one risk to check. The weak answer rests on a multiple with no peer group and never looks at cash.
Finance drill set
A distributor has receivables of USD 120 million and yearly revenue of USD 730 million. What is its DSO, in days?
Net profit is 40, depreciation 15. Receivables rose 10, inventory fell 5 and payables rose 3 (all in EUR millions). What is operating cash flow, in EUR millions?
EBIT is 50, tax is 30 percent, depreciation is 10, capex is 18 and working capital rises by 2 (all in AED millions). What is unlevered free cash flow, in AED millions?
A business has invested capital of SGD 800 million, a ROIC of 11 percent and a WACC of 8 percent. How much value does it create each year above its cost of capital, in SGD millions?
Peers trade at 8 times EBITDA. A target has EBITDA of INR 50 crore and net debt of INR 120 crore. What is its equity value, in INR crore?
A project costs USD 200 million today and returns USD 121 million in each of the next two years. At a 10 percent discount rate, what is its NPV, in USD millions?
A forecast ends with free cash flow that will be EUR 15 million in the first year after it. The WACC is 8 percent and long-run growth is 2 percent. What is the terminal value, in EUR millions?
Answering a "should we buy" question with EBITDA alone. Calling a business good because it is profitable, without comparing its return with the cost of capital. Mixing up the quality of a business with the price being asked for it: a great business can be a bad deal. Giving one precise value when the honest answer is a range.
A target earns a 15 percent ROIC against a 9 percent cost of capital, but the asking price needs 6 percent growth forever. What is the best summary?
Which single number best tells you whether a business can pay its lenders and owners?
Private equity and acquisition cases put all of this together: cash flow, return on capital, and price against value.
Read the private equity and venture capital briefSources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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