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...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 Receivable and Inventory, approximately 0.63m in Accounts Payable and a Revolving Line of 0.59m.
Even though the Revolving Line is a debt toward a bank and it bears interests, one MD suggested we shouldn't subtract it from the enterprise value, because the revolving line is used to finance the working capital and not the assets of the company.
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?
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 ...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 a possible conversion, Hamilton instructs us to reduce the debt by its book value and increase the O/S by 9.4M. I don't understand why you would increase the O/S by the max 9.4M when there already has been a prior partial conversion - shouldn't the O/S increase by less than the max 9.4M?
A couple of other related questions:
(2) Would you take the same approach for convertible preferreds? (I know he said Warrants are treated as options)
(3) Since the 10Q stub period doesn't breakdown the capital leases for us to exclude from debt, and Hamilton discourages pulling cap lease figures from the most recent available disclosure, how do you rationalize comparing apples to oranges effectively with the other comps?
Thanks for all the help guys. Happy early Thanksgiving!Read More
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...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 year projections. That means that it will not have to pay any taxes. Would it be correct to use the actual taxes (in this case zero)paid by a company from the P&L (since we are certain that there will be no actula cash outflow nad hence treat it as a form of "inflow"), or that would effectivelly be a double counting of leverage (Account for the actual Taxes paid on EBT and discount with WACC)?
2. Say we try to perfrom a SoP valuation. The parent company has its ST Debt which is mainly used to finance its W/C needs. Plus it earns some interest from LT receivables. On the DCF Analysis is ot ok to calculate an adjusted EBITDA by adding back the interest earned by the LT receivables and subtract the Interest expenses of the ST Debt, while at the same time once we reach the TEV, subtract only the LT Debt of the company to calculate the Equity Value? (Instead of subtracting Total Debt). The rationale is that W/C needs in the projected 5yr period will be financed through ST Debt only since this company is of high leverage and on a restructuring process.
3. Say a company receives a goverment grant for an investment. According to IFRS an annual portion of the grant is recognized as income on the P&L and nets off with the same portion of the total Assets Depreciation, effectively lowering the actual depreciation. The useful life of the assets being granted the subsidy is 20yrs. Would it be correct on the DCF analysis to calculate an adjusted EBIT after we subtract from EBITDA the remaining portion of depreciation after we exclude the effect of the postion of grant recognised as income? (i.e Total Depreciation 1000, Grant posrtion 100, Remaining Depreciation 900. If EBITDA is 2000 and reported EBIT 1000, can adjusted EBIT be calculated as 2000-900=1100?)
4. When it comes to the calculation of WACC. Let's suppose there is no beta for the company hence we try to built a bottom up beta. When i used to work for a bulge bracket US bank, i was told to use Net Debt of the peers to calculate the Debt/Equity ratio. If i were to use Gross Debt, then i had to adjust EBOT with the Interest received from the Cash Balances of the company. However this approach has a drawback, that large cash balances will most likely increase Cost of Debt. WHich of the above do you think is a better approach?
5. What would be the best way to calculate possible future tax shield as a result of a high levergae for a company? For example let's suppose that the tax shield for each year is Tax Rate*Interest expense. Under normal conditions (when a company is projected to pay taxes) we should discount the amount calculated before for each year using the after tax cost of debt and add the sum to the TEV. However what if we are in a situation where a company due to its carrying losses is not expected to pay any taxes. According to my view in such a case tax shield does not exist since the company will not pay taxes at all. We shoudl start calculating any tax shield from the year it's carrying losses turn to profits and it is expected to pay taxes, with a formula like IF(carrying losses for the year>0;Nominal Tax rate*Interest Expense;0). Is this approach correct?
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...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 Product Development. I tried to dig more from the footnotes but was NOT helpful. So based on the stated R&D expenses and the Product development cash out flow and the existing intangible asset accout of Product Development, does it mean that the company actually spent (cash outflow) of $12m for R&D (Product Development), out of this amount, the company expensed $8m immediately in the income statement and capitalized $4m on the balance sheet to be amortized?
If yes, then, in making the projection, do we allocate the total cash out spending on R&D from the cash flow statement to expenses on the income statement and capitalize the rest on the balance sheet to be amortized? Many thanks.Read More
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...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 Revenues which are not classified in the current liabilities section of the balance sheet also be subtracted from the TEV in order to calculate Equity Value? If so, what is the justification for doing so, and if not, then what is the justification for not including it in the calculation?Read More
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.
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?
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...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 be likely to close on 6/30/08.
