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Package 4: Valuation Modeling Topics

Package 4: Valuation Modeling Topics

We dive deeper into the nuances of valuation by understanding the art (not science) of valuation. Build upon your core financial models by integrating and layering on hands-on valuation analysis. Construct standard full-blown DCF analysis, trading & deal comps analysis and summary football field. Dive real deep into the nuances of valuation by ripping apart footnotes and making subjective inputs while balancing objectivity.

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Last 10 posts

capital lease in TEV
Hi I understand that you exclude capital lease from TEV as it's not exactly debt and the difference with operating lease is just the accounting definition. However if you exclude capital lease from TEV, does that mean that you have to include any interest and depreciation effect from lease from ... Read More

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by Elvina J.

added 6 years ago

Questions on calculating items for multiples (9 questions)
Multiples 1. For P/E, you only use net income from continued operations and income to common shareholders (excluding minority interest), correct? 2. Do you need to take out the EBITDA from discontinued operation from EV/EBITDA? usually EBITDA isn’t broken out that way and I don’t know if t... Multiples 1. For P/E, you only use net income from continued operations and income to common shareholders (excluding minority interest), correct? 2. Do you need to take out the EBITDA from discontinued operation from EV/EBITDA? usually EBITDA isn’t broken out that way and I don’t know if there is usually any disclosure on EBITDA from discontinued vs continued operation. Is that why you usually do not adjust EBITDA for discontinued operation? 3. When you take forward or historical P/E or EV/EBITDA, EV/revenue etc multiples from capiq, Bloomberg etc, are these already adjusted for you? (taking out minority interest and discontinued operation) or do you have to recalculate one by one? 4. Are you including MI in total debt because you are including these in TEV calculation? You exclude MI from total debt when you are calculating solvency and liquidity ratios right? 5. Adjustments for non-recurring items: these should have been captured in the company disclosures of their reconciliation from GAAP non GAAP numbers right? So less need to read through the footnotes to look through item by item? 6. If you are calculating FCF ratios eg EV/FCFF, how do you adjust for these non recurring items? Diluted share calculation 7. Diluted share outstanding number is from WACSO or from financials, what if the number has changed since the release of the latest financials? Say the company has issued additional share and the number from Bloomberg or capiq is the latest share count since the release of the financials? Which number do you use to calculate equity value and to calculate diluted share? Does this change the exercisable share number stated on the financials to use to calculate the diluted share as well? 8. How do you calculate diluted share outstanding if you have different class of stocks (class A, B, C etc)? Are these all usually common stocks? 9. Currently exercisable options on the financials are those that can be exercised per that date in the financials (hence outdated). Do you need to update this to include any other potentially exercisable options at the time of you spreading the comps? (just by comparing current share price and exercise price) Thank you so much for taking the time to respond to my questions! :) You have been a big help! Read More

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by Elvina J.

added 6 years ago

Other income
Other income under revenue is different from other income below EBIT line right? ie the former does not have to be reclassified to below EBIT line?

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by Elvina J.

added 6 years ago

Clarification on LIFO/FIFO adjustment & tax savings
1. Adjustment after tax (cell H54): formula = 2.4*0.6-4.9. you add 2.4*0.6 because you generate lower pretax income so you should be paying less tax hence you add back 2.4*0.6 as tax savings after adjusting back to LIFO (since you are converting all comps to LIFO standard for apple to apple comparis... Read More

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by Elvina J.

added 6 years ago

Clarification on cost method and tax differences in the 10K
1. Adjustments – 1st one – page 2 of 10K: “Including a favorable fourth-quarter adjustment of $1 million related to taxes, the sale resulted in a pre-tax gain of $26 million and a loss of $7 million on an after- tax basis. The relatively high tax cost is largely due to the tax basis of the Com... Read More

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by Elvina J.

