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Discount rate unwinding
When i do a DCF model and used a discount rate of 15%, I generated an equity value say 100 dollars. As we move into next year, I need to adjust my discount factor, making year 1 into year 0, my equity value will be increase to 113. My question is how come my equity value is 115, shouldn't my equit...
When i do a DCF model and used a discount rate of 15%, I generated an equity value say 100 dollars. As we move into next year, I need to adjust my discount factor, making year 1 into year 0, my equity value will be increase to 113. My question is how come my equity value is 115, shouldn't my equity value increase by my discount rate, which is 15% as my discount rate unwind? thanks
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by Mandy L.
added 5 years ago
Beta for Cost of Equity
Hello WST,
I understand that many have access to Bloomberg terminal at work or in school so getting beta for a particular stock is not an issue. However, would you have any recommendation for those who don't have Bloomberg and need beta to calculate cost of equity for a particular company? For ex...
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DCF Mid-Year Convention
Hello WST,
A quick question, would you recommend using mid-year convention for DCF because obviously firms don't normally receive all its cash at the end of the fiscal year? Many thanks.
A quick question, would you recommend using mid-year convention for DCF because obviously firms don't normally receive all its cash at the end of the fiscal year? Many thanks.
DCF Correct Time Period inputs
Hi WST,
I have a not so smart question, let's say I am making a 5 year projection (2018-2022) for DCF analysis to calculate a company's implied stock price. Now, the company just releases its latest financial statements. So should I use the latest financial figures to calculate, say, net debt, an...
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Warrants
Why do companies issue warrants? Do warrants usually have a premium price over the current market value? if yes, why is that?
Stock rights offering
Why is that the stock price normally gap down after ex rights date? What seems to be the logical reason for the price adjustments?
Hedging Instruments and TEV
Hi, is there ever a case when you would add/subtract the fair value of hedging instruments when getting to enterprise value from equity value?
Question on interest income impact on FCFE and valuation
I have this company with no debt and high cash pile.
(1) In the FCFE calculation = FCFF - (int x (1-tax)) + net borrowing; I will need to add back interest expense * (1-tax). But in my Co case with high cash pile, do i add back interest income instead?
(2) when determining the value per shar...
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Accounting question on
A company invest in a target and obtain 40% stake for 120mn. So the target is valued at 300mn.
6 months later, the company is increasing its stake in the target from 40% to 60%.
The announcement read:
"The increased stake will take effect following a share capital increase, whi...
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Free Cash Flow to Equity
Would increase in debt (refinancing) in a year increase free cash flow to equity in that year?
Seasonal Working Capital
How should a working capital target be chosen for a business that has seasonal net working capital (for example, every year a company must build up inventory and its suppliers do not take credit, or bonuses for employees are paid at the end of each fiscal year). From what I have seen, many practitio...
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FCFF - Unlevered Free Cash Flow
Hi, I took a class last time regarding corporate valuation and there was a discussion on calculating unlevered free cash flow, where we deduct capex (and we do not add borrowing for that year). What should we do if the company borrowed a huge amount of cash for capex that year? Should we really have...
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FCFF (Unlevered Free Cash Flow)
Hi, when calculating unlevered free Cash Flow, we are deducting capex from the cash flow of the company, but net borrowing is not added. What if the company borrowed money to finance the capex? so for valuation purposes, for that year, FCFF will be negative. Is there a way to correct for it? Thanks...
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Exit Transaction Fees & IRR/MOIC
When doing an LBO model, if you assume a certain amount of transaction fees the sponsor will have to pay at exit, should you account for these in the MOIC/IRR that you calculate in your LBO analysis?
Thanks for the help!
Thanks for the help!
Beta Benchmark - Canada vs US
I've seen some beta benchmark questions here, but just to be explicit: if there is a mix of US and Canadian companies, do I benchmark the Canadian off of SPTSX or SPX? Thank you!
IPO Valuation
I am trying to value a company for an IPO (proceeds strictly used for expansion, not for the existing shareholders to exit), using DCF (on the FCFF). I have done financial forecast on the company, taking into account the improved performance after it receives new capital from the IPO. After I deriv...
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TEV and ¨significant¨Cap/Op Leases
Love the videos! Could you provide some additional clarity to the airline/truck/rail exception for calculation of TEV in the Op/Cap Lease context? I can think of many industries/companies, outside of the three exceptions given, that pay significant amounts (depending on your definition/thresholds) f...
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Ibbotson Equity Risk Premium
Understood in the class that Ibbotson's sheet on Equity Risk Premium (ERP) will be made available in the Forum, may I know how can I find it please? Thanks.
If whole sheet cannot be shared, may I know the latest ERP (2017) for Philippines please?
If whole sheet cannot be shared, may I know the latest ERP (2017) for Philippines please?
BS line item treatment for determining TEV
If a company lists restricted cash not for working capital purposes, but instead for covenants adherence, would you be allowed to subtract it in the TEV like normal cash? Also, what is the difference between Investment in Unconsolidated Affairs (asset side) versus minority interest (on the liability...
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Mutual Fund Taxes
If you're invested in a mutual fund, how does the rate at which the mutual fund churns affect your taxes? In other words, when paying taxes on a mutual fund, does it matter how long you've been invested in the fund (more than a year and you're taxed at capital gains rate instead of ordinary income t...
