Nomura Greentech IB

A company issues $200 million in new shares, and then it uses $100 million from the proceeds to issue Dividends to shareholders. How do Equity value and Enterprise Value change in each step?

$200 million issuance of shares means $200 increase in equity value, or non-core business Asset (all Assets) and is attributable to common shareholders EV = equity + debt - cash, so 200 increase in equity cancelled out for minus 200 increase in cash, means no change in enterprise value $100 million from the proceeds to pay dividend means total assets (cash) or equity value reduces by $100 million, cancelled out by the reduction in cash

EV Tax Credits

1. $7500 tax credit only allows for products with 40% US based materials to qualify 2. Inflation Reduction Act promises to accelerate electric car affordability for millions of Americans, but tax credits will decrease dramatically before ramping up over the long term 3. In the next years, fewer electric cars will qualify for EV tax cedits and the qualification rules for credits will be really confusing 4. EV tax credits are granted the most (generous rebates and tax credits) in California (up to $4000) and Connecticut ($7500), Oregon ($5000) 5. Asia dominates battery cells so it is not always China centric. It has pushed cell manufactured to build US factories like LG 6. There are ton of tariffs against foreign materials, forcing LG and Samsung to build their US based factories

Limitation of historical approach to calculating cost of equity

1. Assumptions subjectivity (growth rate, period measured) 2. Should average returns be reported as arithmetic or geometric?

How do you do precedent Transactions?

1. Choose the company universe based on: - Dynamics of the deal (buyer size versus seller size) - Method of buying: (stock/cash, all stock, all cash) - Nature of deal (targetted auction versus broad auction) - Market condition during which the deal happened 2. Locate the financial information 3. Locate the necessary deal-related information: - Method of purchase of the deal (all cash/all stock/stock and cash mixed together) - Long-term adjusted rate * equity purchase price to see how much NOL can offset taxable income - Synergies (EV/LTM EBITDA or EV/LTM EBIT or offer price/share /LTM EPS) 3. Benchmark the comparable companies' figures/key financial ratios against the target 4. Derive the median figures for the valuation, narrow down to 2-3 companies, apply the LTM earnings/profitability figures of target to determine valuation

working capital and negative working capital

1. Current asset - current liabilities 2. Pay off short-term debt/liabilities with short-term asset. Exclude items relating to a company's financing activities like cash or debt from the conversation, only consider operating cash flow 3. (Current Assets - Cash) - (Current Liabilties - Debt) Negative WC means higher deferred revenue balances (higher liabiltiies), common among long-term contract companies or companies with subscription models Companies like retail pay down cash to purchase inventory first as customer pays upfront cash, use these to pay off their accounts payables rather than keeping a large cash balance on hand. This lowers the current asset values Negative WC can mean not enough CA to pay off CL, low quick ratio = potential bankruptcy (not enough upfront payment quickly enough to pay off debt

EBIT vs EBITDA vs Net Income Difference

1. EBIT and EBITDA are available to Equity Investors, Debt Investors, Preferred Stock Investors, and the Government. Nobody has been paid yet (the interest has not been deducted for the debt investor, the tax has not been deducted for the government) 2. Net Income is only available to equity holders as interest expense has been paid to lenders while the taxes have been paid to the governments but the equity investors have not yet received their common dividends

EBITDA multiple in Green Energy

1. EV/ EBITDA (before capital expenditure and the after effect of capex like depreciation is accounted for) = 18.2x in Q4 2020, and 15.9x in Q4 2021 2. Companies with a high degree of differentiation - which use multiple renewable sources to produce Green Energy - such as Canadian producer Innergex, Renova Inc were able to achieve the highest multiples 3. EBITDA valuation multiples, despite not growing as steadily as the revenue ones throughout last year. peaked in Q4 2020 at 18.2x and staying relatively stable after a small correction

How do you calculate and check the sanity of Terminal Value in a DCF?

1. Exit multiple method: Apply an exit multiple: EV/EBITDA figure based on the comparable companies, to EBITDA in the final year of the forecast period/ EV/EBITDA * EBITDA in the final year (we do mid-year not end of year though as cash comes in throughout the cycle of the year) 2. Terminal FCF Growth Rate (g - constant growth rate in Gordon) Once we have the EV. We cross check it with another formula: Terminal value = Final Year FCF * (1 + Terminal FCF Growth Rate)/(Discount Rate - Terminal FCF Growth Rate) We can check the Terminal FCF Growth Rate implied by the first method versus the Terminal Multiple implied by the second method Also, the multiple should result in a growth rate that is below the long-term GDP Growth rate (if you have a developed country company with a Terminal FCF Growth rate of 10% which is even higher than their GDP growth rate then something must be wrong

Future Share Price Analysis

1. Get the median P/E historically of public company variables 2. Apply the P/E multiple to company's forward (1-year to 2-year ) EPS figures to get its implied future share price 3. Discount this back to the present value by using a discount rate in-line with the company's Cost of Equity figures.

Why is inventory purchase not recognized on IS?