added 6 years ago

Question on adjustment of pre opening expense on diluted normalized EPS
Cell F87 of diluted normalized EPS $0.94 is after adjusting for pre-opening expense of $15,999. Since this not a one-off item and it was added back on the pre tax adjustment in cell F78, then the normalized diluted EPS is not $0.94 right? It should be: $0.94 + 15.999*0.6/491.717 = $0.95 (using dilu... Read More

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by Elvina J.

added 6 years ago

Questions on the slide (various aspects) - 6 questions
1. pro forma vs reported numbers: Why take pro forma instead of reported numbers? When you are projecting the consolidated company post M&A, which financials to use? 2. organic vs inorganic growth: When you are trying to project organic vs inorganic growth and % of growth in the combined company... 1. pro forma vs reported numbers: Why take pro forma instead of reported numbers? When you are projecting the consolidated company post M&A, which financials to use? 2. organic vs inorganic growth: When you are trying to project organic vs inorganic growth and % of growth in the combined company from acquisition vs from organic (acquiror), is it the right way to do this: use historical financials (3-5 years) of target & acquiror and going forward, except that going forward you include synergies? Is there a need to use pro forma 2004-2005 numbers from SHLD in this case and how do you use given pro forma numbers when carrying out this inorganic vs organic growth analysis? 3. Adjustments on pro forma questions: Gain from sale of business: a. $317m gain from sale of business that occurred at pretax level but was offset by MI expense post tax. This MI expense occurs post tax below net income right? All MI income / expense usually occurs after net income to common shareholders (so post tax), is this right? 4. Adjustments on pro forma questions: Bankruptcy ($40m expense on page 9/43 on top of PDF – is this expense equal to the gain that you will add after reversing?): a. I agree they are below EBIT but they are in between EBIT and earning before tax, so they are pretax. The slides state these numbers are post tax, how do you arrive at post tax conclusion? b. Is gain adjustment from bankruptcy $40m from page 21/43 on the cashflow statement equal to the bankruptcy expense $40m on page 9/43. This cashflow statement is from successor company meaning GAAP right (so post M&A consolidation and not pro forma)? 5. Adjustments on pro forma questions: other income adjustments ($21m gain created from $48m other income): a. I agree they are below EBIT but they are in between EBIT and earning before tax, so they are pretax. The slides state these numbers are post tax, how do you arrive at post tax conclusion? b. $23m vs $21m gain from asset sale (not sure which number to use): Where is $21m gain from? On page 33/43 It was stated $21m gain from other income from $45m cure payment to Kmart? However, on notes 12 page 32/43, gain on sale of investment in total is $23m instead of $21m. Which is the right number to use $23m or $21m gain? The total other income pro forma is $48m vs reported $38m and the breakdown of other income is only given $38m (which seem to be reported, instead of pro forma) so how do you know which gain from investment sale number to use out of the $48m since the breakdown of other income pro forma is not given? 6. Estimates for pro forma diluted EPS: you used 2 methods using pro forma net income before and after accounting changes. Whichever is the method, you always take the higher diluted EPS number to be conservative correct? Hence there is no preference for either method. Read More

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by Elvina J.

added 6 years ago

Questions on the slides (8 questions)
1. Do you always have to include cost of preferred equity in WACC? In which case you MUST include cost of preferred equity? 2. Since preferred equity is closer to debt, does that mean cost of debt < cost of preferred equity < cost of equity? How do you calculate the returns and valuation multiple... Read More

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by Elvina J.

added 6 years ago

Relationship between P/E and inverse of P/E (2 questions)
Hi! First, awesome videos! Follow up questions on multiples, esp for listed companies valuation when analysing a stock in a long short fund context: 1. Is inverse of P/E = earnings yield = cost of equity? I was looking through this link and it states that this statement is wrong ie inverse o... Read More

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by Elvina J.

added 6 years ago

Adjustments for non-recurring items to calculate adjusted EV/FCFF or other cashflow ratios
i. Does this mean you have to adjust for cashflow statement and balance sheets? Can you give an example for such adjustments for items that affects both cashflow statements and balance sheets? e.g. deferred tax impairments etc

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by Elvina J.

added 6 years ago