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Diluted Shares Outstanding - Market Cap
Hi, would you ever measure market cap using the current share price and the treasury method (but using options outstanding instead of options exercisable)?
Two different NPV
I have tried to reconcile two methods to calculate the NPV of a project. In theory, both should normally lead to the same result. However I have obtain two different outcomes. I am looking at a project which is 100% debt finance. Loan principal repayment is made quarterly. At the end of the investm...
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Perpetuity Growth Method
Why do we use tax effected EBIT instead of using unlevered free cash flow to calculate TEV when trying to back solve implied ebitda multiple in a DCF? Thank you
Crude Inventory Product Financing Arrangement
In a product financing arrangement with a crude trader, there is a free 30-day and another extended credit 30-day to match the inventory cycle of 60 days. The first 30-day is free while the last-30 days is not. So the last 30-day is an interest-bearing payable. Economically and legally, the trader s...
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Gain/Loss on Derivative for Oil & Gas Company
For oil and gas companies, should we not adjust out gains/losses on derivatives that are used for hedging purposes given that such companies engage in such transactions consistently?
TEV
Is this a good formula?
Cash or Normal net working capital + Enterprise Value + Non-operating assets = Long-term liabilities or long-term Debt + Minority Interest + Equity + Non-operating liabilities + unfunded pension liabilities + preferred shares
wherein:
"Normal" net working capital = Curren...
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Growth Rate Math
Hi there, if a company is trading at 20x forward earnings projections, and if one assumes a post-growth ("terminal") earnings multiple of 15x and a required rate of return of 7.5%. How do you determine the implied 5 year growth rate??
Capital Lease Discussion
Hi, I have read through the capital explanations but am still somewhat confused. Why do we not include capital leases as a form of debt? From what I read, you said "Capital leases are capital leases b/c the accountants said so. Else they would be operating leases and off-balance sheet." By this, do ...
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Comparable companies analysis
My subject company is a private one going to IPO. Let's say I have concluded the industry average P/E and am going to calculate subject company's implied market cap. Is this market cap considered pre-money or post-money? Because if that is a post-money market cap a.k.a. enlarged share capital, the o...
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Equity value derived from DCF
At the end of DCF model, when I have the implied enterprise value, deduct net debt and finally get an equity value, is this considered a pre-money equity value? Should I add back IPO offer size to get a post-money equity value?
WACC
1. When calculating cost of equity (in order to derive WACC) by CAPM, which country's risk free rate and market risk premium should be adopted? Let's say it's a Korean company doing most of its business in Korea, going to list in HK, but reporting currency is USD...
2. Following last question, whe...
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EV/EBITDA vs. P/E
Why can't EV/EBITDA multiples be higher than P/E multiples?
Derivative Assets for E&P Companies
When modeling an E&P company and the derivative assets listed on the balance sheet are expected to be monetized in the projection period, do we decrease the derivative asset balance to zero and run the figure through the income statement for the related period? And then project zero for the derivat...
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Cash
Do we separate cash into operating cash or excess cash? or treat all cash as excess cash?
Risk Free Rate (what to use)
Often times, we are asked to use a risk free rate for the CAPM. I have always been told to use the 10 year Treasury bond for the RFR, what is the proper rate to use and why?
One time items?
There are a few items that I've been seeing on the income statement that I am trying to determine whether it should be removed for the purpose of calculating a normalized EBITDA, can you please explain why some of these items should or should not be included?
FX Gains/Losses
Gain/Loss on sale of...
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Capital and Operating Leases
I am curious if you guys have an opinion on leases and there role in valuation: Do you make adjustments for op leases in EV for multiples? Do they make an impact on your comparison to other similar companies that use cap leases instead? Do you count them in EV in general? Thank you.
Weighting trading multiples
I am currently looking at a public company that focuses on a very nice area where there aren't a lot of other public companies that do the same thing as their core business. I'm able to only generate two companies and would like to ideally include five. I have added 3 other comps that have a small p...
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Target D/E Ratio for WACC
Without asking company management, how do you determine the optimal D/E ratio for the purpose of calculating weights for the WACC?
Target D/E ratio for WACC
Without having to ask management, how do you determine the optimal D/E (D/A or E/A) ratio for calculating a company's WACC?
Restricted Stock Units/Equity Compensation Plans
Should RSUs be treated the same way as options outstanding when it comes to calculating diluted shares outstanding? If so, should we look at the "Granted", "Vested," "Forfeited/Cancelled" or "Nonvested" (ending balance).
Also do we use the "Weighted Average Grant Date Fair Value" for exercise price...
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Selling Receivables
I have a question regarding adjustments to EV/EBITDA when a Company sells receivables. The following is the scenario,
There are three comps that you're evaulating EV/EBITDA. Two of the companies have 20m in cash on their B/S and does not sell their receivables for financing reasons. The third com...
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Forecasting Tax Rate
How would you forecast the tax rate for a company?
For example, if the statutory tax rate was 40% for the last three years, and the effective tax rate for the last three years were 20, 21,22% What tax rate would you use in your forecast and why? Can someone please explain this to me, perhaps usin...
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Ref Range Issues
My company is basically without a direct comp. It sits between movie theatres and studios. I have 4 comps and will add another. All data used were taken from CapIQ.
Per Public Comps, all but one of the calculations (Forward EPS*2014E) yields values that are all over the place and, in some cases, ...
