Re: Enhancements to the core model - Part II tax schedule
Yes, correct. Except that technically DTA and DTL changes are not part of working capital - they usually fall under "non-cash items". Still under CFO category, but below NI, above working capital. Remember, anything that changes on the BS must change somewhere on the CFS.

Liabilities and Interest Expense
In the "Financial Statement Analysis" video, he says that we should only include "Interest-Bearing Negotiated Securities" (IBNS's) as Liabilities in the A=L+OE equation because we are only interested in capital structure. My first question is why are IBNS's any different from ot... In the "Financial Statement Analysis" video, he says that we should only include "Interest-Bearing Negotiated Securities" (IBNS's) as Liabilities in the A=L+OE equation because we are only interested in capital structure.

My first question is why are IBNS's any different from other debt and debentures? If I issue a bond or note to raise $100k and use it to buy equipment, how is that different from going to a leasing company to finance the same $100 of equipment? (other than the first scenario produces a debenture that has claim on all the assets of the business in the event of default)

Do they not both equate to capital structure in the sense that they both financed PP&E for the company?

My second question is: assuming that we are only supposed to include IBNS's in the liabilities, does that mean the line item for interest expense on the Income Statement should only include interest relating to IBNS's?

If not, how do we resolve the difference between only having IBNS's on the BS and all interest on the income statement?

If so, please explain why? and where then would the other debt or debenture income and expense be posted on the income statement?

Thanks
Rick Read More

Re: Liabilities and Interest Expense
First, thanks for the quick response. Let me repeat what I think you said to make sure I've got it straight. First, the only time we really need to worry about excluding debt and debentures that are not IBNS's from liabilities is in certain industries like airlines, real estate, etc., where th... First, thanks for the quick response.

Let me repeat what I think you said to make sure I've got it straight.

First, the only time we really need to worry about excluding debt and debentures that are not IBNS's from liabilities is in certain industries like airlines, real estate, etc., where there could be a high proportion of debt that would not normally be seen in typical capital structures.

Second, regardless of the industry (as considered above), Interest Expense on the Income Statement ALWAYS includes all debt and debentures.

Did I get that right?

Rick Read More

Re: TEV and negative net debt clarification
Even after watching the Corporate Valuation video and reading your previous responses, I still feel a bit unclear about Equity Value being greater than Enterprise Value. I think going over my understanding of these topics might help you identify where my confusion lies. Under an 'unlevered' valuat... Even after watching the Corporate Valuation video and reading your previous responses, I still feel a bit unclear about Equity Value being greater than Enterprise Value. I think going over my understanding of these topics might help you identify where my confusion lies.

Under an 'unlevered' valuation approach where we use a WACC to calculate Enterprise Value, the Equity Value is calculated by subtracting net debt (which is the [b:znlwqkmx]existing[/b:znlwqkmx] debt outstanding less cash on hand which is not excess) from Enterprise Value. To me, this does not appear to be comparing 'apples to apples' because our WACC is based on an 'optimal' amount of leverage whereas we are subtracting the EXISTING amount of debt at the time of valuation (which may not represent the 'optimal' capital structure). I seem to be missing the point on how an acquirer of an under-leveraged business can add value by refinancing the business to an 'optimal' capital structure. Does finance theory not state the capital structure does not impact the Enterprise Value of a firm?

In your previous response you stated, "Net debt of negative is fine! Why? Because it means that there's excess cash for shareholders to take out of the company and so equity value" Does the shareholder not have the opportunity to do the same thing under an Enterprise Value calculation?

Thanks in advance for your help. Read More

Distressed Credit Overview - Valuation questions
1. Slide 29 a. Where do bank vs bonds fall in this cap structure diagram (unclear) b. Senior debt i. Even though it has a 1st or 2nd lien on assets, is it always considered “unsecured” and not “secured”? why – i... 1. Slide 29
a. Where do bank vs bonds fall in this cap structure diagram (unclear)
b. Senior debt
i. Even though it has a 1st or 2nd lien on assets, is it always considered “unsecured” and not “secured”? why – is it because Senior Secured Debt is typically
placed in SPV vehicles?
ii. Does this category include bank debt only (eg, 1st and 2nd lien term loans, etc), not including bonds

2. Slide 34
a. Under Distressed Value boxes, if TEV = 300, shouldn’t the entire 300 go to pay the Senior Debt outstanding since it has seniority over Sub Debt (shouldn’t Senior Debt
be paid in full before moving on to the next claimant)? Why is the 300 TEV split 250 to Senior Debt and 50 to Sub debt?

3. Slide 36
a. try to tie to slide 29 – please help me place the 5 capital structure security categories from slide 29 into slide 36 buckets (where does it fall under Secured Bank
Claims, Secured Asset Financing, Bondholders, etc)
b. Why is Secured Bank Claims senior to “business operations” like Secured Asset Financing and Trade Claims, but Bondholders and Equity subordinate to these
“business operations” Read More