The question: should we assume a 12/31/07 valuation date in the DCF, because that’s what we have the net debt numbers for, to calculate an implied DCF equity value per share? But 12/31/07 has passed two months ago. OR can we assume a, say 6/30/08 valuation date, discount half of the 2008 cash flows (ie a stub period) to 6/30/08, BUT use the 12/31/07 net debt?
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...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’d assume you have to use each company’s individual tax rate, because that will impact the cost of their debt.Read More
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 ...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 approach to calculate EV and subtract net debt to calculate implied equity value should I adjust for the working capital surplus/deficiency (especially if significant - the industry is also cyclical)?
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...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 that results from tax depreciation? (i.e. don't we need to subtract tax depreciation * marginal tax rate from our FCFs?)
For the model we developed in class, we did not build in the tax implications for depreciation. Nor have I found much mention of doing so in any references.
Thanks in advance and I hope to hear back from you.Read More
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'...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's assume that I pay a 8% interest rate on the debt.
The $25 current asset of OID gets amortized on the income statement at $5 per year, and gets included in the total interest expense line item, and is deductible for book purposes.
I pay interest expense of 8% interest rate X $75 of debt that I actually received cash proceeds, and that interest expense runs through the income statement.
Is this correct? If not, what should be changed? I feel especially unsure of whether the 8% interest rate should be multiplied by $75 or $100, but I don't want to doublecount the OID.Read More
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...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 the proper treatment in arriving at TEV when net debt is negative? Enjoyed the sessions. Read More
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...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 market will automatically adjust the stock price (due to the dilution effect caused) , so, by multiplying the stock price by the # of fully diluted shares outstanding wouldn’t result in overestimating the value of a company?
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 ...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 equity and later WACC to discount FCFF and a levered beta for the cost of equity to discount FCFE? Please advise.Read More
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...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 comparing health insurers vs. life insurers. Back in 1986, many health insurers also had life insurance exposure. So this supposedly noncash chrage (deferred policy acquisition cost amortization), which is predominantly broker commissions for the unearned premiums of acquired life insurance policies, gets added back and increases the EBITDA base. (I know that we should use equity multiples -- i.e., PTI or BV but we're forced to use EBITDA along with those).
My thinking here is that this item should be treated as an expense because this large non-cash item articially lowers the EBITDA trading multiples when treated as a noncash charge. Subtracing this amount from the EBITDA base makes the multiples to be much more reasonable. Also, doing so makes the EBITDA multiples (i.e., enterprise value to EBITDA) to be similar to the PTI multiples (i.e., MV to PTI). Have you ever normalized the EBITDA base for a mixed insurer with life insurance exposure this way?
For example:
EV = 80
EBITDA = 20
EBITDA multiple = 4x
Amortization of deferred policy acquisition costs = 10
EBITDA adjusted by treating this amortization as an expense = 20-10 = 10
Adjusted EBITDA multiple = 8x
Will normalizing this way eliminate the distortions caused by this noncash item? Thanks.Read More
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 ...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 the same company issues equity denominated in a foreign currency, then does the company still need to make the same foreign currency exchange adjustment to the issued equity with currency exchange gains (losses)?
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...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 data for one year. But usually I see that on valuation it is used the national benchmark (in sell-side research), so my question is should I use a national benchmark for valuation of, for example, a Dutch company or use the benchmark of my portfolio?
Note: for the USA I think that the S&P 500 is the correct index to arrive the value of Beta but for Europe it's trickier. For instance, if I'm valuating a Portuguese company (my home country) if I use the national benchmark (PSI-20 Index) for the major capitalization stocks the Beta will be close to 1 (because the top 5 weights represent almost 65% of the index) and for a European benchmark they will be very different, so the impact on valuation is relevant.
Which approach do you consider the best?Read More
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...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 the unlevered cash flows (of course adjusting it to the marginal tax rate before we proceed with the Terminal
Also, what is the concept behind "Cash-Taxes" that you use in our modules?
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...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 private company without knowing what the market value of equity and debt are? Thanks in advance.Read More
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...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 basis (incl. SBC), it is ambiguous as to whether they submit their EBITDA figures to consensus with or without SBC. So basically one comp has an EBITDA consensus number that is the average of EBITDA forecasts incl SBC and EBITDA forecasts excl. SBC. If we are using consensus estimates in our comps, this seems to really murk things up? is there any simple answer to this that I am missing?
For the DCF analysis, the acquiror (our client) has created internal projections of the target and based them off of consensus estimates to begin with. the consensus estimates For this particular company overwhelmingly does not seem to include SBC. does this significantly alter how we should look at computing the standard DCF? one suggestion is to subtract out a run-rate SBC in all of the years at the EBIT line in order to get the tax benefit and add it back along with the other items to get to free cash flow.
I don’t know if this helps, but I am dealing with a Tech company.