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Multiples
This thread should be much shorter than the last . . .
I have a transaction (intrinsic value) model going on here. I've used annual, historical data exclusively (2011, 2012, 2013). My first forecast year is 2014. The company reported 1Q14, so LTM data exists. I need to use multiples for my ref ra...
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Treatment of Revolver as Debt for TEV
I wanted to ask your view on a discussion we had here at the firm. The topic was how to calculate the Net Debt of a company for the purpose of subtracting it to the enterprise value and getting to a purchase price.
The firm is a small growing company with approximately 1.6m in Accounts Receivabl...
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Very quick question
I know this isn't your specialty, but what major database do the majority of the banks use for Transactions Comps? ie. CapitalIq, Thomson SDC, etc? If a company were to subscribe to one what would you choose?
Convertible Debt Adjustment
In the Complex Trading Comps example, Costco has zero-coupon convertible subordinated notes due in 2017 with face value of $900M and a max shares convertible of 9.4M. However, in the 10-K it clearly says that $329.M in principal amount has already been adjusted, yet in explaining how to account for ...
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startups
Can you provide some guidance on valuing startups?
FCFF calculation & WACC
Hi Guys,
I have a few questions that i would like your opinion on.
1. On the DCF Analysis we calculate NOPAT after we subtract from EBIT the Cash Taxes (i.e NOPAT=EBITx(1-Tax rate)). Now let's assume that the company has retained losses carried forwmard which will not turn positive for the 5...
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R&D Expense and Capital
Hi WST,
I am analyzing an ODM TECHNOLOGY company and trying to build an integrated projection. From reviewing its financial reports, it has, say, $8m of R&D expenses on the income statement and $12m of investment cash outflow of Product Development; it also has an intangible asset account for P...
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Deferred Maintenance Revenue treatment for TEV
I have a question regarding how to treat Deferred Maintenance Revenues relating to maintenance fees earned by a company for software licenses in terms of calculating the Equity Value of a Company. Normally, the Equity Value = TEV + Cash less Debt. However, should the Deferred Maintanence Revenue...
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DCF - FCFF time horizon and excluding Terminal Value
I am working on FCFF and I have wondering if we take a longer period and don’t include the Terminal Value for future calculation and discount it back, is that correct method? As we know that most of the value come from the TV, the stock price is too high, is that appreciate to do it like that.
Is DCF a pre- or post-tax value?
Does the dcf generate a pre or post tax value? Clearly after tax, because you use nopat in the interim years.
But if you use the terminal mutiple approach, you're not tax effecting ebitda, so isn't that apples to oranges, ie when comparing after tax interim fcf vs. Pre tax terminal value?
But if you use the terminal mutiple approach, you're not tax effecting ebitda, so isn't that apples to oranges, ie when comparing after tax interim fcf vs. Pre tax terminal value?
DCF Valuation Date
Lets say you’re doing a DCF of a target company, to calculate standalone equity value per share by taking DCF EV minus net debt, divide by S/O.
Let’s say the latest net debt info you have is as of 12/31/07 10K.
But, we’re past 12/31/07. it’s already late February. The transaction would b...
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WACC tax rate adjustment for bea
Hey Hamilton, got a quick theoretical question for you re the WACC and delevering beta: is there any theoretical defense for assuming that all of the comps’ betas get delivered assuming a standard 35% tax rate? Or do you have to delever comps’ betas using each company’s individual tax rate? I...
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Net Debt and Working Capital
Net debt includes all debt - short and long-term less excess cash. The revolver is often an operating line secured by accounts receivable. I have seen analysts calculate net debt as long-term debt net of working capital surplus/deficiency. Is this correct?
When I want to use an EBITDA multiple ...
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Free Cash Flow Tax Adjustment for Depreciation
When estimating free cash flows for a valuation, every reference I have explains to add back depreciation & amortization to NOPAT. I know that this is because the D&A cash flows are only book implied. However, at what point do you adjust cash flows for the real effect of the tax shield t...
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Original Issuer Discount
Got a quick question for you re OID: am I correct to assume that it works as follows:
I borrow $100 from the bank (with a 5 year maturity), but it has a 25% OID. So, I only get $75 in cash. So, my balance sheet would show: 75 increase to cash, 100 debt liability, and 25 current asset of OID. Let'...
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TEV and negative net debt clarification
I attended both the morning and afternoon sessions yesterday in Chicago. I was reviewing the work we did later in the evening and noticed that two of the retailers used in the template had negative net debt. This resulted in a TEV which was less than the equity value of the company. What is th...
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Diluted Shares Outstanding for Equity Value
I have got a question related to Diluted Shares Outstanding that you may be able to help me with.
Why should we include the diluted figures when calculating Market Equity Value for Trading Multiples analysis? Because my interpretation is that when these options or covertibles were excercised the...
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Levered vs. unlevered beta for cost of equity
My question relates to the appropriate use of levered vs. unlevered beta in deriving the cost of equity in a free cash flow to the firm and free cash flow to equity analysis.
I have read conflicting information on the subject.
Is it appropriate to use unlevered beta to calculate the cost of ...
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Deferred Acquisition Costs for Life Insurance Companies
I am trying to value diversified insurance companies using market multiples. When you have the "amortization of deferred policy acquisition costs" for life insurers, should I treat it as a cash expense, not as a non-cash amortization charge it ostensibly is?
