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Calculating Equity and Debt base for WACC
There are two ways to calculate your equity and debt base that go into your WACC calculation. On one side you use book value (shareholders’ equity and total debt). This seems intuitive because it reflects the actual capital structure of the company. On the other side you use market values (mark... Read More
There are two ways to calculate your equity and debt base that go into your WACC calculation. On one side you use book value (shareholders’ equity and total debt). This seems intuitive because it reflects the actual capital structure of the company. On the other side you use market values (mark... Read More
Re: Cost of Equity and Debt
Recall that the WACC analysis is meant to capture the MARGINAL cost of capital for the company. As such, you definitely use MARKET VALUE of equity and debt. In reality, for non-distressed companies, we proxy market value of debt by using book value of debt. Minor, immaterial differences, so no worri... Read More
Recall that the WACC analysis is meant to capture the MARGINAL cost of capital for the company. As such, you definitely use MARKET VALUE of equity and debt. In reality, for non-distressed companies, we proxy market value of debt by using book value of debt. Minor, immaterial differences, so no worri... Read More
Valuation Question
We are helping our client reduce inventory. We are trying to make the case that capital tied to inventory has a cost - inventory cost + cost of capital. In my view, it is WACC. Our client thinks it is interest rate of revolving credit. Your thoughts?
We are helping our client reduce inventory. We are trying to make the case that capital tied to inventory has a cost - inventory cost + cost of capital. In my view, it is WACC. Our client thinks it is interest rate of revolving credit. Your thoughts?
Re: Valuation Question
What's the number days inventory outstanding? If short number days, then revolver is ok. Commercial paper and revolvers are short term funding needs, like inv and a/r. However, if long lead time to produce and sell, then WACC. (Think GM - needs more permanent source of capital since they sell crap... Read More
What's the number days inventory outstanding? If short number days, then revolver is ok. Commercial paper and revolvers are short term funding needs, like inv and a/r. However, if long lead time to produce and sell, then WACC. (Think GM - needs more permanent source of capital since they sell crap... Read More
Convertible Debt Adjustment
In the Complex Trading Comps example, Costco has zero-coupon convertible subordinated notes due in 2017 with face value of $900M and a max shares convertible of 9.4M. However, in the 10-K it clearly says that $329.M in principal amount has already been adjusted, yet in explaining how to account for ... Read More
In the Complex Trading Comps example, Costco has zero-coupon convertible subordinated notes due in 2017 with face value of $900M and a max shares convertible of 9.4M. However, in the 10-K it clearly says that $329.M in principal amount has already been adjusted, yet in explaining how to account for ... Read More
Re: Convertible Debt Adjustment
1) You would adjust the S/Out by the amount that still has not been converted. We don't remember the numbers off-hand, but it would not be the entire maximum amount of shares. 2) Yes, same for all convertible securities. There's no difference in this context between preferred or debt. The differen... Read More
1) You would adjust the S/Out by the amount that still has not been converted. We don't remember the numbers off-hand, but it would not be the entire maximum amount of shares. 2) Yes, same for all convertible securities. There's no difference in this context between preferred or debt. The differen... Read More
AD analysis left-field questions
I had a few side/random questions from the accretion dilution analysis. Finance ONLY purchase price equity (& NOT EV), as quick/dirty model/anal? In other words, I would think that financing would FUND EV (if there is debt, that debt would most likely be refinanced/ repaid/retired, or less co... Read More
I had a few side/random questions from the accretion dilution analysis. Finance ONLY purchase price equity (& NOT EV), as quick/dirty model/anal? In other words, I would think that financing would FUND EV (if there is debt, that debt would most likely be refinanced/ repaid/retired, or less co... Read More
Re: WMT model question
From the perspective of financial analysis, we don't differentiate the difference between redeemable and non-redeemable. This is an accounting related classification that results in whether or not it is slotted into the Equity account (new rules) or if it is not. As such, the point is that the entit... Read More
From the perspective of financial analysis, we don't differentiate the difference between redeemable and non-redeemable. This is an accounting related classification that results in whether or not it is slotted into the Equity account (new rules) or if it is not. As such, the point is that the entit... Read More
A quick question about TEV
In advanced modeling session, Hamilton uses tax-effected EBIT, instead of Free cash flow to firm, to calculate terminal enterprise value (TEV=EBIT(1-tax rate)(1+g)/(WACC-g), but almost all texts use FCFF in numerator). Given EBIT not including capx or working capital, how would this argument be ju... Read More
In advanced modeling session, Hamilton uses tax-effected EBIT, instead of Free cash flow to firm, to calculate terminal enterprise value (TEV=EBIT(1-tax rate)(1+g)/(WACC-g), but almost all texts use FCFF in numerator). Given EBIT not including capx or working capital, how would this argument be ju... Read More
There is always a component of cash that cannot be used that is for working capital purposes. The true definition of excess cash is the total Cash & Equivalents (usually including Short-Term investments as well) and then subtract this required amount. The excess (the difference) is the Excess C... There is always a component of cash that cannot be used that is for working capital purposes.
The true definition of excess cash is the total Cash & Equivalents (usually including Short-Term investments as well) and then subtract this required amount.
The excess (the difference) is the Excess Cash that is technically not required to run the business.
In practice, however, the general best practice is to simply take the total cash figure. While we recognize this is flawed, the level of precision required is immaterial and generally insignificant (unless you're GM! - you get the point) and as such, we don't actually calculate true "excess cash".
For a bit more insight on a related topic to excess cash, go here:
viewtopic.php?f=3&t=489&p=1107 Read More