Re: Capital and Operating Leases
In short, we do not want you to include leases (both capital and operating leases) in your TEV calculation. Thus, in theory one would actually want to adjust out capital leases from debt figures on the BS. For a full robust discussion of this, please refer to our Private Company Valuation course (wh... In short, we do not want you to include leases (both capital and operating leases) in your TEV calculation. Thus, in theory one would actually want to adjust out capital leases from debt figures on the BS. For a full robust discussion of this, please refer to our Private Company Valuation course (which you have access to) or the snippet on leases in the Supplementary Video Exhibits section of your online login. P.S. Please do not use the EV acronym. Thank you. Read More

Implied statement of cash flows vs. actual statement of cash flows
In your class, we entered the historical income statement and balance sheet and then solved for the statement of cash flows. When I've tried this on my own, I've found that my working capital and CFI numbers differ significantly from items found in the company's reported statement of cash flows and ... In your class, we entered the historical income statement and balance sheet and then solved for the statement of cash flows. When I've tried this on my own, I've found that my working capital and CFI numbers differ significantly from items found in the company's reported statement of cash flows and lead to very different free cash flow numbers. In many cases, management doesn't provide enough information on their non-cash charges to reconcile their statement of cash flow numbers. What is the best practice when you encounter this issue? Read More

Re: Cash requirement
In an M&A deal, the minimum working capital requirement is similar to the min cash concept, but in practice, it makes it to the purchase agreements as a purchase price allocation. Making an estimate for it depends on the type of company it is. I.e. Manufacturing vs. services based. If services based... In an M&A deal, the minimum working capital requirement is similar to the min cash concept, but in practice, it makes it to the purchase agreements as a purchase price allocation. Making an estimate for it depends on the type of company it is. I.e. Manufacturing vs. services based. If services based, it’s usually anywhere from 30 to 60 days of expenses. For manufacturing really depends on cash conversion cycle. You’d really need to know from the CFO what the requirement is in order to run the business. They need that level in the company after you buy/invest. If they dividend in excess, purchase price goes down since you need to “replenish” to get working cap back to that level. Read More

Re: Selling Receivables
Generally, A/R is not considered capital structure so no change to TEV. However, as you noted, the change arises due to the increase in Cash balance since you sold the A/R and got cash. This in turn lowers your Net Debt (cash is higher) and affects TEV. To get a true apples to apples comparison, ... Generally, A/R is not considered capital structure so no change to TEV. However, as you noted, the change arises due to the increase in Cash balance since you sold the A/R and got cash. This in turn lowers your Net Debt (cash is higher) and affects TEV.

To get a true apples to apples comparison, we would reduce the third comp by the amount of A/R that they sold. So, for the third comp, reduce their cash balance by $100MM and increase A/R by $100MM (only if you care about balance sheet which you don't if only spreading comps here). This will reconcile the three companies. Just like in cases of LIFO vs. FIFO, one would make the adjustment as well purely and solely for comparability purposes.

In the case of M&A, we don't care by the way. Because we have minimum working capital adjustments in purchase agreements that reconcile this. The issue you brought up only applies in the case of valuation and comparability. Read More

Re: Cash Circular
As an addendum, I have checked all formulas, all signs, and all working capital accounts. Basically, I have checked everything I can check, yet assets still exceed liabilities by an amount equal to interest income.