This issues arises becuz we're compa...
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Forex Gains (losses)
Hi WST,
I understand that if, say, a US company with functional currency of USD and issues debt denominated in a foreign currency then each quarter the company will need to adjust the debt with foreign currency exchange gains (losses) on the balance sheet and income statement. Now, I am curious if ...
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Correct benchmark for beta
I'm a buy-side equity analyst at a European bank that has an equity portfolio of only euro zone stocks. In my valuation models, namely discounted cash flows, to arrive the WACC of a specific stock I use the Beta of the stock versus a European benchmark (I use Dow Jones Eurostoxx 50 index) with daily...
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Effective vs marginal tax rate for FCFF
I have taken the on-line courses (Advanced Fin model - core model and the enhancements) and I still have a doubt that you may be able to help me with:
- Not specifically talking about our case (WMT) but: Should anyone use the effective tax rate to calculate the tax-effected EBIT when calculating...
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WACC of a private company?
Hi WST, I understand that in calculating WACC, we should use the "market" value of equity and debt of an enterprise to derive the % of equity and debt weight. However, what happens if the enterprise is a private company; then, where can we obtain the proper % of equity and debt weight for the priva...
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Stock Based Compensation
I have some questions relating to stock based compensation expense. I am doing a valuation of a company using DCF and Comparable Company analyses and SBC expense has raised its ugly head.
For our comparable company analysis, while all analysts seem to be submitting their EPS figures on a GAAP bas...
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Tangible Book Value for Insurance Companies
We're calculating the multiples of the public companies (in 1986) so that we can select a multiple for our subject company (private). In that case, I've been told that the multiple to use is the Tangible BV. In other words, BV minus intangible assets minus DPAC. However, this DPAC is such a large...
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CAPM alpha risk
Should we include alpha risk in calculating CAPM? If, yes, what should be included?
Correct Net Debt for TEV
First of all I would like to thank for a great website for learning.
I have problem in defining net debt thereby getting a true value of TEV. I have found and heard many definitions of net debt, these are some of them:
a) interest-bearing debt less cash & cash eq
b) LTL + short...
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Adjusting historical financials for non-recurring/XO items
I have a technical question related to the impact on taxes when adjusting historical financials for non-recurring/extraordinary items that you may be able to help me with. Let’s take a generic example:
EBIT => $ 300
Interest => ($ 1000)
Pre-Tax income => ($ 700)
Taxes => $ 200
...
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DCF Terminal Value Discount Period
Hope you’re well. got a technical question for you: re the DCF: should the terminal value as per perpetuity growth rate method be discounted back at the same time period as the terminal multiple approach?
Ie, doesn’t FCF * (1+g) / (r-g) = present value of terminal value, as of 1 year after the ...
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Reference Range (Corporate Valuation)
Hi,
In the Reference Range sheet, how are the reference ranges be calculated? However, I understand how I can calculate each implied enterprise value, implied equity value and implied price per share.
In the Reference Range sheet, how are the reference ranges be calculated? However, I understand how I can calculate each implied enterprise value, implied equity value and implied price per share.
Valuation of fair market value of debt converting to equity
Question....
How do you fair maket value debt that is converting to equity post a bankruptcy? Meaning, the senior lenders are goign to have all of the equity post restructuring and you're trying to figure out the value of the equity day 1 of chapter 11 emergence...
Here's what I know so far..
(...
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Oil and Gas Valuation
Ware there any rules of thumbs for valuing oil and gas reserves in the ground on both P1, P2 and P3 bases? Such that there are 100m barrles in the ground, what is it worth? Are assumptions made on how is extractabel etc? Same things for gas.
Would appreicate a rule of thumb as well as overview ...
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Tax expense for terminal year
Hi WST,
If a company enjoys a tax reduction for whatever the reason for, say, our project years (5 years). Should we adjust the terminal year tax expense to the normal level in order to obtain the correct terminal value? EX, the effective tax rate for t+1 till t+5 would be 10%; however, it would ...
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A quick question about TEV
In advanced modeling session, Hamilton uses tax-effected EBIT, instead of Free cash flow to firm, to calculate terminal enterprise value (TEV=EBIT(1-tax rate)(1+g)/(WACC-g), but almost all texts use FCFF in numerator).
Given EBIT not including capx or working capital, how would this argument be ju...
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Why is minority interest NOT included in M&A analysis?
Full Question:
I believe you characterized minority interest as a quasi-financing for earnings (which seems similar to interest-bearing debt). Therefore, it would seem that I should include minority interest in my enterprise value calculation.
I believe you characterized minority interest as a quasi-financing for earnings (which seems similar to interest-bearing debt). Therefore, it would seem that I should include minority interest in my enterprise value calculation.
Please elaborate why cash is deducted from enterprise value.
Full Question:
Please elaborate why cash is deducted from enterprise value. I always have performed this calculation because I presume the acquiror will use the cash to finance the deal.
Please elaborate why cash is deducted from enterprise value. I always have performed this calculation because I presume the acquiror will use the cash to finance the deal.
Corporate Valuation: Nuances on these methodologies
Hi there,
I have a couple of doubts in relation to this module:
(1). Could you please explain in more detail why capital leases are excluded (I watched that part twice and didn't really get it)? If we had a leasing finance (a credit line w/ a commercial bank) would we include it in the EV calc...
