Re: Thoughts after going through package3 (advanced modeling)
1) Please review our Corporate Valuation course online for a detailed discussion of MI. Short answer: MI on the BS is treated just like Debt in your TEV calculation. 2) If the MI expense recognized on the IS is not paid out in cash, then MI is added back to CFO. 3) Please review our Corporate Valu... 1) Please review our Corporate Valuation course online for a detailed discussion of MI.
Short answer: MI on the BS is treated just like Debt in your TEV calculation.

2) If the MI expense recognized on the IS is not paid out in cash, then MI is added back to CFO.

3) Please review our Corporate Valuation as well as our Private Company Valuation courses online for a detailed discussion of Terminal Value.

4) Please review our Corporate Valuation as well as our Private Company Valuation courses online for a detailed discussion of Terminal Value. Read More

RE: Short Term Investment treatment
If you get Interest Income, isn't that +10 in CFO (via Net Income). If strict IFRS GAAP, then in some cases, it is +10 in CFI. But regardless of that, I'm not sure what you mean by drawing 25 to finance the company. If you draw 25 to finance the company, that's usually a CFF item, most likely v... If you get Interest Income, isn't that +10 in CFO (via Net Income). If strict IFRS GAAP, then in some cases, it is +10 in CFI.

But regardless of that, I'm not sure what you mean by drawing 25 to finance the company. If you draw 25 to finance the company, that's usually a CFF item, most likely via increase in debt. the offsetting entry is increase in cash by the same 25. I'm not sure why you would reduce CFI by 25 since nothing is touching CFI at that point. How does one "draw down 25 from CFI"?

Then you introduced a new concept in your last statement. If you want to use ST Investment, then the entry is reduce ST Investment by 25, increase cash by 25... Read More

Re: IRR
1) your transaction premium/price and therefore, your implied transaction multiples should be a result of your valuation, which comes BEFORE the LBO model (in theory) and of course, the financial model is first. This partially stems from deal comp multiples as well as standalone "intrinsic valu... 1) your transaction premium/price and therefore, your implied transaction multiples should be a result of your valuation, which comes BEFORE the LBO model (in theory) and of course, the financial model is first. This partially stems from deal comp multiples as well as standalone "intrinsic value"

2) Do not compare your IRRs against our example model - each deal is different!
Here's a quick summary of IRR trends:

Rationale for Trends with Different Exit Multiples (multiples are illustrative)

ENTRY MULTIPLE:
- Standalone (no premium): 7.3x
- Transaction (with premium): 8.7x

– LOW EXIT MULTIPLE (say, 8x): you are selling in Y1 at a much lower multiple than you bought in (huge neg). As you de-lever, you build equity quickly at the beginning, net debt pay down in Y2 as a %age of the very low equity base in Y1 is large, so you are near breakeven in Y2 after huge Y1 loss

– MEDIUM EXIT MULTIPLE (say, 9.5x): as you de-lever, you build equity. As you reach Y4, your equity growth slows to the point where it can't sustain a higher IRR b/c your equity needs to grow at same rate of IRR in order to sustain that IRR of 20%+

– HIGH EXIT MULTIPLE (say, 10x): you are selling at a strong multiple and as you de-lever and build equity your IRR raises initially, but as the TVM comes into play and your %change in equity can't keep up with the high IRR, your IRR begins to decrease

– Super long-term IRR is equal to TEV growth rate which is tied to revenue growth and EBITDA margin expansion (COGS/SG&A improving) b/c after you fully pay off ALL debt, your Equity Value and TEV grow in lock-step to revenue growth rate; however, technically cash balance is growing due to interest income (slight compounding effect) so equity value grows slightly slower than TEV Read More

RE: Monthly Model Balance Sheet Drivers
We would still use the same formula except instead of 365 days, use the
actual number of days in the month because your cogs and sales and sg&a figures are monthly now. Balance sheet figures are still end of period.

Re: CLOSING aDJUSTMENT
Dividends (or lack of dividends) are already reflected in the capital structure, from the Cash portion of Net Debt. Thus, if there's excess cash available, then it already increases the Equity Value that the sellers get. Working Capital adjustments are usually minor and supposedly already incorporat... Dividends (or lack of dividends) are already reflected in the capital structure, from the Cash portion of Net Debt.
Thus, if there's excess cash available, then it already increases the Equity Value that the sellers get.
Working Capital adjustments are usually minor and supposedly already incorporated into the "excess cash" portion.

Term Sheets, IOIs (Indications of Interest), LOIs (Letters of Intent) and certainly PA (Purchase Agreements) should all spell out the terms and capital structure assumptions.

Adjustments: Let's say we want a minimum of 30 days expenses. So if total expenses are $120, we want 1 month of working capital (that is $10).
Thus, Net Current Assets less Current Liabilities must add up to $10. Let's say it's only $5. That means that we need another $5 in cash to get to the required $10.
If there's $20 of cash on the balance sheet, that means $5 is locked up (for our working capital requirement) and excess cash is $15.
Note that Net Current Assets does NOT include cash and that similarly, Current Liabilities excludes debt related items.

The $15 excess cash goes into your Net Debt calculation (Total Debt less Excess Cash) which is part of your Enterprise Value vs. Equity Value calculation (take our Corporate Valuation class for further elaboration on this, too much to explain here).

Now, say that prior to the deal, shareholders dividended $10. Well, according to your terms, because you specified $15 excess cash and now there's only $5 excess cash remaining after the $10 dividend, then that alters Equity Value and net payment. The key is that you're SUPPOSED to specify the terms (i.e. you can't touch the cash, etc).

Now, on Working Capital adjustment: let's say an Accounts Payable was paid or Accounts Receivable was received, then since that's part of ordinary day-to-day operations (hence, Working Capital), you make the minor adjustment.

BUT, dividends are FINANCING and CAPITAL STRUCTURE related! Read More