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Re: Distressed Debt Model
Our distressed model is not meant for evaluating HY bonds. We would suggest our regular "Core Model" which maps out cash flows and credit ratios to evaluate non-distressed high yield. Our distressed model is essentially for an imminent bankruptcy (or in bankruptcy). In addition, our Covena... Read More

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by WST Expert 1.

added 12 years ago

Re: Distressed Debt Model
The idea is that you want to argue to the judge what happens when the valuation is incorrect - you are unjustly enriching certain parties. The two key drivers of fulcrum are post-petition valuation and post-petition leverage, both of which impact recovery rates of the senior securities in the capita... Read More

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by WST Expert 1.

added 12 years ago

Questions from Advanced Financial Modeling course
Hi I'm going through the advanced financial modeling course and a few questions that came up (they're a little elementary but would be helpful in fully understanding the topic): When going up and down the capital structure, why are things such as working capital (AR, AP, Accrued Liabilities etc.) n... Read More

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by Guest 1.

added 12 years ago

Re: Questions from Advanced Financial Modeling course
1) In short, we only consider financial related items in Capital Structure for valuation. Working capital items are considered operating related and not financial related. Don't get confused by the accountants' definition of debt which is all liabilities. Not the case in finance. For a thorough disc... Read More

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by WST Expert 1.

added 12 years ago

Re: WST Macro
As silly as it sounds, this could be the case of one of your keys on your keyboard being stuck / sticky? Can you try each combination of keys separately: i.e. Ctrl+B to make sure it bolds Shift+B to make sure you get a capital B ALT + any key on the menu/ribbon Then do a Ctrl+Shift+B for our blue m... Read More

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by WST Expert 1.

added 12 years ago

Re: Estimated Taxes
Hi, I am having trouble understanding the impact of NOL on the cash flow statement. Correct me if I'm wrong on this: If I apply a NOL carry forward this year to reduce my taxable income, my net income will increase by tax rate x NOL balance. On my cash flow statement, my cash has already increased... Read More

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by Guest 1.

added 12 years ago

Re: Estimated Taxes
No, per our previous response, GAAP taxes is $400. NI is $600. You are confusing GAAP accounting with Cash accounting. Deferred Taxes would be $400-$20=$380 $20 is "current portion" and assumed to be paid OUT IN CASH that year (or taxes payable up by $20, considered to be part of working ... Read More

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by WST Expert 1.

added 12 years ago

Other Income and Expense
I have a question regarding other income and other expense. Should these be placed below the line along with interest expense/income and capital leases or should it be placed on the very top just after net sales on the income statement? If other income/expenses should be placed below the line (EBI... Read More

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by Guest 1.

added 12 years ago

Re: Power plants company: Free Cash Flow?
If you’re doing a NAV calculation, which it looks like you are, then I would agree to use FCFE because this is the “net” cash flow after tax that the company receives. This falls under a sum-of-parts valuation in which you add up the value of each asset on an equity value basis, after the spec... If you’re doing a NAV calculation, which it looks like you are, then I would agree to use FCFE because this is the “net” cash flow after tax that the company receives. This falls under a sum-of-parts valuation in which you add up the value of each asset on an equity value basis, after the specific asset’s debt load.

FCFF as discussed in class refers to company valuation. So in that context you take the total FCFF of the entire company (which is really the sum of each asset’s FCFF, but you are getting FCFF off financial statements as opposed to each asset’s P&L) and then you apply DCF to get TEV, minus net debt, etc. If you recall I said we generally don’t like FCFE because of the ability to manipulate your net borrowings and thus, alter the value arbitrarily. However, in the case of project finance (power plants and mines for sure), the debt changes (amortization) is usually predetermined and doesn’t change, so the ability to manipulate the numbers is not there.

This is a similar concept in real estate. Value the entire company based on company cash flows vs. NAV build-up of each property after debt load per property. You are currently doing the NAV of each asset and the debt structure of these pre-existing assets won’t change or is pre-determined, so FCFE would be correct in this context. However, for DCF of entire company, you want to use FCFF for sure and then minus out net debt. Let me know if that distinction is clear. In class, we were referring to company value not per asset value.

For future projects that have not yet come online, the question of FCFE vs FCFF boils down to whether or not the debt funding is in place yet. Your concern of not taking into account debt in the future is correct – because you are supposed to. remember, it’s always FCFF, then discount to get TEV minus net debt. The ONLY time FCFE and FCFF will yield the same numbers is when the interest rate, earnings yield AND the wacc are all the same. (review the Share Repurchase video in your WST login).

So to answer your question, I would do the following for future projects: use FCFF. And then assume an average debt/capitalization ratio and subtract that out. So if your UNLEVERED value (using FCFF) is $100 and the average debt load is 30% debt/capital, you can assume $30 of debt, so equity value is $70. This is because you don’t want to get caught (trapped) making assumptions on interest rates that you don’t know yet. Otherwise, you may continue to use FCFE, but you have to assume interest rates and of course, you still need the assume debt level per project.

As I skim through you model though, I see inconsistencies in each plant though. So if I look at your EXISTING plants, sometimes you do equity value off NOPAT and then sometimes TEV off FCF and then minus net debt. Since you’re doing an NAV build-up of each plant, I would just calculate FCFE for each and discount that. add them up as you have it on NAV tab and minus out corporate/parent debt as you did. don’t double count - i.e. b/c you took out interest on per asset basis (hence FCFE), don’t include those asset specific debt that already reduced cash flow.

Let me know if that clears things up. Read More

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by WST Expert 1.

added 12 years ago

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