Thanks for any help you can give.Read More
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...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 item on the balance sheet for some (like AFLAC, Torchmark, Washington National) that the residual BV is meaningless (often negative), and inflates the multiple. This guy at Deloitte is telling me that the TBV should only be BV minus intangibles: forget the DPAC. But all the Web definitions of an insurance company's TBV says, I should subtract DPAC?Read More
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...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 term interest bearing debt less cash & cash eq
c) Total debt less cash
d) Total debt less all liquid assets
1) What would you say is the most correct definition to give a true picture of a company’s net debt?
2) What would you include into the net debt to produce a higher margin of safety when calculating TEV?Read More
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
...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
Net Income => ($ 500)
Suppose we have to adjust EBIT for two non-recurring items (pre-tax): (1). $ 400 one-time lawsuit expense; (2). $ 200 one-time restructuring expense.
Now, the Pre-Tax income should be ($ 100) - once we added back $ 600 to EBIT. So, with those ajustments (reducing losses from -$700 to -$100), how would we adjust the positive $ 200 on the Tax line to reflect the tax impact due to normalization adjustments?
Let’s assume a marginal tax rate of 35%.Read More
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 ...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 terminal period.
So, if you’ve got a 5 yr dcf, and you’re using midyear convention and a 12/31/08 valuation date:
Year 1 period = .5
Year 2 = 1.5
Year 3 = 2.5
Year 4 = 3.5
Year 5 = 4.5
Terminal value = 5.0
Wouldn’t the perpetuity growth rate formula deliver value as of period 5.5, rather than as of 5.0?Read More
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..
(...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..
(1) You use a discounted cash flow method
(2) You use the capital structure post restructure
Here's my fundamental question...
(1) the discount rate to use to discount future projected cash flows. how do you figure it out? I understand the debt component of WACC but specifically the equity....
CAPM... this becomes so much more of a factor in WACC of a distressed, Ch. 11 company.. I assume the equity is much more of a component to the total capital structure.. how do you figure weight the equity in WACC? meaning Equity as a % of total capital.... Secondly, do you use a typical CAPM formula? say the answer comes out to 11%.. Does that even make sense given that it's a distressed company that just emerged from bankruptcy? shouldn't CAPM be 20-25%? A required return of an equity investor on their equity? I guess the equity portion of WACC is very confusing. Please advise.Read More
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 ...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 on hwo to approach a more industry standard valuation process. Many thanks for your hlep on this.Read More
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 ...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 be normal say 35% after that. Should we use 35% to calculate the tax expense for the terminal year or still multiply the growth rate by the t+5 NOPAT? Thanks.Read More
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...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 justified? Hamilton didnt explain this in advanced sessions and I didn't find relevant resources either, so would you please clarify this a little bit more? Many thanks.Read More
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.
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.
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...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 calculation or not?
(2). Once PE is generally looked on a forward basis, I assume there should be no difference in calculating forward PE using Equity Value / Net Income and Price / EPS, since the diluted shares outstanding for the forecasted period would be calculated w/ today's share counting and effect of options using the today's share price (and not using WACSO). Does that logic make sense? (obviously here assuming no share repurchases going forward, them current share count = forecated share count, meaning Eq. Val / Net Income would be equal to Price / EPS).
(3). When applying the multiples from Deal Comps on the statistics of the company we are analysing, once I get to Equity Value should I divide this Eq. val. by the diluted shares O/S calculated using options excercisable or outstanding (since I have used options outstanding in arriving to the deal comps multiples in the selected deals)? And what about that when doing an LBO analysis (where you actually simulate a transaction), options outstanding or exercisable in the LBO analysis calculations?
(4). In the reference range, as we apply different multiples we will get to a series of Equity Value and consequently different implies prices per share. And my question is: is it appropriate to adjust the number of diluted shares O/S for each different multiple and implied new share price obtained in the reference range? If yes, how one would do that if we need our price per share to calculate our diluted shares O/S (and this same price per share is what we are trying to calculate)?
(5). Finally, should we include non-completed or only announced deals in our deal comps analysis? And why in deal comps we do not consider any forward multiples (only LTM)? Any specific reason here?
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...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 use these assets.Read More
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...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 (WACC calculation), why did you include tax shield on the cost of preferred since it does not affect taxes (it's located after the income tax line on the IS)? And is there any specific reason for including preferred in the calculation of levered / unlevered beta (I don't understand because it is not a debt - so no leverage related)?
(3). I understand the concept of Corporate Overhead from an expense perspective, but honestly have never seen as a valuation component as here. So, I would like to understand what is the rationale here behind this Corporate Overhead of $200 million? What does it really means?In addition, how did you come up with this 4.5x - 5.0x range? EBITDA range applied to Overheads?? Does that make sense?
