Posts by: Elvina J| Wall St. Training

measuring capital charge
Hi from the course, I see that you are using total capital to calculate capital charge. I was reading up on Damodaran's explanation on this as well and don't understand that, can you elaborate? "In cases where firms alter their capital invested through their operating decisions (for example, by usin... Read More

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by Elvina J.

added 6 years ago

Negative EVA
Hi I revised the calculation on EVA using Rirchard S's method as per the prior thread below, however this yields negative EVA through the projection years hence TV as % of TEV is >100%, I guess this renders EVA useless in valuing the company right? Which also means from EVA perspective, it is re... Read More

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by Elvina J.

added 6 years ago

DCF - can you project with a change in capital structure
Hi When pitching a stock for long/short funds: 1. Say the company has debt repayment schedule, in addition to using trading comps, I thought of using DCF as a sanity check or to extrapolate a few data points for valuation. Say the management announced debt repayment schedule in the next few yea... Hi

When pitching a stock for long/short funds:
1. Say the company has debt repayment schedule, in addition to using trading comps, I thought of using DCF as a sanity check or to extrapolate a few data points for valuation. Say the management announced debt repayment schedule in the next few years of your 5 years projection. I understand that DCF keeps the capital structure constant (which is also it's flaw in valuation method), is it recommended to project such debt repayment and any other planned equity changes during the projection?

2. Follow up question to the above, assuming there is a change in the capital structure during the projection, then for diluted share outstanding for your valuation, I assume you would include the exercisable options or securities at that terminal year using implied share price as exercise price (which is ok even though there is circular) right?

3. If you recommend changing the capital structure through the projection as above, if I were to pitch the stock to a fund, and I assume the fund take minority stake, does it mean projecting FCFE is more relevant than FCFF in the DCF? (since you are an equity investor hence you get whatever that is paid to you after debt holders are paid off). Is that right?

4. If you keep capital structure constant through the projection, you should yield the same implied share price whether you use FCFF or FCFE in DCF right (hence you can use this method as a way to check errors in your projection if you dont get the same implied share price using both methods)?

5. What if you project a capital structure that is not constant through DCF, would DCF using FCFF vs FCFE yield a different implied share price?

6. If you were to project a different capital structure in the DCF, does that render DCF method useless meaning is it better to use other valuation methods e.g. trading comps like 1-year forward or 2-3 year forward multiple?

7. Practical application of DCF: I understand that some hedge fund folks have the impression that DCF is useless due to too many theoritical assumptions that could impact on the valuation greatly, although in some case I think it can be used if there is a lack of trading peer comps, am I right? Just wanted to get your opinion on the limitation. For pitching stocks, are there any methods that you think are less useful? (e.g. residual income, liquidation value is also less useful unless the company is in distress or you are projecting the share price to go to 0)

8. Is it realistic to project the share price to go to 0 e.g. Blue Apron for example? From what I know (correct me if I'm wrong), troubled companies hardly reach 0 share price (maybe Bear Stearns?). Share price tends to go to very depressed price and stay there for a long time before they decide to privatize it. Read More

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by Elvina J.

added 6 years ago

residual income (application in real life) - 4 questions
Hi 1. is there a scenario where residual income will be helpful in valuing a publicly listed company? 2. What would be the objective of using residual income in such scenario? 3. is this method more useful for valuing certain sectors? 4. would it be helpful in valuing any listed company in... Read More

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by Elvina J.

added 6 years ago

mid month convention for real estate (new capex)
why do you use month 7 for year 1 and then month 8 for year 2 to 5? Why not use month 8 for year 2, month 9 for year 3 etc?

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by Elvina J.

added 6 years ago

redeemable vs non redeemable non controlling interest (4 questions)
1. Classification: am I right to say that the redeemable portion is temporary equity hence on the > statement of equity: the net income number that shows up is after subtracting the temporary equity portion? > balance sheet: only non-redeemable portion of non controlling interest shows up under... 1. Classification: am I right to say that the redeemable portion is temporary equity hence on the
> statement of equity: the net income number that shows up is after subtracting the temporary equity portion?
> balance sheet: only non-redeemable portion of non controlling interest shows up under shareholder's equity? where does the redeemable portion show up in balance sheet?

2. When calculating TEV: do you add the whole non controlling interest (both redeemable and non-redeemable)?

3. In the case of a non controlling stakeholder that holds a redeemable stake, can you explain how it flows through the financial statements in the case when he redeems? Say his stake is worth $10. If he redeems this over 5 year period say $2 per year, then in

a. Year 0 - reclassify redeemable non controlling interest into liability:
this $10 becomes amount owed to the holder under liabilities ($2 under account payable as it is payable in a year) whereas remaining $8 is under other long term liabilities (payable in future after 1 year lapsed). On cashflow statement, you have increase in payable of $2 so additional cash under CFO so net change is +2. no change in CFI and CFF. On BS you have on the current liability side +2, other long term liability +8, and under retained earnings -10 so no change in asset. Is this correct?

b. Year 1 - you start expensing $2 (assume stays the same but this could have fluctuated year on year depending on the performance of the firm that minority shareholder has a stake in)
P&L: -2 under interest expense or other expense so after tax of 40%, net income is -$1.2
CFS: under CFO, -1.2, and since payable is down 2 this year so net CFO cash is -3.2 ,under CFI and CFF - no change.
Balance sheet: asset side: cash -3.2 and liability side 10-2=8, equity side =-1.2 (from net income), so asset side is -3.2 and liability+equity = 8-1.2 = 6.8

QUESTION: this is not balancing, what is wrong here?

4. what is the risk with a firm with a huge noncontrolling interest as part of the net income eg 50% of net income from from noncontrolling interest in general (whether there is redemption or not)? Read More

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by Elvina J.

added 6 years ago

Converting from one inventory accounting method into another to compare apple to apple
Hi! Dean Choi mentioned that given different companies use different inventory accounting methods (LIFO, FIFO, average), it is more accurate to convert all the items of the companies you are looking at to calculate a ratio into the same accounting method e.g. calculating inventory turnover ratio for... Read More

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by Elvina J.

added 6 years ago

Re: Projection of FX translation
Gotcha. (i) How about if you are trying to project a company whose 50% of revenue comes from international market (say more than 2 international markets) and 50% from the US. Given significant portion of revenue from overseas, is there a need to project FX effect into the model? If so, how to do... Read More

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by Elvina J.

added 6 years ago

Re: Projection of FX translation
Hi! thanks for the explanation. Per your comment on applying FX impacts after the core projections, can you walk me through how you would do that through the 3 financial statements? Say USD1=EUR2 exchange rate, how would that impact the revenue, cost lines etc up to net income on P&L and similarly w... Read More

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by Elvina J.

added 6 years ago

Re: Impact of gain from sale of asset on financial statements
for cash gain, per your explanation, am I right to state this correction? CFO: just bring over net income here, no other entry CFI: which one is correct, (a) or (b)? (a) add proceeds from sale of asset +10k and less: gain in asset sale: -1.5k? so 2 lines or is it just (b) net gain in asset sa... Read More

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by Elvina J.

added 6 years ago