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net debt and debt to total cpaital
Is the following the correct approach to calculate the following ratios?

Net Debt to Total Capital --> Net Debt/ SE + Net Debt
Debt to Total Capital --> Debt /SE+Total Debt

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by Guest 1.

added 12 years ago

Re: net debt and debt to total cpaital
Net Debt to Total Capital is a mis-matched ratio. It should be Net Debt to Net Capital. References to Equity are Shareholders Equity (Book Value) in the context of credit ratios. Definitions: Total Debt / Total Capital = Debt + (Debt + Equity) Net Debt / Net Capital = Net Debt / (Net Debt + Equity)... Read More

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by WST Expert 1.

added 12 years ago

Re: taxes
The figures from the tax schedule, primarily the CHANGE in DTA and DTL would actually update the BS line items as appropriate. (Beginning balance + the change). Then, under CFO (below D&A, above working capital items), you calculate the change in DTA and DTL from the BS (similar to the working ... Read More

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by WST Expert 1.

added 12 years ago

Re: Accounting Bootcamp- Short term debt CFO or CFF
Great question! To help clarify, when we think of working capital (changes in CA and CL) they are ONLY operating related activities NOT financing related. As such, changes in any debt related items (under US GAAP) will definitely fall under CFF as opposed to CFO. Think of it this way - anything that... Read More

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by WST Expert 1.

added 12 years ago

Re: Inventory Writedown
Assuming you want to recognize the Inventory Writedown in Year 1 of the projection model: 1) Insert a new line on IS below COGS and call it Inventory writedown of $100 (or whatever amount). Inventory writedowns usually flow thru COGS however, since COGS is a driver of Inventory on the BS, you want ... Assuming you want to recognize the Inventory Writedown in Year 1 of the projection model:

1) Insert a new line on IS below COGS and call it Inventory writedown of $100 (or whatever amount). Inventory writedowns usually flow thru COGS however, since COGS is a driver of Inventory on the BS, you want to keep this extra (one-time) item distinct from COGS. Now, NI should be lower by $100 * (1-T). If you want to report Pro Forma IS figures, you would undo this, but still need the numbers to flow through for the writedown.

2) Inventory down by $100 => this change on an integrated model won't cause an imbalance b/c Working Capital picks up change in Inventory and adjusts cash balance lower by $100; however this is incorrect b/c cash shouldn't change due to inventory writedowns.

3) CFO: add a new line in the non-cash section, under D&A, above working capital items:
Non-Cash inventory Writedown: increase by $100 => this is to adjust for the fact that the $100 of new expense that flows thru IS and RE is a non-cash expense; this causes BS to not balance (correctly so)

4) CFO: increase/decrease in Inventory in working capital
subtract change in inventory by $100 => this is required because your inventory balance on the BS is now $100 less than if you had no writedowns. As such, your change in inventory on CFO is now understated by $100. i.e. if last year INV was $1,000 and this year, it's $2,000, that's a $1K reduction of Cash. But a writedown of Inventory makes this year's new INV balance $1,900 and on CFO, it shows $900 change. But the change really was $1,000 and cash still went down by $1,000 not the new $900. So, make sure the correct change in INV is reflected by subtracting the $100 writedown, so that the $900 change goes back to $1,000 change

Notice, that as a net effect, cash went up by $100 * T because you had a tax savings of that amount since the inventory writedown is tax deductible. If you were doing this on a Pro Forma Adjustments column (i.e. in a stock raise or M&A/LBO), then you would flow this $100 * T through increase in DTA and resulting tax schedule. This wasn't required here because we did this on Year 1 projection and thus "used up" the DTA right away. So in theory, the second the inventory writedown occurs, the correct entries would be:
COGS up $100
RE up $100 * (1-T)
DTA up $100 * T

when the DTA due to this specific inventory writedown is used up:
DTA down $100 * T
Cash up $100 * T
and thus, still makes sense from an accounting debits/credits perspective as to why Cash goes up by $100 * T in our set of entries.

Happy modeling! Read More

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by WST Expert 1.

added 12 years ago

Re: Historical Cash Flow statement
NEVER use historical BS and IS for historical CF statement creation. You MUST input directly from actual figures. If you look at most CF statements, i.e. Inventory changes in Working Capital section, you'll see that the CF number rarely matches the change in corresponding periods on the BS. This is ... NEVER use historical BS and IS for historical CF statement creation. You MUST input directly from actual figures. If you look at most CF statements, i.e. Inventory changes in Working Capital section, you'll see that the CF number rarely matches the change in corresponding periods on the BS. This is due to writedowns, charge-offs, reserve allowances, etc that we don't have detail for, but the auditors have figured out. As such, you must portray the actual cash changes, not from calculating yourself historically.

Generally speaking, for transaction models (i.e. M&A, LBO), we don't usually need the historical CF statement because the items on the CF statement are mostly derived from the IS or BS.
i.e. in our Advanced Financial Modeling - Core Model course, we explain how to construct CFO which is largely based on IS (Net Income, Depr, etc) and BS for working capital purposes and deferred taxes.
The other line items in CFO (such as one-time gains, SBC comp etc) aren't driven off the historical CF figures.

For CFI, the biggest items are (i) CapEx which is from mgmt or separate detailed schedule of future costs; and (ii) acquisitions (see our merger classes for proper merger accounting).

However, for purposes of building a tracking model (whether equity research or private equity and budgeting/reporting), we will include historical CF statement for completeness sake; however, historical CF doesn't usually drive future CF figures.

The exception is for CFF and capital structure inputs. For our CFF items such as repurchases and dividends, you'll need a detailed schedule as well that once again, is driven independently as opposed to based on historical CFF. i.e. for dividends, we are about historical dividends per share to drive future dividends, as opposed to historical reported amounts on CFF.

Occasionally, one will need historical CF statement to project future CF statement items, but these are specific line items. i.e. in our advanced modeling class for banks, we need the historical CF statement to drive the future, but that is an exception. Read More

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by WST Expert 1.

added 12 years ago

Re: Manufacturer With Captive Finance Co.
I think the operating lease expenses may be categorized as non-operating expenses for arriving at operational efficiency ratios (if that what you want to calculate). Cash used to acquire equipments for operating leases cannot be capitalised as capex. The same will be shown as non current assets an... Read More

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by Guest 1.

added 12 years ago

Re: Historical Cash Flow statement
Hi, yes recasting of financial statements are definitely recommended which would be required for forecasting. Additionally if you are trying to analyze historical balance sheet (say any specific trend or ratio) or you are trying to compare to a industry benchmark ratio, then standardization of finan... Read More

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by Guest 1.

added 12 years ago

Re: Insurance financial modeling
Hello, we have a solution for you. The original logic that we used to construct the insurance sweep was that if you generated cash that year, i.e. Cash Available/Required in row 8 of Sweep tab was positive, that the minimum cash balance was essentially ignored because you would be building cash b... Read More

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by WST Expert 1.

added 12 years ago

Re: does the idiosyncratic risk of the company change?
Tricky question. Since firm specific risk is defined as total risk (sigma or standard deviation) less market risk, as the total risk of individual stock changes and assuming market risk stays constant (since we only update market risk premium once a year when Ibbotson publishes their updated Marke... Read More

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by WST Expert 1.

added 12 years ago

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