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.
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...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 shares that are bought back from the public market and the dividends they were originally paying?Read More
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...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 of time, the company paid substantial amount of dividends to its shareholders.
I am not sure how to make the closing adjustment especially that we didn’t discuss these issues from the startRead More
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.
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...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 because if the markets are efficient and the stock is fairly priced, than buying the stock is a zero NPV project. No value creation. Both arguments make logical sense, but I can't seem to reconcile the two.Read More
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...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, if we change the debt/equity levels through share repurchase...enterprise value should go up. So how is that not a positive NPV project? The only way I can reconcile this is to think that the potential value creation from leverage is priced into the stock, so it's zero NPV. However, I don't know if that's the right idea.Read More
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...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 physical cash that's left for equity holders, it's after all capex + working capital etc. is paid out. Again, I can't reconcile the two arguments. Why do we take a percentage of capex + working capital items?Read More
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?
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...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 margins and revenue growth.
What are the pitfalls of using ROE? My guess: It is based on book value of equity so return is not what a new investor would get, companies that invest in cap-ex, etc. for growth will show low ROE initially so you’d miss these opportunities with a required ROE hurdle, doesn’t indicate level of risk used to generate ROE.
What is the assurance that the value produced by a high ROE company will flow through to the owners? My guess: The stock price must appreciate and/or dividends must be paid or else the firm will be taken over.Read More
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...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 mixed figure derived from both accrual and cash-based accounting?Read More
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?
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?...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?Read More
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...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 cost and not know which ratio to use to compare the earnings to the replacement cost? can you share your view with me in how to approach this situation? thanks a lotRead More
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 ...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 will invest in the capital increase).Read More
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.
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?
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...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 FCFFs, or is it only used (useful) for estimating forward? And as a follow-up, if you can calculate the FCFF for the current quarter, or past year, how do you handle “Net Working Capital”? In my FCFF estimates for future years, I am using the current year’s working capital as a percent of revenue and applying this to my incremental revenue estimates for each year going out. If I were to apply the same approach to the current quarter, or past year, how would I do it? Do you simply take the incremental change in the “Working Capital” from the current quarter vs. previous quarter, or current year vs. previous year? Any input would be greatly appreciated. I hope my questions make sense to the experts, but as I said, I am a “freshman” at equity valuation.Read More
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...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 atleast some of these costs would be considered to be recurring since the company is going to be absorbing these costs after integrating the new business / product line into their operations. If you have some time, any thoughts you had on this issue would be much appreciated.Read More
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...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 company receives an income tax benefit so they account in the asset side under deferred tax assets) they must account for that benefit on the other side of the equation as well. This happens through retained earnings (NI is reduced by the charge) and there is an add-back (roughly) in paid-in capital. Without the add-back in additional paid-in capital, the model will not balance. Also, when options are exercised, they provide cash which is accounted for through the CFF and occasionally a tax deduction through the CFO. That is what I have found so far. Please let me know if someone at your firm thinks I am right.Read More
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...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, shouldn't we be using the yield on the 3 year Treasury bond instead?
another related question, shouldn't the maturity of the company's estimated cost of debt matches that of the risk free rate? so if we are using 10 year risk-free rate, then we should use the yield on the company's 10-year bond where as if we are using 3 year risk free rate then we should also be using 3 year cost of debt for the company as well.
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...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 Maintanence Revenues which are not classified in the current liabilities section of the balance sheet also be subtracted from the TEV in order to calculate Equity Value? If so, what is the justification for doing so, and if not, then what is the justification for not including it in the calculation?Read More
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 ...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 the british comp does NOT have an ADR, so you can’t get a US-based beta for it. also, as you know, british comps trade based on a slightly different market, so their betas etc will be impacted by country-specific factors, investors, macroeconomic outlook etc. Clearly, cost of equity via CAPM assumes the US risk-free rate. What adjustment(s) if any, must we make to the British comp’s beta to make sure we are doing an apples-to-apples comparison? if your answer is that “it’s okay to mix apples and oranges in this case, because Britain isn’t very different from the US”, then let’s assume the company was based in Singapore or Russia – ie places with very different macroeconomic environments. Then, what would your answer be?Read More
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?
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...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 levered beta for the target company. Is there a database for betas that does this analysis and arrives at a beta value?
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...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 database that does these calculations to arrive at beta values?
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 ...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 does this differ in public vs deal comps?
2.
I think I learned elsewhere that one can dynamically link the current stock price to a service provider on the excel sheet so that everything updates by pressing F9. Is this the case? Are there pros/cons to this? Why do we statically input the stock prices for the public comps (and other models)?