1. Inventory cost is only recognized as COGS when the goods are sold, will just sit in the warehouse. 2. Inventory purchase is part of change in net WC (it is a current asset) but remember that WC is NOT part of Income statement 3. It will serve as an outflow of CFO as inventory is an asset

Why unlevered cash flow in DCF instead of levered cash flow?

1. Levered cash flow are cash flow available to the equity holders only after cash has been repaid. However, debt repayment is more like a managerial decision, and we do not know what will happen. So we should use unlevered cash flow, meaning pre-debt payment instead 2. We will be discounting using WACC which takes into account the weight and cost of capital of debt, equity and preferred stock, not just equity, so just an apple to apple thing

A company buys a factory using $100 of debt. A year passes, and the company pays 10% interest on the debt as it depreciates $10 of the factory. It repays $20 of the loan as well. Walk me through the statements from beginning to end, and assume a 40% tax rate."

1. Net Income: First year, we pay $10 interest and $10 of depreciation on the IS. In total, we decrease our IS by 20 * 60% = -12 2. Cash: CFO: -12 in cash, add back 10 in depreciation (interest payment already factored into net income so it is honestly a CFO cash outflow) CFF: Outflow of 20 in principal payment: Net cash = -12 + 10 - 20 = -22 3. Balance sheet: Cash: -22. Depreciation in PPE: -10 so asset down by 32 Retained earning down by 12. Debt is down by 20 (100 plus in debt has been recorded and will not be counted as incurred during the first year. L + E down by 12 + 20 = 32

A company runs into financial distess and needs cash immediately. It sells a factory that's listed at $100 on Balance Sheet for 80, assume 40% tax rate, run us through the impact on the 3-tatements?

1. Net income down by a loss of 20% * 60% = $12 2. The loss is non cash so we add back $20 to the CFO plus a -$12 loss in NI, Cash will be up by 20 - 12 = 8 3. CFI up by sales of PPE which is +80 gain 4. Cash up by 88 and added to assets. Asset is up by 88 in cash yet net out the 100 (original price of the PPE) loss in PPE. In total Asset is down by 12. 5. Retained earning also down by 12 due to net income down by 12

Revenue Multiple in Green Energy companies valuation

1. Revenue Multiple (EV/Revenue Multiple was 9x) 2. This is comparable to the hotter sectors in tech, like FinTech and Saas in their earlier years, and have come to achieved double-digit revenue multiple over the past years 3. Revenue Multiples for Green Energy companies grew throughout all of 2020, almost doubling from 6.7x in Q1 to 12.7x in Q4 2020 when they reached a peak. 4. They then stabilized around the 10x mark for Q1 and Q2 of 2021 before failing slightly. The median 50% staying between 6.5x and 11.7x

What are the steps to valuing companies within the power and energy sectors?

1. Select industry classifications (oil and gas versus renewables) 2. Size (market capitalization and revenue) 3. Geographic locations Cost of equity: CAPM model Cost of debt: Risk free rate + spread. Spread is determined by using the Interest Coverage Ratio (ICR) approach whereby risk profile is measured using the ratio of EBIT to interest expenses WACC of oil and gas are highest for renewables (9%) while WACC of renewables (6% - 7%). Renewables cost of equity might be 7.4% to 8.5% while oil and gas can reach 9 to 10% Cost of debt for renewables might only be 3.0 to 3.4$ while oil and gas is 2.7% to 3.2%. Lending to renewables is as cheap as oil and gas despite a lot of evolving renewables technology, and this might be a good news. Multi-utilities WACC might be less than 5.0%

Why using the Treasury or government borrowing as a risk free benchmark is flawed?

1. The riskiness of lending to a government may have little to do with the risk of investing in a business in that country 2. Renewable energy is more political environment sensitive than consumer packaged goods. If consumers packaged goods are beaten by an economic crisis, their earnings bounce back very quickly and face little risk of appropriation by the government 3. Cost of debt for some companies may be lower than that of their government, such as in the case of Brazil, where a number of companies' debt is rated investment grade whereas the government is not. The same thing applied to Russia and Argentia since 1990 whose governments defaulted on debt. Greece also defaulted on their debts to the International Monetary Fund and European Central Bank multiple times 3. Returns on ten-year government bonds in Brazil were more volatile than those of beverage company Companhia de Bebidas das Americas (Ambev) and less volatile than those of major Brazilian banks 4. Some companies like raw-material exporters might benefit from currency devaluation while importers suffer from devaluation

What is the limitation of WACC/features of WACC compared to the normal cost of capital?

1. WACC assumes there would be no change in the capital structure, which is not possible all over the year, and if there is any need to source more funds 2. It assumes that there would be no change in the risk profile. As a result of faulty assumptions, there is a chance of accepting bad projects and rejecting good projects

Impact of Inflation on M&A Funding

1. We often choose the terminal growth rate in termnial value using inflation growth or GDP growth 2. When inflation rises, the Treasury rate is higher and the discount is higher because an acquirer could safely park their money in a risk-free investment with high interest. For example, if cap-rate of a multifamily property is 3.5% compared to Treasury Rate of 4.0%, then one might as well invest in the Treasury Bond and sit around with less risk 2. As interest increases, valuation is compressed. As taxes increase, investors derease risks and don't make as many efforts to generate money through investments. As taxes increase, business owners themselves are also less likely to cash out due to the increased tax consequences from such sale.

