TEV
Is this a good formula? Cash or Normal net working capital + Enterprise Value + Non-operating assets = Long-term liabilities or long-term Debt + Minority Interest + Equity + Non-operating liabilities + unfunded pension liabilities + preferred shares wherein: "Normal" net working capital = Curren... Is this a good formula?
Cash or Normal net working capital + Enterprise Value + Non-operating assets = Long-term liabilities or long-term Debt + Minority Interest + Equity + Non-operating liabilities + unfunded pension liabilities + preferred shares
wherein:
"Normal" net working capital = Current Assets Less Current Liabilities

What is included in the definition of long-term liabilities? Do you include items like asset retirement obligations, deferred tax liabilities, advances from shareholders, other non-current liabilities (but is not debt)? Read More

Re: Off-balance sheet Inventory Financing
Since the off-balance sheet crude inventory financing is a required cash outflow for your project, yes, you must include that initial cash outflow in your IRR calculation. Otherwise, who will provide that capital to kick start the project? However, good news is that you should be able to model a ret... Since the off-balance sheet crude inventory financing is a required cash outflow for your project, yes, you must include that initial cash outflow in your IRR calculation. Otherwise, who will provide that capital to kick start the project? However, good news is that you should be able to model a return of that working capital financing BACK to you once you have reached run rate, unless it is always locked up - if that's the case, upon exit, you would receive that WC financing back, whether as end of greenfield project or upon sale, the buyer needs to replenish that initial capital base to keep operations running. Read More

Re: Capital Lease Discussion
Great, thanks a lot. That makes much more sense. If you were to include capital leases in the capital structure, would they be above common equity/preferred stock (in the context of a distressed situation).

Re: Minority interest included as debt
Generally, for the purposes of levering and unlevering betas, you would not include Minority Interest (NCI) as part of the D/E portion. The reason is because the existence (or lack thereof) of MI does not impact Net Income, whereas altering D to E ratio would impact Net Income and therefore EPS and ... Generally, for the purposes of levering and unlevering betas, you would not include Minority Interest (NCI) as part of the D/E portion. The reason is because the existence (or lack thereof) of MI does not impact Net Income, whereas altering D to E ratio would impact Net Income and therefore EPS and therefore volatility in the earnings stream and ultimately, valuation.

For sure, MI is to be included as a form of capital when calculating TEV. Read More

Re: Capital Lease Discussion
Easiest way to think about it is like this: When you buy a company, you are NOT buying out the existing leases; i.e. the rent on HQ is not being paid in advance at the time of sale. As such, you wouldn't add Operating Leases as a form of debt to TEV nor to Sources & Uses of Funds in a transaction (... Easiest way to think about it is like this:
When you buy a company, you are NOT buying out the existing leases; i.e. the rent on HQ is not being paid in advance at the time of sale. As such, you wouldn't add Operating Leases as a form of debt to TEV nor to Sources & Uses of Funds in a transaction (M&A or LBO). Since Capital Leases are economically the same as accounting leases, i.e. no difference except due to accounting reasons, then likewise, you don't add Capital Leases back either. For instance, when you buy a company, you are NOT buying out the remainder of that copy machine that is sitting on the books as a capital lease.

For industries with significant buy vs lease decisions in COGS, primarily the transport sector, such as airlines, car rental, etc, you would indeed use EBITDAR whereby the Rent on such buy vs lease decisions in COGS are added to EBITDA to get EBITDAR. At which point, you would use "Adjusted TEV" which is TEV + Leases due to the "R" portion, but noting that the Leases here may be either operating or capital leases, and is broken out separately in the 10K.

If a company does not break out such "R" and leases as discussed, then it is not an industry that utilizes this metric. For instance, the retail sector (i.e. own vs lease your stores) does NOT fall under this category since the rent is in SG&A, a relatively minor part of the entire P&L. Exceptions apply of course, such as Mervyn spin-off by Target and subsequent bankruptcy but those are distressed situations and not part of going concern valuation. Read More