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...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 get a set of 2008 monthly new index number.
and for 2009 SSS growth, i multiply the 2008 monthly new index number with (1+SSS growth rate 2009) to get a new set of monthly index number for 2009
and then compare the 2007 the index number of 100 that i begin with to see if it grows above 100
is that how i can tell if the recovery has take place? or i can't do it this way as there are seasonality in the retail business, say winter and summer time? thxRead More
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...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 rigorously put in a comment explaining the source (pg), reason/description, the amount, and gain/loss? I thought IB M&A was all about being as anal and clear as we can(?) or is this all just for illustrative purposes, but in the real world, we should do as I described?
Basically, I'm wondering whether different IBs have different "styles" of spreading their sheets or whether there's a "standard" we should conform to. Or is it actually pretty unimportant?
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 ...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 certain companies just want to take advantages of the tax shield.Read More
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...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 EBIT*(1-Tax Rate) to get the unlevered net income for the next 2 years because the company is not making profit hence not paying any tax in this 2 years?
I am thinking we should just use the EBIT plus the interest expense (if they have) tax shield, then do the D&A, etc adjustment. Is this right?Read More
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...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. Does the exchange of 0.8595 stay relevant? What day does an acquirer actual exchange its shares with the target? Timing question....
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...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 $105m, which they'll still leverage 70%.
In this case, what is the effect on cost of capital? 1/3 of the capital is essentially free now; does that mean if the WACC before was 6%, it now becomes 4.2% (6% * 70%)?
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...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 capital for each year * (ROIC-Cost of Capital). That product is EVA for that year. Then I discount that year's EVA appropriately. Finally, I sum the discounted EVAs for 20-25 years. By comparing the value-created (i.e. the sum of discounted EVAs) to the starting book value, i arrive at what the theoretical market (or price) to book value should be.
Does this appear to be a logical approach? Am I missing something? Is there a more logical or simpler approach?
Thank you.
Discounted EVA 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year 1 2 3 4 5 6 7 8 9 10 11
Invested Capital 9,292 10,602 11,895 13,174 14,444 15,661 16,744 17,724 18,687 19,660 20,647
ROIC 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Cost of capital 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
EVA 232 113 125 138 151 162 172 182 192 202 211
Discounted EVA 219 100 105 109 113 115 115 114 113 113 111
Aggregate value creation: 2219 ==> series extends to 2029 ====>Read More
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...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 utility).
If that company then used this Operating Cash Flow to pay down debt and as a result was debt-free after 3-5 years, then subsequent FCFF would essentially be equal to FCFE. The cash flows would presumably be used to pay dividends. What discount rate would you use? WACC or cost of equity? In theory the company could choose not to pay down debt as quickly, in which case you'd discount FCFF by WACC? Does the fact that all of the FCFF would actually go to equity holders change the discount rate you use?
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...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 associated multiples....thanks for your help!Read More
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...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 actually paying for the debt and equity to - if company X were public or private?
I guess I'm just a bit confused because equity denotes ownership but since debt also financed the firm, does this mean I'm buying the debt as well - or how does this exactly work?
=====
Just a follow up with same above example:
Suppose Company X has $50 total market value of equity and they have 100 shares so price/share is $0.50. If I make a tender offer of $0.75/share for 51 shares, would I be correct in saying that I gain control of the entire company now? But what would happen to the $50 of debt - if I buy the debt, would this be equal to paying off all the principal and thus there would be no more interest?
But in the case that the tender offer succeeds and I don't "buy" the debt, would this mean that I control the company and own 51% of it, but I still have debt outstanding and must continue to pay the interest expenses?
I realize this is a basic question, but I wanted to be clarified.
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 ...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 growth in the cash flow by year 25?
Thanks.Read More
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?
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....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.
This might sound dumb, but the YTM for which instrument are we using? And I thought that the cost of debt was a function of the YTM _and_ the credit ratings for the company? How exactly does this work and how do we as analysts find this number?Read More
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...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 strictly completely available to the equity holders. While FCF would take into account interest payments to debt claimants, it does not take into account principal repayment of debt. It seems like free cash flow yields would be more apples-to-apples if it used EV to FCF instead of market cap to FCF.
What's wrong with this argument? Thanks.Read More
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...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 calculates present value for current share count, however, there is some cash that will be used in future by the company to make up for the spread between option issue vs exercise priceRead More
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 ...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 one would use the average if you have private company and you want to calculate the WACC for it. But in a stand-alone valuation for a publicly traded firm (the resulting WACC is used in for the stand-alone DCF valuation of WMT) I don’t see why I need to use peers to come up with an industry beta that I then re-lever?
