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

Re: Options Exerciseable versus Outstanding - Complex LBO
Vested means that the employee must usually stick around to get the right to exercise the options. For instance, if an employee receives 100 options but it vests pro-rata over 4 years, that means after the first year, the employee can only exercise 25 options (exercisable) although all 100 options a... Vested means that the employee must usually stick around to get the right to exercise the options. For instance, if an employee receives 100 options but it vests pro-rata over 4 years, that means after the first year, the employee can only exercise 25 options (exercisable) although all 100 options are outstanding. If the employee leaves after that first year, they lose the the remaining 75 options. Read More