Re: WACC of a private company?
If BOTH the target company AND the industry have little to no debt, then it's hard to make a case that debt is a big part of the capital structure. As such, go with the actual or the industry (round to 5%). Also, WACC is as of a point in time. Since your DCF value is as of a point in time as well,... If BOTH the target company AND the industry have little to no debt, then it's hard to make a case that debt is a big part of the capital structure. As such, go with the actual or the industry (round to 5%).

Also, WACC is as of a point in time. Since your DCF value is as of a point in time as well, you must match the discount rate (WACC) to the cash flows generated given TODAY's WACC. Thus, WACC shouldn't change over time. Some bankers like to complicate things and calculate an updated WACC every year, we don't agree with that approach.

And yes, the value will be small because the discount rate is so high, that is not an unfair conclusion.
There is HIGH risk involved, so why shouldn't the value be small?

If you are on the sell side, put in a 15% WACC then. Why? Because. Read More

WACC for a Private Equity Firm
Consider that a private equity firm is interested in buying a firm and then exiting in three years time. It's my understanding that, generally, we should be using long-term, 10-yr Treasury bonds in order to gauge risk-free rate. However, in this case since the investment horizon is only 3 years, sh... Consider that a private equity firm is interested in buying a firm and then exiting in three years time.

It's my understanding that, generally, we should be using long-term, 10-yr Treasury bonds in order to gauge risk-free rate. However, in this case since the investment horizon is only 3 years, shouldn't we be using the yield on the 3 year Treasury bond instead?


another related question, shouldn't the maturity of the company's estimated cost of debt matches that of the risk free rate? so if we are using 10 year risk-free rate, then we should use the yield on the company's 10-year bond where as if we are using 3 year risk free rate then we should also be using 3 year cost of debt for the company as well.

Thanks in advance.. Read More

Re: WACC : Historical Beta Values
For cost of debt calculations the most widely used practice is to use the credit ratings to assign a credit premium over a risk free rate. which sources are used to get the values of premiums based on the credit ratings?

Is there any subjective analysis involved?

Re: GAAP or cash
Analyst projections are utilized as a reference point. If you're doing an LBO, you must confer with management. But again, LBO sensitivity is more important. your GAAP historicals are supposed to be adjusted anyways. Truth be told, these are all fairly basic questions. Please take our Complex Trad... Analyst projections are utilized as a reference point. If you're doing an LBO, you must confer with management.
But again, LBO sensitivity is more important.
your GAAP historicals are supposed to be adjusted anyways.

Truth be told, these are all fairly basic questions.
Please take our Complex Trading Comps course, Segment Build-up and LBO modeling:
http://www.wstselfstudy.com/programs.html Read More

Re: Oil and Gas Valuation
Rarjoon, Oil & gas companies typically use a Net Asset Value (NAV) calculation to derive the value of all their reserves. As you mentioned, reserves are typically categorized as 1P, 2P, or 3P, representing roughly 90%, 50%, and 10% recovery probabilities, respectively. However, a number of geol... Rarjoon,

Oil & gas companies typically use a Net Asset Value (NAV) calculation to derive the value of all their reserves. As you mentioned, reserves are typically categorized as 1P, 2P, or 3P, representing roughly 90%, 50%, and 10% recovery probabilities, respectively. However, a number of geological and legal factors affect the exact classifications and probability estimates.

Oil & gas assets are split by business segment (upstream, refining/marketing, etc.) and then by geographic region, which may include specific countries or merely continents. The value of each asset is then adjusted individually for risk (i.e., uncertainty in actual recoverable
reserves) to arrive at Risked Value. This all sums up to Total Enterprise Value, which is finally adjusted for net debt, corporate expenses, etc.

The greatest variability in oil & gas modeling stems from estimating the Risked Value of both proven and probable/possible reserves; each firm and its jurisdiction will have their distinct guidance. On an actual deal, financial analysts would find much more information in production-sharing contracts (PSCs) and regulatory guidelines. PSCs contain all the restrictions and procedures on how a given government and resource company split profits, ranging from how to handle any production set aside to recoup the company's costs ("cost oil") to bonuses that come into effect past certain levels of production. Read More