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 ...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 in the first place, then we should deduct the PV of the net debt from the PV of the CF's plus terminal value, and not the future values? or can we also deduct today's net debt, if somehow we did not project the balance sheet out to the terminal value date? was this how you went about it with the Pepsi example?Read More
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...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, if we change the debt/equity levels through share repurchase...enterprise value should go up. So how is that not a positive NPV project? The only way I can reconcile this is to think that the potential value creation from leverage is priced into the stock, so it's zero NPV. However, I don't know if that's the right idea.Read More
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...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-growth rate)?Read More
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, ...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, should be FCF. (whether this is levered or unlevered; I don't even mind if it is levered since I'm usually thinking about buying the equity). I'm trying to find out the likely (initial) return for a buyer of the business. Warren Buffett has stressed the point that FCF should take into account an allowance for maintenance capital expenditures (he refers to EBITDA as bullshit earnings since depreciation is the worst kind of expense, i.e., an expense you have to pay for up front with your initial capital outlay). When I get financial information from say, Yahoo Finance, I cannot find out what maintenance capital expenditures are (and this is not unusual even with analyst reports). I can find operating cash flow.
My question relates to finding a proxy for free cash flow that is really available to the business owner and takes into account maintenance capital expenditures. Would using operating cash flow be appropriate (keeping in mind that it does not account for maintenance cap ex)?
For example, if I go to Yahoo Finance and type in WMT and then click on key statistics, it gives me an EV of 240B, EBITDA of 24.5B, operating CF of 18.4B and levered FCF of 2.2B. When I'm trying to value the business I don't care about actual capital investments and expenditures, I'm only interested in FCF minus maintenance cap ex (for the purposes of valuation).
In the absence of a guesstimate for maintenance cap ex, would operating CF be a good proxy or would you suggest another term that would involve more tweaking?Read More
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 (...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 (e.g., a state utility commission determines what ROE the company is allowed to earn), would that make a difference as to whether market or book value of equity should be used to determine the weightings of the cost of capital?Read More
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 ...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 from Corporate Valuation module - so exactly, is preferred stock tax deductible or not?Read More
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...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 share price? This is all assuming that the company takes on the same amount of incremental debt to fund the share repurchase/dividend, and that the share repurchase occurs on a pro rata basis.Read More
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...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 value of the outstanding convertibles is larger than the market value of the equivalent number of shares if converted, the holder of the convertible will not convert and there is no need for adjustment with respect to share dilution. Isn't this commensurate to comparing apples to oranges? Normally, one would compare present values to present values and future values to future values. Face value of the convertibles is their future value. Their PV is far below their face value and also the value of the shares if converted. In White and et al. (2003) the comparison of share price and the conversion price is given as a decision rule for deciding for the dilutive effects of convertible bonds and using option pricing models is suggested as one of the ways to separate debt and equity values of the convertible bonds. So the decision for the holder of the convertible is whether to exchange or not the PV of the convertibles for the equivalent number of COSTCO common shares. If this value is less than the total value of the shares,the convertibles are likely to be converted. So to sum it up, why is the future value (i.e., face value) of convertibles compared to the market value of shares?Read More
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 ...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 of COSTCO?Read More
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...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 – is it because Senior Secured Debt is typically
placed in SPV vehicles?
ii. Does this category include bank debt only (eg, 1st and 2nd lien term loans, etc), not including bonds
2. Slide 34
a. Under Distressed Value boxes, if TEV = 300, shouldn’t the entire 300 go to pay the Senior Debt outstanding since it has seniority over Sub Debt (shouldn’t Senior Debt
be paid in full before moving on to the next claimant)? Why is the 300 TEV split 250 to Senior Debt and 50 to Sub debt?
3. Slide 36
a. try to tie to slide 29 – please help me place the 5 capital structure security categories from slide 29 into slide 36 buckets (where does it fall under Secured Bank
Claims, Secured Asset Financing, Bondholders, etc)
b. Why is Secured Bank Claims senior to “business operations” like Secured Asset Financing and Trade Claims, but Bondholders and Equity subordinate to these
“business operations”Read More
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...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 correct approach? i.e. ROE of 10% and cost of equity of 8% = a "correct" price-to-book of 1.25x?
Thank you.Read More
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...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 current liabilities (net of cash) and Current liabilities ( all non-interest earning debt, but including Supplier credit, accounts payable and accrued items (salaries, taxes etc)).
For me at least, it makes sense to measure changes inventories because it represents cash tied up-within firm that may be crucial to its operations (almost like a form of capex especially for the retail sector). Moreover, the value of inventories may appreciate representing an asset gain or conversely depreciate, or never be utilized in sales (in which case would constitute an expense). All of which would affect the value of the firm
However (and my question is) why are changes in receivables and payables included in free cash flow ?