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Goodwill
Hi WST,
Quick Question: should option proceeds be deducted from purchase price to calculate the goodwill?
Many thanks.
Quick Question: should option proceeds be deducted from purchase price to calculate the goodwill?
Many thanks.
How do you factor net operating losses (NOLs) in valuation?
Full Question:
How do you factor net operating losses (NOLs) in valuation? I try to determine the NOL present value and add it to the enterprise value. This approach is very speculative, so I try to exclude NOLs from my valuation analysis unless I feel fairly confident the company/acquiror could us...
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Corporate Valuation Methodologies: about the case study
Hi there, a couple of questions here on the case study:
(1). In the DCF page, how can you figure out these different diluted shares O/S if what you are trying to calculate (the price per share) is the input for our treasury stock method calculation for diluted shares O/S?
(2). In slide 42 (WAC...
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Why arent lease payments considered future debt obligations?
Full Question:
What is the rationale for not placing lease payments in the category of "future debt obligations" on your analysis sheet?
What is the rationale for not placing lease payments in the category of "future debt obligations" on your analysis sheet?
For the WACC, should I use YTM or coupon for cost of debt?
Full Question:
For the WACC, should I use YTM or Coupon rate for the before tax cost of debt? I guess coupon rate, because the YTM can change if the bond is putable,callable,exchangeable,convertible etc.
For the WACC, should I use YTM or Coupon rate for the before tax cost of debt? I guess coupon rate, because the YTM can change if the bond is putable,callable,exchangeable,convertible etc.
Advanced Valuation Modeling: Share repurchase
Hi,
I'm not understanding this small thing:
When the company buys back shares, what happens to them - does the company just "destroy" them so that the s/out decreases, or does the new owner get the dividends now? If the latter, why would dividend payout decrease?
Basically, what happens to sh...
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CLOSING aDJUSTMENT
Hello,
I had done a valuation for a buy-side transaction based on discounting free cash flows to firm. Now, five months later we are trying to close the transaction.
However, many things have changed in the company including cash balance, debt level, and working capital. Also, during this period o...
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What do I do for beta of a company if there is no beta?
Full Question:
If there is no beta for a company, then can I regress the company's excess return (to its sector market index) to the sector market return? Should I use 1 year or 5 year (1 whole business cycle) data? I know that Beta instability can be a problem.
If there is no beta for a company, then can I regress the company's excess return (to its sector market index) to the sector market return? Should I use 1 year or 5 year (1 whole business cycle) data? I know that Beta instability can be a problem.
Please clarify if any value is gained by buying back stock-1
Full Question:
It has been said that holding cash isn't necessarily bad for a company. My belief is that the company can repurchase shares, therefore increasing their debt/equity ratios. Higher debt = higher tax shield so the value of the company is greater. Now, theory says, that's not true becaus...
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Please clarify if any value is gained by buying back stock.
Full Question:
So I understand your example. But my understanding is that M&M proposition II says that in a world with taxes, increasing debt means increasing the value of the firm or Enterprise Value. In the examples you provided me, the enterprise value of the firm stayed constant. I'm saying...
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Free Cash Flow to Firm vs. Free Cash Flow to Equity
Full Question:
When calculating free cash flow to equity, we adjust the capex+working capital+depreciation numbers so that it represents only the equity portion. That makes sense because the equity shouldn't be responsible for all the cash outflows of the firm. However, when I think about the physi...
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Do you include pension liability in firm value?
Full Question:
Do you include the effect of pension liability in firm value (enterprise value or equity value)?
Do you include the effect of pension liability in firm value (enterprise value or equity value)?
How is the WACC - cost of debt affected by a tax benefit?
Full Question:
I have a question regarding cost of debt calculation. If a company has a tax benefit rather than the usual tax expense, then how is the after tax cost of debt calculated?
I have a question regarding cost of debt calculation. If a company has a tax benefit rather than the usual tax expense, then how is the after tax cost of debt calculated?
ROE vs Revenue as stock return predictor
Full Question:
On the attached exhibit, chart one plots revenue vs. return, and chart two plots ROE vs. return.
The questions are:
What are the flaws in just using Revenue? My guess: Does not capture expenses or profit margins.
What are the virtues of using ROE? My guess: Captures both ma...
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Do you need to adjust EBITDA for non-cash items?
Full Question:
When calculating a comp’s EBITDA for valuation-related purposes, do you adjust for all items of a non-cash nature – specifically stock-based compensation expense, LIFO inventory adjustments and pension/OPEB expenses? Or, do you have to pay respects to the fact that EBITDA is a mi...
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Maintenance capex vs capital expenditures revisited
Full Question:
Should capital expenditures that are not purely maintenance capex be reflected in the cash flows as an outflow of cash as long earnings from that investment are reflected in the EBIT?
Should capital expenditures that are not purely maintenance capex be reflected in the cash flows as an outflow of cash as long earnings from that investment are reflected in the EBIT?
Cost Accounting vs Equity Accounting
What is the difference between Cost method Accounting Investment and Equity method Accounting Investment?
What is the difference, if any between book tax vs GAAP tax?
Full Question:
A company XYZ has a different book tax versus cash tax. How does that impact their FCF? And if they tell you that their book tax is 25% vs cash tax is 15%, how do you adjust for it in the FCF statements and analysis? Also, what is the difference, if any, between book tax vs GAAP tax?...
