Complex Trading Comps Analysis: COST Inputs
Hi, (1). Sorry, but I still don’t see logic and consistence in the converts explanation. We are analyzing the convertibility of the security as of TODAY, and in my view, and as also expressed in a previous post here, as of TODAY, it is in-the-money, and as such, should assume conversion (as the... Hi,

(1). Sorry, but I still don’t see logic and consistence in the converts explanation. We are analyzing the convertibility of the security as of TODAY, and in my view, and as also expressed in a previous post here, as of TODAY, it is in-the-money, and as such, should assume conversion (as the basic rule for dilutive securities). So, WST argues that if the maturity was tomorrow or the share price drops tomorrow a investor would not convert – but for me, in essence, it is a subjective thinking (one cannot be imagining if something was tomorrow what would have happened…) We are analyzing it as of TODAY and have to decide to convert it or not based on what we have TODAY (Present Value and current share price).

(2). So, repeating the question of a previous post (that I’m not sure was answered in full), why is the future value (i.e., face value) of convertibles compared to the market value of shares? (since we actually need to compare Present Value vs. Present Value and Future Value vs. Future Value)?

(3). Independently of the different points of view, what should we consider in terms of numbers, to decide if it is in-the-money or out-the-money: PV of Convertibles (as stated on BS) vs. market value of equivalent shares, or Face Value of Convertibles (the FV/par value) vs. market value of equivalent shares?

(4). If converted, the adjustments would be:

A. Reduce debt by the amount stated on the BS (PV of face value)
B. Increase book value of equity by the equivalent number of shares converted x current stock price
C. Add the equivalent number of shares to the basic shares Outstanding

Am I missing any adjustment here?

(5). Also, Could you please confirm if the new book value of equity should be increased by the amount of book value of the convertible bonds (now excluded from debt on the BS) or by the market value of the equivalent number of shares (current stock price x equivalent number of shares that were converted)?

(6). Sorry, but in the previous answer WST mentioned that “what costco shares suddenly dropped the next day? then it is suddenly out of the money and one wouldn't convert;” – it is the sane thing for options – one can wait and decide to convert the options until it expires because may believe the share price can go up. And anyway we convert it, because our analysis is as of TODAY and does not include the subjective factor of thinking in the “timing” of this and that. It seems to me by assuming this for the converts, we are adopting two different criteria for the same thing. Does that make sense for you guys?

I appreciate your help in these questions.
Thanks again.

Cheers. Read More

trading comps for private placements, vcs, IPOs?
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Discount rate when FCFF = FCFE
Suppose a company ceases or dramatically slows its capex such that Op Cash Flow approximates FCF (and assume there are no changes in working capital) and enjoys a perpetual stream of relatively steady cash flows from its existsing asset base without the need to heavily reinvest (e.g. this would be a... Suppose a company ceases or dramatically slows its capex such that Op Cash Flow approximates FCF (and assume there are no changes in working capital) and enjoys a perpetual stream of relatively steady cash flows from its existsing asset base without the need to heavily reinvest (e.g. this would be a utility).

If that company then used this Operating Cash Flow to pay down debt and as a result was debt-free after 3-5 years, then subsequent FCFF would essentially be equal to FCFE. The cash flows would presumably be used to pay dividends. What discount rate would you use? WACC or cost of equity? In theory the company could choose not to pay down debt as quickly, in which case you'd discount FCFF by WACC? Does the fact that all of the FCFF would actually go to equity holders change the discount rate you use?

Thank you. Read More

Accounting: ROC
For ROC ratio,

Net Income + Interest / Equity + Debt,

the interest in numerator, is that interest expense or interest income?

If it's interest expense, then it's actually being subtracted from net income, correct?

Please advise. Thanks

Ev calc? Inlcude postretirement liab's and pension liab's?
I am looking at CTB and need help clarifying whether I should include the company postretirement liab's as part of net debt when calculating net debt. The company is underfunded and the inclusion, or exclusion of these liablities will have a significant impact to it's EV calc and the company's asso... I am looking at CTB and need help clarifying whether I should include the company postretirement liab's as part of net debt when calculating net debt. The company is underfunded and the inclusion, or exclusion of these liablities will have a significant impact to it's EV calc and the company's associated multiples....thanks for your help! Read More