Effectively a Receivable is an interest free loan to made to the customer while a payable is more or less credit extension by a company’s suppliers. In the case of receivables I view them as earnings in transit, where the cash here is actually rightfully owned by the firm. In the case of Payables I see this as largely interest free borrowings but more importantly cash that is not owned by the firm.
It is my observation that increase in accounts payable overstate FCF and increases in accounts receivables understate FCF.
If I were looking at this from a credit or liquidity perspective – factoring both makes sense.
However, if I am looking at this from an Owner Earnings Perspective, then changes in payables and receivables I believe distort the value of the firm.
This is the impression I have received from reading Berkshire Hathaway’s 1986 Chairman’s letter to Shareholders. Where Warren Buffett purposes:
Owner earnings = Net income + depreciation & amortization +/- one-time items - capital expendituresRead More
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!
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?
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...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 and is stated in the first 3 pages of the 10k. My question is which is the correct number to use for DCF and why? Thanks!Read More
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...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 use?
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? ...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? I tend to see the effective tax rate most often in 10k and 10q ThanksRead More
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...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 could carry out for a company? I hope that these questions can be answered and would greatly appreciate it if someone can help. Thanks a lot.Read More
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?
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...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 range. Do I 1) stick with the yearly data and apply multiples to the annual data (for 2013 -- I can go back in time, thanks to CapIQ, and get comp multiples for that period in time) or 2) do I display an LTM column on my IS and apply only current, LTM multiples? In industry, we applied LTM multiples to LTM data, but that was a quarterly earnings model that hinged upon EV/EBITDA. I'm trying to avoid having this thing go quarterly.
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, ...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, wildly below the market price of $26 and change. I don't know how to make sense of dispersion that ranges from about $5 to $27. Suggestions?
On acquisitions, while the movie business is consolidating, they aren't buying other public companies. They are buying private firms. I found spotty data on one transaction. My Series 79 book says the 8Ks and Proxies are great places to look for info. on this. It's lying.
On selected premia, well, no transactions, no premia. End of story, yes?
Per DCF, my multiples give the market price and then some, but imply high growth rates of 6% to 7% (in line w/ company 11 yr CAGR). The perpetuity method, where I input 2% and 4% growth rates (kinda like the economy), produces values well below the market price of $26.
Lastly, I converted their no-debt WACC to an industry.
What's my best move with respect to this dispersion & lack of data? Should I say the comps were all over the place and, thus, inconclusive. There were no transactions, so the best valuation was a DCF multiple? Sorry for the barrage of questions, but it has been years since I did this.Read More
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...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 using an example? Thank you so much.Read More
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...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 comp, sells 100m in receivables. What adjustments do you need to make to EV/EBITDA so that you're comparing apples to apples?
I was told that this transaction would affect net debt and interest expense? Can someone please elaborate on how to make the adjustment and why? Also if possible, please use the above numbers in the example. Thank you.Read More
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...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? Lastly with regards to Equity Compensation Plan, are they securities that must be factored into diluted share count? In this case, how do we account for the 498,130 if at all? Thank you.
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table provides information as of May 31, 2014 with respect to shares of our Common Stock that may be issued under our existing stock incentive plans, all of which were approved by our shareholders:
EQUITY COMPENSATION PLAN INFORMATION
Number of shares of
Common Stock to be issued
upon exercise of outstanding options,
warrants and rights
(a) 0
Weighted-average exercise
price of outstanding options,
warrants and rights
(b) 0
Number of shares of
Common Stock remaining
available for future issuance under
equity compensation plans
(excluding shares reflected in column (a))
(c) 498,130Read More
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...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 portion of their business in the same niche area as the company I'm looking at while their core business is something else. Would it be incorrect for me to "weight" the trading multiples towards the 2 companies that are true comps and allocate a smaller weight on the remaining three or is this practice ok? How do we get around the problem when there aren't too many direct comps to derive good trading multiples?Read More
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.
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...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 assets
In addition, with respect to calculating the after-tax impact of these items, should it be affected by the effective tax rate for that year or marginal tax rate?
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?
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...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 derivative asset on the balance sheet going forward? ThanksRead More
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...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, when trying to obtain an industry average unlevered beta, should I include all its global peers or just peers doing business in the same region or peers listed on the same exchange?Read More
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?
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...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 offering size would be a different story from deriving from a pre-money market cap.Read More
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 ...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 you mean that you are trying to get an apples to apples comparison of companies. Because there might be inconsistency between whether firm's capitalize their leases (some might classify their leases as capital leases while others might not), we should simply not include them as debt? If this is the case, then in order to make a comparison apples to apples, why don't we take the opposite approach and simply capitalize the leases of the company that chooses not to? Isn't the whole point of capitalizing leases to make it possible to compare companies apples to apples (one company might issue debt in order to purchase an asset while another might simply lease the asset; by capitalizing the 2nd firm's leases, we can compare them to the other firm in an apples to apples manner because now the decision of whether to lease or purchase does not affect their value)?