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Replacement cost and earning power
I'm looking an industrial company and is required to value the company using their replacement cost to see how much the earning is generated, using that as a benchmark to value another company's on that basis to see its justified multiples. however, i'm not sure how i can get to the replacement cos...
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How to value a company if we do or don't invest?
Full Question:
We are using DCF to value an existing equity investment. The company is planning a capital increase two years down the road. We may or may not participate in the capital increase. My question is how should value our existing equity investment under these two scenarios (whether we ...
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How do convertible bonds affect total capitalization?
Full Question:
Assume we convert all the in-the-money convertible bonds. Would this effect a firm's total capitalizaiton? If, no, then do we simply move the amount of CB from debt to stockholder's equity? Thanks.
Assume we convert all the in-the-money convertible bonds. Would this effect a firm's total capitalizaiton? If, no, then do we simply move the amount of CB from debt to stockholder's equity? Thanks.
Return On Equity (ROI)
Question: why is [color=#FF0000:34q7ajk1][b:34q7ajk1]ROI=g/(1-d)[/b:34q7ajk1] [/color:34q7ajk1]d: divident payout ratio; g: dividend growth rate? How was this equation derived? 
Mechanics of FCFF calculation
Full Question:
I have just started to learn how to calculate FCFF and have an obvious “newbie” question - Can the FCFF be calculated for the current quarter, or past year, without estimating forward? Simply put, is it logical and/or accepted industry practice to look at the current, or past FCF...
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Question on Calculating EBITDA for Healthcare companies
Hope all is well. I’m working on a credit review for a healthcarecompany and was wondering why it is standard practice for companies to leave out charges for in process research and development stemming from acquisitions when calculating earnings from continuing operations. I would think that at...
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Stock-Based Comp adjustment
Full Question:
So the short answer to the question is actually that when companies account for stock-based comp. it is a non-cash charge that should be added back in the CFO area. However, because stock-based comp. must be accounted for by the company as a potential benefit (b/c upon exercise the c...
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WACC for a Private Equity Firm
Consider that a private equity firm is interested in buying a firm and then exiting in three years time.
It's my understanding that, generally, we should be using long-term, 10-yr Treasury bonds in order to gauge risk-free rate. However, in this case since the investment horizon is only 3 years, sh...
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Why is there a holding company discount?
Full Question:
Why in equity valuation is given a discount to holding companies? For example, a company like GE.
Why in equity valuation is given a discount to holding companies? For example, a company like GE.
How do I treat Deferred Maintenance Revenues in TEV?
Full Question:
I have a question regarding how to treat Deferred Maintenance Revenues relating to maintenance fees earned by a company for software licenses in terms of calculating the Equity Value of a Company. Normally, the Equity Value = TEV + Cash less Debt. However, should the Deferred Maintan...
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How to calculate CAPM for emerging markets?
Full Question:
Let’s say you’re valuing a company via DCF and so you need to figure out the target company’s cost of equity via CAPM. You’ve selected your comps, almost all of whom are US-based. But you’ve also got a british comp in there, who is a great comp. let’s further assume that ...
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Complex Trading: adj beta vs raw beta on bloomberg
Hi,
In the video, you explained that adj beta = 2/3*raw beta + 1/3 <- (1 * 1/3)
In the bloomberg screenshot for Walmart, however, I see this equation below the box:
ADJ BETA = 10.671 X RAW BETA + 10.331
How does this relate to the original equation you explained?
Thanks
In the video, you explained that adj beta = 2/3*raw beta + 1/3 <- (1 * 1/3)
In the bloomberg screenshot for Walmart, however, I see this equation below the box:
ADJ BETA = 10.671 X RAW BETA + 10.331
How does this relate to the original equation you explained?
Thanks
Complex Trading: Quick cost of debt question
Hi,
This might be a dumb question but I just need to be clarified:
I know that the risk free rate for equity is 10yr Treasury bill. But the cost of debt (before tax) the yield to maturity of what instrument? Is this always the case or when do we use a different instrument?
Thanks
This might be a dumb question but I just need to be clarified:
I know that the risk free rate for equity is 10yr Treasury bill. But the cost of debt (before tax) the yield to maturity of what instrument? Is this always the case or when do we use a different instrument?
Thanks
Urgent : Historical Betas Database
Could someone please enlighten me if there exist any databases which have historical beta values for companies? Which are the most reliable or popular databases?
Also, while computing the WACCs for a company, we sometimes use peer sets or industry averages for unlevered beta and then find out the l...
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WACC : Historical Beta Values
Could someone please enlighten me as to what databases exist for historical beta values (say past 5 yrs.)for companies?Which databases are considered most reliable?
Also we use peers to find an average unlevered beta value and then lever it to the capital structure of the target company. Is there a...
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Complex Trading: Options schedule in K vs bloomberg
Hi,
1.
I understand using bookvalue for debt as opposed to market value because they're very similar, but is this the same case for options? (I have never used a Bloomberg so I don't know whether bloomberg provides options schedule) Why do we use 10-K if we want the most up-to-date info?
How ...
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Same stores sales on retail business recovery
if i have a set of same store sales growth for a retail company. i'm trying to see if the current recovery in those growth has actually made the sales level back to the pre-crisis level. hence...
i index by putting 100 as 2007's monthly number.
then i multiply that 100 with 1+SSS growth in 2008 and...
