RE: Quick & Dirty Basic LBO Model: Modeling Private Cos
The ramifications for a private company vs a public company are very similar - the major difference is that there is no EPS and Shares Outstanding. Thus, to "fudge it", you could assume that there is one Share Outstanding or, better yet, to be more precise, you would use Net Income => so instead ... The ramifications for a private company vs a public company are very similar - the major difference is that there is no EPS and Shares Outstanding. Thus, to "fudge it", you could assume that there is one Share Outstanding or, better yet, to be more precise, you would use Net Income => so instead of P/E, you would use Equity Value / Net Income per the courses.

In addition, for an LBO of a private company or a subsidiary (treated the same), the biggest change would be to drive the value of the offer price to be based on TEV/EBITDA as opposed to percent premium over current stock price (which doesn't exist). Everything else stays the same => you would still have TEV and Equity Value, just not Stock Price. Thus, there is no concept of "number of shares" or "nominal value"; you simply use TEV as the starting point and work the opposite direction on the capital structure.

For a large corporation wishing to divest a business unit with no legal entity, the parent company would have to first create a legal entity or structure it as an asset sale. There is never "no equity" - there is always a cost basis somewhere (both GAAP equivalent of Shareholders' Equity and tax basis for tax treatment). Read More

Re: Gain on the disposal of assets, in CFO or CFI on CF?
Traditionally, our understanding of an asset sale is that the net book value of the disposal goes through CFI and the gain/loss is on the Income Statement via Net Income and thus, the gain/loss is through CFO. Any non-cash gain/loss would then be listed under the non-cash items portion of CFO. Howe... Traditionally, our understanding of an asset sale is that the net book value of the disposal goes through CFI and the gain/loss is on the Income Statement via Net Income and thus, the gain/loss is through CFO. Any non-cash gain/loss would then be listed under the non-cash items portion of CFO.

However, with the convergence of US GAAP to IFRS, there is a choice to recast and put the entire portion of the sale (book value and the gain/loss) through CFI. As such, you'll see an adjustment out of CFO (since gain/loss since hits IS and NI) and reclassified into CFI.

In either case, depending on what you're trying to do, the figures are provided so you can recast however you want. Read More

Re: IRR>WACC, chose this project?
not necessarily, i.e. market share grab is for bragging rights. the revenue /profit / cash flow would have been included, yes, but it is a non-financial decision.
clarify if company WACC. if project WACC is different then potentially leads to different decision (see our Finance 101 course).

RE: Tax-effected EBIT vs EBITDA for DCF terminal value
In a DCF, for the perpetuity growth rate method of calculating terminal value, CF*(1+g)/(r-g), what would be the proper term for "CF"? One should not use EBITDA since it is merely a proxy for cash flow and does not properly estimate Free Cash Flow to Firm. EBITDA rightfully is before the effects of ... In a DCF, for the perpetuity growth rate method of calculating terminal value, CF*(1+g)/(r-g), what would be the proper term for "CF"? One should not use EBITDA since it is merely a proxy for cash flow and does not properly estimate Free Cash Flow to Firm. EBITDA rightfully is before the effects of capital structure and leverage in that it is pre-interest expense but you still have to pay taxes!

Free Cash Flow to Firm might sound like the correct term to use for the "CF" at first glance, but if one is to use the perpetuity growth formula, which is a theorhetical concept, then following pure theory, Capex and depreciation net out over time and the changes in working capital are so negligible (by definition, very low growth) that the three terms cancel out, effectively, left with "Tax-Effected EBIT" as the correct term to use for "CF". In other language, "Tax-Effected EBIT" is also known as NOPAT (Net Operating Profit After Tax).

Do note that there are other sources out there who disagree and argue that if one is to use "Tax-Effected EBIT" then the denominator should be simply g and not (r-g), although I don't agree with that.

If you have the growth rate, the Implied EBITDA multiple would simply be the Terminal Value / Terminal Year EBITDA. Read More

Re: does the idiosyncratic risk of the company change?
Tricky question. Since firm specific risk is defined as total risk (sigma or standard deviation) less market risk, as the total risk of individual stock changes and assuming market risk stays constant (since we only update market risk premium once a year when Ibbotson publishes their updated Marke... Tricky question.

Since firm specific risk is defined as total risk (sigma or standard deviation) less market risk, as the total risk of individual stock changes and assuming market risk stays constant (since we only update market risk premium once a year when Ibbotson publishes their updated Market Risk Premia report), then the idiosyncratic risk would in theory change.

However, generally speaking we don't care for idiosyncratic risk since it doesn't belong in a well diversified portfolio. This concept of CAPM and risk doesn't apply in an LBO context since the cost of capital of the equity sponsor (i.e. private equity firm) is not calculated using CAPM, but rather, the required return of private equity firms. Read More