RE: How do I treat Deferred Maintenance Revenues in TEV?
Normally speaking, TEV focuses only on capital structure and "sources of funds". In other words, it focuses on valuation of entities. However, your question focuses on a "working capital", "day-to-day operations" of the company as opposed to capital structure. Thus, without knowing more about the sp... Normally speaking, TEV focuses only on capital structure and "sources of funds". In other words, it focuses on valuation of entities. However, your question focuses on a "working capital", "day-to-day operations" of the company as opposed to capital structure. Thus, without knowing more about the specific industry or company in question, our initial gut feeling is to do nothing to your equation for TEV and Equity value, in other woreds, don't adjust either for the Deferred Maintenance Revenues. Read More

RE: How do convertible bonds affect total capitalization?
Yes, the TEV effectively increases as presumably, the post-conversion captial structure has more equity due to dilution. That's on the market value side. On the balance side side, correct, remove converts from debt as before and increase book value by the converted amt (shares * price /share). Howev... Yes, the TEV effectively increases as presumably, the post-conversion captial structure has more equity due to dilution. That's on the market value side. On the balance side side, correct, remove converts from debt as before and increase book value by the converted amt (shares * price /share). However, note that in a standalone model, once you assume conversion, APIC increases and no further adjustment in future years. But for trading comps, you have to constantly re-assess in-the-money or not. Read More

RE: Maintenance capex vs capital expenditures revisited
YES! CapEx that is not purely maintenance capex is to be reflected in the Free Cash Flow to Firm calculation! To do is would be remiss and excluding a significant portion of cash that doesn't below to the firm's stakeholders!

RE: Do you include pension liability in firm value?
Generally, in a standalone valuation context, such as a trading comps analysis, unfunded pension liabilities are not adjusted for. Trading comps attempt to quantify the current market valuation parameters. Unfunded pension liabilities are not considered part of the capital structure as it is not a f... Generally, in a standalone valuation context, such as a trading comps analysis, unfunded pension liabilities are not adjusted for. Trading comps attempt to quantify the current market valuation parameters. Unfunded pension liabilities are not considered part of the capital structure as it is not a form of capital in the equity value, net debt, preferred and minority interest summation to get to enterprise value.

Unfunded pension liabilities would definitely be adjusted in an M&A context primarily as a purchase price allocation - when buying a company, the acquiror would want to make sure the pension is fully funded and so, would deduct unfunded pension liabilities from purchase price or insert a clause that the seller is responsible for paying future liabilities.

However, in extreme cases of unfunded pension liabilities (such as large unfunded liability), one might decide to adjust for it under certain circumstances when calculating current market valuation. However, it really depends on the specific situation and contxt. In such a standalone situation, valuation multiples would not really be affected since unfunded pension liability typically does not hit the Income Statement, but instead through Other Comprehensive Income. Read More

RE: Please clarify if any value is gained by buying back stock.
You have to remember the core lessons from my valuation class! If nothing else has happened to the company, why should there be a change to the value of the company (enterprise value)? If the "core, recurring profitability from core operations" has not changed, there is no change to TEV. Capital str... You have to remember the core lessons from my valuation class! If nothing else has happened to the company, why should there be a change to the value of the company (enterprise value)? If the "core, recurring profitability from core operations" has not changed, there is no change to TEV. Capital structure changes do not change this as capital structure is a "function" of debt and equity mix, meaning that equity value is a derived number. So if you just altering the capital structure mix, the core value (TEV) stays the same.

Your reference to M&M II seems to be tackling it the other way around - that equity value is the beginning point and u add debt to get TEV which is what we do to calc the current mkt observable TEV but again, that TEV is supposedly fixed if there are no changes to profitability.

This is the same concept of why we always use FCFF and never FCFE because calculating an equity-based number doesn't tell us anything abt the value of the company, but just the equity. Then, once u know TEV, you boil down to derive equity value. Read More