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Deal Comps Analysis: Quick model formatting question
Hi,
This might seem like a dumb question, but does it really matter how we structure our models? Because the deal comps inputs doesn't have the "adjust EBIT" etc but the public comps do. Also, I feel a bit uneasy about hardcoding all these "adjustments": in the real working world, shouldn't we ri...
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Deal Comps Analysis: Deal Info Source?
Hi,
Would I be correct in saying that the deal info source (besides the bloomberg printouts) are from the 8K? If not, where is it from?
Would I be correct in saying that the deal info source (besides the bloomberg printouts) are from the 8K? If not, where is it from?
Corporate Valuation: capital lease
Hi
About the capital lease, the instructor mentioned in the lecture, his view of capital lease is not very positive, it shows more debt, less efficient for the asset turnover ratios, however, capitalized also means future depreciation, you can get the tax deduction for the capital lease, perhaps ...
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Cost of Debt Sources
Do any companies provide cost of debt for WACC calculation purpose for the companies? Is there any such database that is used?
Thanks
Rohit
Thanks
Rohit
Negative Free Cash Flow in DCF
I am trying to do a 5 years DCF on an early stage tech company. It will have negative EBIT in next 2 years (also the FCF after the D&A, Capex, NWC adjustment) and becoming positive in 3rd year. So in caculating the Free Cash Flow from EBIT, does it still make send to still use the formula of EBI...
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All Stock M&A transaction...Timing Question
Ex. BofA acquisition of MER. It was announced that BofA would exchange 0.8595 BofA shares for each MER share. This was announced on 9/16/08 so was based on BofA's share price then and MER price then. However, when does the actual exchange occur? BofA's share price has plummetted in the past few days...
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Factoring subsidies into WACC
Hello,
A company I'm valuing gets a significant portion of its financing via government cash grants.
Let's assume they normally spend $150m in capex annually with a 70/30 leverage ratio. With the cash grant, they'd get a 30% rebate off of their capital cost. So now their out-of-pocket capex is $1...
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Discounted EVA approach
I am attempting to apply an EVA (Economic Value-added) approach to measure value creation over a series of years.
I am wondering if you can help validate whether the approach below is sound. The copy-and-paste function does not properly align the #s, but basically i simply multiply averageinvested...
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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...
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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...
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Quick simple offer value question
Hi,
I'm a bit confused on the following matter:
Let's say company X has $50 market value equity and $50 net debt so firm value is $100. Let's say I want to buy company X 100% with no premium (for this example). Am I actually paying $50 for the equity, or $100 for the firm? And to whom am I act...
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Valuing a perpetuity linked to inflation
Hello,
What's the best way to value a perpetuity linked to inflation? I.e. if, for example, there were an instrument that paid a fixed cash flow over 25 years that would adjust in nominal value to CPI, how would you value it? If you simply divided the perpetuity by the discount rate, you'd mask the ...
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When to normalize IS? Always?
Hi,
To my knowledge there are 5 major valuation models: DCF, public comps, deal comps, M&A, and LBO. For which of these, would be normalize the IS just as we did for public/deal comps? And why?
To my knowledge there are 5 major valuation models: DCF, public comps, deal comps, M&A, and LBO. For which of these, would be normalize the IS just as we did for public/deal comps? And why?
Quick cost of debt question
Hi,
In the finance 101 vid, you mention that the cost of debt, in theory, is the incremental marginal borrowing rate - the more one borrows, the higher the risk and thus rate. But we must use the current yield to maturity as the next best answer because the marginal rate is impossible to predict....
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Free cash flow yield
I often see investors use price to free cash flow or free cash flow yield to gauge the attractiveness of a stock. Typically they use market price of the stock vs the FCF/share. However, this seems slightly apples-and-oranges to me, since the price is what the equity holders pay but the FCF is not st...
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net debt and debt to total cpaital
Is the following the correct approach to calculate the following ratios?
Net Debt to Total Capital --> Net Debt/ SE + Net Debt
Debt to Total Capital --> Debt /SE+Total Debt
Net Debt to Total Capital --> Net Debt/ SE + Net Debt
Debt to Total Capital --> Debt /SE+Total Debt
quick question
This question was bothering many people - thought you'd be the only one who would know the real answer.
Should ESO expense be included in DCF or not? We value biotechs on pure cash flow basis, and convert the GAAP oprating income to non-GAAP before adjusting for working capital/capex etc.
DCF c...
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Why use average (industry) beta?
Hi,
I watched the complex trading course as well as the finance 101 and corporate valuation course, yet I still have a question regarding the WACC calculation of the complex trading comps:
Why do we use the average un-levered beta of the industry rather than WMT’s specific beta? I understand why ...
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Valuation Question
If we take the pepsi model you went over for example. once we have taken the PV of unlevered FCF and the terminal value (by taking a multiple to EBITDA), how should we think about the cash and debt in arriving at the equity value? If we had projected the balance sheet out to the terminal value date ...
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Please clarify if any value is gained by buying back stock-2
Full Question:
So I understand your example. But my understanding is that M&M proposition II says that in a world with taxes, increasing debt means increasing the value of the firm or Enterprise Value. In the examples you provided me, the enterprise value of the firm stayed constant. I'm saying...