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??
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...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 = Current Assets Less Current Liabilities
What is included in the definition of long-term liabilities? Do you include items like asset retirement obligations, deferred tax liabilities, advances from shareholders, other non-current liabilities (but is not debt)?Read More
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?
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...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 still owns the inventory asset and so in a liquidation scenario, the inventory will be sold and used to pay the 60-days liability.
Will this 30-day interest bearing liability be considered as a "debt" in the normal calculation of Enterprise Value? The general rule is that any interest-bearing payable are included in Enterprise Value, right or wrong? Also, will this payable be included in the Project IRR calculation particularly terminal value?Read More
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
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...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 investment period, I own 100% of the asset which can dispose in full. Think like 100% debt funded property.
Method 1: that’s your typical cash flow discounting. The $100 cash outflow tomorrow is equivalent to $99 today plus the interest it would generate between today and tomorrow.
Method 2: I have tried to work backwards using undiscounted amounts minus opportunity cost which I have called “interests forsaken”. The NPV is then equal to the sum of undiscounted cash outflows and inflows minus the interest forsaken.
Comparing the two methods, I obtain a NPV difference from 1 to 2 and would be grateful to have some guidance on whether my reasoning is wrong or is it due to a modelling mistake. I have summarised the issue in excel but could not attached a file to my post.
Hi, would you ever measure market cap using the current share price and the treasury method (but using options outstanding instead of options exercisable)?
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...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 tax?). If a fund has 10% compared to 50% churn, how does that affect the taxes you have to pay?Read More
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...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/equity side)? Thanks.Read More
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?
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...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) for leases. Stated differently...without their leased assets, they wouldn´t be able to run/sustain their business. Any rules of thumb or additional clarity would be greatly appreciated. Thanks!Read More
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...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 derive the enterprise value of the company, is this Enterprise Value post-money or pre-money? Tend to argue that it is post-money valuation as the financial forecast already takes into account the improved performance. If it is post-money, am I right to say that we should not add the cash proceed (from IPO) to derive the equity value?Read More
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!
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?
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...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!
FCFF = CFO + Int Expense (1-tax) - Investment in Fixed Capital
FCFF = NI + NCC+Int(1-tax)-FCInv-WCInvRead More
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...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 a huge negative cash flow to be discounted?Read More
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...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 practitioners look at average net working capital for the past 12 months; however, would it be incorrect to use this methodology for a seasonal business since doing so would result in a working capital target that would be overly inflated or deflated in relation to the amount typical for the corresponding season?Read More
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...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, which will see the conversion of a portion amounting to US$15.5m of share premium reserve held by target into 15.5mn shares in target to be issued to the Group. Following the share capital increase, the Group intends to fully support target’s business development plan and finance its development over the next three years."
So my question is how to calculate the new deal value if it deviates from the original 300mn in 6 months ago.
What I tried:
method 1:
use the share capital increase amount US15.5 / 20% = 77.5mn
then this means the deal value declined from 300mn to 77.5mn
method 2:
since the target has issued more shares to raise company stake from 40% to 60%.
So I solve the share capital increase as a plug number to see how much share capital need to issue to the company to reach 60% stake. The plug number i get is 150m.
if the share capital increase is 150 represent 20% stake, then 150 / 20%, the new equity value is 750m - doubled from 6 months ago.
So I don't think both calculation for new equity value is right. Thanks for your help in advanceRead More
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...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 share and after i discounted back the FCFE cashflow, do i add net cash to the sum of PV FCFE to determine the value per share? Normally when i use FCFF, I do add back net cash (debt) back to sum of PV FCFF. Would like to get confirmation. Thank you.Read More
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...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, and total capitalization for the weight of debt and equity or stay with using the FY 2017 historical figures since we are discounting the cash flow back as of FY 2017 anyway? Many thanks.Read More
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.
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...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 example, Yahoo finance provides a stock's 3-year monthly beta or some other sites that you might recommend under such circumstance? Thanks.Read More
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? thanksRead More
The firm is a small growing company with approximately 1.6m in Accounts Receivable and Inventory, approximately 0.63m in Accounts Payable and a Revolving Line of 0.59m.
Even though the Revolving Line is a debt toward a bank and it bears interests, one MD suggested we shouldn't subtract it from the enterprise value, because the revolving line is used to finance the working capital and not the assets of the company.
What do you think about that? Read More