Re: EV/EBITDA vs. P/E
Please note that we would highly recommend avoiding use of the “EV” acronym since it is misleading – equity value or enterprise value? We always recommend use of TEV for [Total] Enterprise Value. Regarding your actual question, generally TEV/EBITDA will be lower than PE multiples due to sim... Please note that we would highly recommend avoiding use of the “EV” acronym since it is misleading – equity value or enterprise value? We always recommend use of TEV for [Total] Enterprise Value.

Regarding your actual question, generally TEV/EBITDA will be lower than PE multiples due to simple math. Since EBITDA is a pre-tax figure, and EPS (the E in PE) is after-tax, by definition, EBITDA multiples will be lower than PE.

Note that there can easily be distortions, such as massive one-time items below EBIT/EBITDA that obviously impact Net Income and thus EPS. Additionally, if you have so much cash (i.e. most tech firms), then TEV will be lower than Equity Value and it’s *possible” that the markets have totally mispriced (unlikely) and have the relationship being flipped, but extremely unlikely.
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Re: Cash
Thanks again. I understand. But for an asset-sale type of transaction wherein target will sell asset only without working capital. Any project loan will include a working capital line/revolver, so we must make sure we are paying the "fair" multiple for this type of asset on a going concern basis. At... Thanks again. I understand. But for an asset-sale type of transaction wherein target will sell asset only without working capital. Any project loan will include a working capital line/revolver, so we must make sure we are paying the "fair" multiple for this type of asset on a going concern basis. At EV = Equity + Net Debt and Net debt = Amortizing Loan + Revolver - Cash. Although cash is fundamentally an amount that buyer will put in to bankroll the initial ~3 months of operating expenses so we can say its "operating cash". Since without the initial cash, EBITDA cannot be earned so to speak. On the other hand, if on Day 1, we would flip and sell it back to the market again, then we can technically free up those cash immediately and can be used to pay back those revolver line drawn and can be treated as excess cash. Thus, it can be argued both ways. What is your view? Read More

Re: Cash
Thanks. So if we assumed a minimum working capital that include a minimum operating cash, then this same amount of operating cash should also be excluded in the terminal value in calculating the equity IRR, right?

Re: Reverse Morris Trust (RMT)
A Reverse Morris Trust is a transaction that combines a divisive reorganization (spin-off) with an acquisitive reorganization (statutory merger) to allow a tax-free transfer (in the guise of a merger) of a subsidiary under United States law. Structure: A Reverse Morris Trust is used when a paren... A Reverse Morris Trust is a transaction that combines a divisive reorganization (spin-off) with an acquisitive reorganization (statutory merger) to allow a tax-free transfer (in the guise of a merger) of a subsidiary under United States law.

Structure:
A Reverse Morris Trust is used when a parent company has a subsidiary (sub-company) that it wants to sell in a tax-efficient manner. The parent company completes a spin-off of a subsidiary to the parent company's shareholders. Under Internal Revenue Code section 355, this could be tax-free if certain criteria are met. The former subsidiary (now owned by the parent company's shareholders, but separate from the parent company) then merges with a target company to create a merged company. Under Internal Revenue Code section 368 (a)(1)(A), this could be largely tax-free if the former subsidiary is considered the "buyer" of the target company. The former subsidiary is the "buyer" if its shareholders (also the original parent company's shareholders) own more than 50% of the merged company. Thus, the former subsidiary will usually have a bigger market capitalization than the target company. The target company's managers rarely run the merged company.

History:
The original Morris Trust structure was the result of a favorable ruling in IRS v. Morris Trust in 1966. The original Morris Trust structure is similar to the above Reverse Morris Trust structure, however instead of a former subsidiary merging with a target company, the parent company would merge with target company.

Following several leveraged Morris Trust transactions similar to the original Morris Trust transaction, but involving cash and bank loans rather than mere stock, Congress enacted Internal Revenue Code Section 355(e) in 1997. This imposes additional taxation on the distribution in the spin-off step whenever 50% interest in a spun off company is transferred tax-free in the two years following a spin-off.

Examples:
Verizon wished to sell its access lines to Fairpoint. Rather than simply selling these assets alone to Fairpoint, however, Verizon created a subsidiary (to which it sold these assets) and distributed the shares of this new subsidiary to Verizon's shareholders. They then completed a Reverse Morris Trust with Fairpoint, where the original Verizon shareholders had a majority ownership of the newly merged company and the Fairpoint management ran the new company. Verizon was able to divest their access lines in a tax free manner as they continued to focus on higher growth wireless business.

Procter & Gamble Co. was planning to sell its Pringles line of snacks to Diamond Foods in a leveraged, reverse Morris Trust split-off. The Pringles business would be transferred to a separate subsidiary which would assume approximately $850 million of debt. However, the two companies were unable to finalize the deal, and in February 2012 Procter & Gamble found another buyer in the Kellogg Company.

Procter & Gamble used a similar transaction structure when it sold Folgers coffee to J.M. Smucker in 2008.

Source: wikipedia
http://en.wikipedia.org/wiki/Reverse_Morris_Trust Read More

Re: Accounting for vested but unexercised stock options...and then again when they are exercised
You are correct in your summary of major accounting entries for stock options. If a company issues stock options amounting to a value of $100 (as in your example), let's say that Net Income goes down by $100 (ignoring taxes for simplicity). Therefore, CFO is also decreased by $100. Since these optio... You are correct in your summary of major accounting entries for stock options. If a company issues stock options amounting to a value of $100 (as in your example), let's say that Net Income goes down by $100 (ignoring taxes for simplicity). Therefore, CFO is also decreased by $100. Since these options are non-cash as noted, $100 is added back to CFO as a non-cash item.

That closes the "loop" on double-entry accounting. On the Balance Sheet, because Retained Earnings flows from Net Income, it will be reduced by $100 (but APIC will not increase). If APIC were to go up by $100, it would need an offsetting entry to comply with double-entry accounting. These options are assumed to be un-exercised at the time of issuance (which is when the compensation gets expensed); only when they are actually exercised will APIC increase (cash decreases). On the flip side, they'll typically issue additional shares to balance this out (refer to the Treasury method), which is the true cause for increasing APIC.

As you can see, there is no impact on the Income Statement. Note that sometimes, cashless conversions take place, in which previously repurchased shares are sold on the open market to pay for the difference between the strike price and the current stock price. For more information on the Treasury method, please refer to the "Treasury Options" chapter in the Supplementary Video Exhibits course, under the "Overview of Financial Markets + Exhibits" package. Read More