Re: Valuation - IRR
I hate to sound naive, but I guess coming from the pure equity long/short world, I am! To review, you would recommend I take the Quick & Dirty LBO class, or might this be too simple? Secondly, "The only thing that's missing is the first payment - or the purchase price so to speak. Once ... I hate to sound naive, but I guess coming from the pure equity long/short world, I am! To review, you would recommend I take the Quick & Dirty LBO class, or might this be too simple?

Secondly,

"The only thing that's missing is the first payment - or the purchase price so to speak. Once you plop that in there (assume it's end of Year 0 cash flow), you have the core inputs for your IRR calculation, with additional adjustments to get to Equity Value and taking into account capital structure."

Would the "purchase price" simply be the investment? For example, if a private equity firm invested $5m, and when the company was sold its enterprise value was $300m and they owned 10% or $30m --- would be a simple IRR, with -5m and $30m being the inputs. Read More

Re: Pref stock included in debt for target M&A?
Please view our videos on Corporate Valuation or search the topic forums here.
In short, preferred debt is considered a form of capital tha tmust be taken out before arriving at true equity value of the current shareholders.

Re: LBO - Quick & Dirty - for a early stage investment
Sounds like you are valuing a start-up. Our traditional simplistic approach to determining capital structure of start-ups is to figure out the run-rate expenses required for say, 1-2 years or whatever comfortable buffer + required capital expenditures (if any). Then map out your potential cash flo... Sounds like you are valuing a start-up.
Our traditional simplistic approach to determining capital structure of start-ups is to figure out the run-rate expenses required for say, 1-2 years or whatever comfortable buffer + required capital expenditures (if any).

Then map out your potential cash flows (which we know is pie in the sky as of now) and see what lenders will lend you for that. Usually, lenders don't lend to start-ups and is mostly VC-funded, so the issue of debt doesn't come up at this stage (unless it's a project finance which is a whole other world). Why? b/c there are no cash flows and assets to pay interest, debt and as collateral. Read More

Factoring subsidies into WACC
Hello, A company I'm valuing gets a significant portion of its financing via government cash grants. Let's assume they normally spend $150m in capex annually with a 70/30 leverage ratio. With the cash grant, they'd get a 30% rebate off of their capital cost. So now their out-of-pocket capex is $1... Hello,
A company I'm valuing gets a significant portion of its financing via government cash grants.
Let's assume they normally spend $150m in capex annually with a 70/30 leverage ratio. With the cash grant, they'd get a 30% rebate off of their capital cost. So now their out-of-pocket capex is $105m, which they'll still leverage 70%.
In this case, what is the effect on cost of capital? 1/3 of the capital is essentially free now; does that mean if the WACC before was 6%, it now becomes 4.2% (6% * 70%)?

Thank you,
Alan Read More

Discounted EVA approach
I am attempting to apply an EVA (Economic Value-added) approach to measure value creation over a series of years. I am wondering if you can help validate whether the approach below is sound. The copy-and-paste function does not properly align the #s, but basically i simply multiply averageinvested... I am attempting to apply an EVA (Economic Value-added) approach to measure value creation over a series of years.

I am wondering if you can help validate whether the approach below is sound. The copy-and-paste function does not properly align the #s, but basically i simply multiply averageinvested capital for each year * (ROIC-Cost of Capital). That product is EVA for that year. Then I discount that year's EVA appropriately. Finally, I sum the discounted EVAs for 20-25 years. By comparing the value-created (i.e. the sum of discounted EVAs) to the starting book value, i arrive at what the theoretical market (or price) to book value should be.
Does this appear to be a logical approach? Am I missing something? Is there a more logical or simpler approach?
Thank you.


Discounted EVA 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year 1 2 3 4 5 6 7 8 9 10 11
Invested Capital 9,292 10,602 11,895 13,174 14,444 15,661 16,744 17,724 18,687 19,660 20,647
ROIC 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Cost of capital 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
EVA 232 113 125 138 151 162 172 182 192 202 211
Discounted EVA 219 100 105 109 113 115 115 114 113 113 111
Aggregate value creation: 2219 ==> series extends to 2029 ====> Read More