A company with a P / E multiple of 25x acquires another company for a purchase P / E multiple of 15x. Will the deal be accretive or dilutive?"

1. You cannot tell unless it is 100% stock deal 2. The seller's Yield is 1/15 = 6.7% 3. The buyer's yield is 1/25 = 4% 4. If the deal is all stock, it will be accreditive since the seller's yield is higher

Free cash flow should be used as the return

1. if the company is not paying dividends 2. if the company pays dividends but the dividends paid differ sizeably from the company's capacity to pay dividends 3. if free cash flows align with profitability within a reasonable forecast period with which the analyst is comfortable

How do you screen for precedent transactions?

1. industry classification 2. Financial criteria (market cap, revenue, EBITDA threshold) 3. Geography Precedent transactions usually within the past 1-2 years (more than 2 years, kinda hard to find data) The most important comparable reason is industries

Two companies are identical in earnings, growth prospects, leverage returns on capital and risk. Company A is trading at a 15 P/E multiple, while the other trades at 10 P/E, which would you prefer as an investment?

10 P/E: A rational investor would rather pay less per unit of ownership

A company generates $200 of cash flow next year. Its cash flow is expected to grow 4% per year for the long term. You could earn 10% per year by investing in other, similar companies. How much would you pay for this company?

200/(10% - 4%) = $3,333

How to conduct sensitivity analysis between WACC and share price?

Analysts perform sensitivity analysis in Excel to understand how fair value is impacted by changes in WACC and growth rate. Fair valuation of stock is inversely proportional to the WACC. Fair valuation is more sensitive to WACC compared to terminal growth rate

Tariff concern due to anti-dumping circumvention investigation

Anti-dumping circumvention investigation of solar cells from South East Asian Countries against the US - Investigate assembly of solar cells in Malaysia, Thailand and Vietnam based on the claims that the manufacturers used parts amde in China which could have been subject to tariff - Suppliers if stop shipment from these countries will worsen the supply chain constraints within the solar and wind project sectors

Impact of inflation on PPA and assets sales in renewables

As yields increases, PPAs terms need to change to accomodate such changes. Strong government backing allows for cost of debt to be relatively cheap compared to inflation rate. Despite not being common, project developers can try to fund with equity which might be lower cost right now before issuing debt later when interest rate subsides.

What is the difference between book value versus market value of equity?

Book value = shareholder equity on the balance sheet. Book value of equity can be negative as the company issues a lot of dividend, or net operating loss is huge Market value = public stock value reflecting demand and supply of equity

Why subtract cash from EV

Cash has been acounted for in the market value of equity, and can be used to pay dividend or repay debt which reduces the value of a company

What are the Combined Equity Value and Enterprise Value in the same deal. Assume that Equity Value = Enterprise Value for both the Buyer and Seller

Combined EqV = Buyer's Equity Value + Value of Extra Stock Issued = 25* 10 + 25 * 6 = $400

Which of the main 3 valuation methodologies will produce the highest valuations?

DCF is very dependent on the assumptions of growth into the future and risk premium built into the discount rate used to discount future cash flow to present value DCF tends to produce the most variable output since it depends heavility on assumptions about future performance Precendent Transactions produce higher values than Comparable companies as it takes into account the control premium

Is it always accurate to add Debt to Equity Value when calculating Enterprise Value?

Debt is usually refinanced during an acquisition, and usually buyer pays off seller's debt so debt adds to the purchase price because buyer has to pay. But there will be cases where buyers do not pay off sellers' debt.

Questions to ask about project financing to ask

Different stages of project financing has different risk premium to be built into the model 1. Phase 1 = low business risk since all the preparation work such as feasibility studies, government and regulatory approval, land lease, negotiating PPAs does not result in material cash outflows 2. Phase 2: business risk = infrastructure construction project (Assets Under Construction) 3. Commercial Operation Date marks the beginning of phase 2, project is put into operation, electricity is produced and sold at electricity prices often contractually secured via FiTs, PPAs or both. 4. Phase 4: Electricity sold at prevailing spot prices at full merchant price exposure unless new PPAs can be contracted.

What does the IRR mean

Discount rate at which NPV of an investment = 0 or (present value of cash flow - upfront price = 0)

Opex and Capex Treatments among earnings metrics

EBIT deducts Opex and D&A (after-effect of Capex) but not CapEx EBITDA deducts OpEx but no CapEx (both the initial amount and the Depreciation afterward are ignored) Net Income is similar to EBIT, it deducts Opex and Depreciation, but not Capex directly. NI and EBIT are more useful to reflect the company's capital spending Net Income - Capex - Change in net working capital = Free Cash Flow (Unlevered) With the EBIT vs. EBITDA choice, it depends on how you want to treat CapEx. To completely ignore it, use EBITDA. To factor it in, partially, use EBIT. Also, remember that EBIT isn't valid in valuation multiples under IFRS, so you have to rely more on EBITDA and EBITDAR there.

Renewables multiples

EV / EBITDAX (Earnings Before Interest, Taxes, