Re: Merger modeling - Purchase price allocation
The trx costs are allocated 100% to trx costs and GW. Since we chose the base of the %ages to be applied to the excess, don't allocate any trx costs to intangibles etc. Yes, correct. One should account for the grossed up DTL specifically due to any FMV. We didn't do that on our model since it was a... The trx costs are allocated 100% to trx costs and GW. Since we chose the base of the %ages to be applied to the excess, don't allocate any trx costs to intangibles etc.

Yes, correct. One should account for the grossed up DTL specifically due to any FMV. We didn't do that on our model since it was a bit too advanced and so we had to pick and choose balancing content vs. general confusion. Read More

Re: Manufacturer With Captive Finance Co.
We would model out the businesses separately to achieve separate financials and then obviously consolidate them at the end. For valuation purposes, we would to sum-of-parts on the businesses. Think of GM and GMAC back in the day - split them separately and treat GMAC as arms length, third party, and... We would model out the businesses separately to achieve separate financials and then obviously consolidate them at the end. For valuation purposes, we would to sum-of-parts on the businesses. Think of GM and GMAC back in the day - split them separately and treat GMAC as arms length, third party, and then consolidate because its still under same parent. Read More

Re: Core Model DCF - terminal cashflow
This is explained in our Basic FM course in the DCF section. Pls view the other posts in the valuation topics (or search for more info). In short, CapEx and D&A cancel out over time for a mature company and we assume minimal changes to WC.

Re: Merger modeling - Merger IS
1) You could definitely. However, since we were clear in making sure the term on Merger Summary is greater than the length of the 5 yr model, then we didn't bother. On a real deal, you would also have 1st yr debt financing fees and differences of Book and Tax depreciation. 2) Assuming you are takin... 1) You could definitely. However, since we were clear in making sure the term on Merger Summary is greater than the length of the 5 yr model, then we didn't bother. On a real deal, you would also have 1st yr debt financing fees and differences of Book and Tax depreciation.

2) Assuming you are taking about row 41 of Merger IS, we did update EBITDA to include. For instance, in F41 (which gets Ctrl+r'ed), it is:
=F32+F49+SUM(F25:F28)

3) Yes you are correct. To be consistent which our prior models and classes, one should NOT include amortization of trx debt financing fees in our EBITDA. Thank you for pointing that out. Read More

Re: TEV and negative net debt clarification
You are confusing the concept of Equity Value/Enterprise Value with DCF. WACC is used in the DCF because it is discounting cash flows to the entire firm (vs cost of equity and Equity Value). Once you arrive at your DCF value (TEV as of today), you're done with DCF. No more reference to WACC. Then... You are confusing the concept of Equity Value/Enterprise Value with DCF.

WACC is used in the DCF because it is discounting cash flows to the entire firm (vs cost of equity and Equity Value).
Once you arrive at your DCF value (TEV as of today), you're done with DCF. No more reference to WACC.

Then, 2ND and DISTINCT conversation and train of thought is: how to go from TEV to Equity Value.

In the case of Microsoft or Apple, in which they both have massive amounts of CASH and little to no debt, it is indeed Net Debt is negative and TEV is less than Equity Value. Think back to the Corporate Valuation video and the quick example of $100MM purchase of a company with $10 of cash on the books. TEV is $90. Recall that Equity Value is an IMPLIED term, derived off TEV, when doing valuation. In short, you care about the SIZE of the pie, not how the pie is divided up among current stakeholders (of which equity shareholders is but only ONE stakeholder).

A THIRD concept (also distinct) is the idea of optimal capital structure and as we phrase it, "opportunity cost of capital". Please refere to the Share Repurchase video under your Exhibit videos at the bottom of your courses. That is altogether a different concept, again, distinct and separate from the first two concepts. You have to refer to our LBO Overview course (or Advanced LBO Modeling course) on the full explanation of "adding value" via capital structure changes in an LBO (in summary, "building equity value via internally generated cash"). The financial sponsor in a levered transaction is adding value to the EQUITY not the enterprise, an important distinction.

Hope that was helpful. Read More