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Tax-effected EBIT vs EBITDA for DCF terminal value
Full Question:
Why did we use the tax-effected EBIT instead of EBITDA when calculating the terminal value using the perpetuity growth rate? Is this the standard in the business? Also, if we have the growth rate, can we calculate the EBITDA multiple using the following formula: (1+growth rate)/(WACC...
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Incorporating maintenance capex into free cash flow calc
Full Question:
I took your "Corporate Valuation Methodologies" class and was impressed with the quality of the class and hope to take more in the future.
I am struggling to find a valuation procedure that I'm comfortable with. The denominator should be EV. The appropriate numerator, in my view, ...
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Diluted shares vs basic shares for WACC
Full Question:
Should companies ever use diluted shares to figure out WACC (instead of basic shares)?
Should companies ever use diluted shares to figure out WACC (instead of basic shares)?
WACC: market vs book value & what regulated industries?
Full Question:
1) Would you suggest for calculating the WACC (to be used as the discount rate) using the market value of the securities rather than book value in order to determine the weightings for the cost of debt and equity securities?
(2) same question, but...If an industry was regulated (...
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WACC - preferred debt tax deductibility & levered beta
Full Question:
1) Your Corporate Valuation Methodologies course states that Unlevered beta = (levered beta/ (1+(1-Tax rate)x(debt/equity+preferred/equity) - why the denomintors are equity not TEV?
2) The Company Profiles module says assume preferred stock is not tax-deductible which is different ...
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Difference btwn $100 special dividend vs share repurchase
Full Question:
As you know, a company can do a share repurchase, or a special dividend, when they're trying to return capital to shareholders on a standalone basis. Why is it that both a special dividend of $100 and a share repurchase of $100 of stock necessarily results in the same exact pro forma...
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Treatment of converts for TEV
Full Question:
My question is about COSTCO's convertibles. I was familiar with "if converted method" to measure the potential dilutive effects of potential dilution from CFA curriculum. The explanation given in the lecture was quite different. In the video, it was explained that whenever the face v...
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Capital leases - exclude vs include
Full Question:
When COSTCO's debt is being calculated, long-term debt and current portion of long-term debt from latest 10Q are simply added. However, long-term debt includes capital leases and there was no adjustment for that. Is there a special reason for not deducting the capital leases in case ...
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Distressed Credit Overview - Valuation questions
1. Slide 29
a. Where do bank vs bonds fall in this cap structure diagram (unclear)
b. Senior debt
i. Even though it has a 1st or 2nd lien on assets, is it always considered “unsecured” and not “secured”? why – i...
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Price to book
I'm curious whether there is a simple way to determine the "right" Price-to-book ratio for a firm, beyond simply comping said firm to its peers or to its own history. Would simply comparing ROE to cost of equity - i.e. making those two #s a ratio and then finding the ratio factor - be a c...
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Working Capital in FCF for Valaution Purposes
I would like if I may, to get your insight on why Changes in Working capital are relevant to calculating FCF for valuation purposes as I currently hold the opinion that it is largely not and would appreciate your insight.
In calculating Working capital for valuation purposes text books focus on cur...
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Enterprise Value Formula
Hi,
In regards to the enterprise value formula, is the cash component of the formula "[i:2zdp2ksj]excess[/i:2zdp2ksj] cash" or "cash and cash equivalents" on the balance sheet? Please explain. Thanks!
Eric
In regards to the enterprise value formula, is the cash component of the formula "[i:2zdp2ksj]excess[/i:2zdp2ksj] cash" or "cash and cash equivalents" on the balance sheet? Please explain. Thanks!
Eric
IRR>WACC, chose this project?
This is an interview question: why you do a project when WACC is 12% while IRR 10%?
I know one reason is real option that may make it more profitable later on. But what are other reasons, do you know? could you name some?
I know one reason is real option that may make it more profitable later on. But what are other reasons, do you know? could you name some?
does the idiosyncratic risk of the company change?
does the idiosyncratic risk of the company change during the holding period? If so, does the change in idiosyncratic risk affect any calculation with respect to the LBO analysis? Why? If not, why?
Shares Outstanding
Hi,
I have a questions in regards to using the corrects number of shares outstanding. Per the 10k, the company stated that it use 6,318,349 dilutive shares to calculate its 2010 EPS. However, when the 10k came out as of 3/11/11 for the year ended 2010. The share count at that date was, 6,366,625...
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DCF Valuation
I recently completed the core model seminar. I would like to know how I can use my core model developed in class and add a DCF valuation tab to forecast the value of a firm?
What information do I need to add the DCF valuation? Are there any templates available at Wall Street Training that I can...
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Tax rate in WACC
Hello,
I have a question in regards to the tax rate used in WACC. Per Hamilton's WACC calculation model, he puts Marginal Tax Rate as the rate to use in WACC. My question is where can we find the marginal tax rate? Is this something that's deduced, is using effective tax rate vastly incorrect? ...
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How would you go about valuing a company?
I am aware of the valuation methodologies such as Discounted Cash Flow, Company Comparable Analysis etc. but am unsure of what the relevant steps are to come to a valuation for a company. Does it matter which valuation method should be used? Also, what could potentially impact a valuation that I cou...
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Valuation Question
We are helping our client reduce inventory. We are trying to make the case that capital tied to inventory has a cost - inventory cost + cost of capital. In my view, it is WACC. Our client thinks it is interest rate of revolving credit. Your thoughts?
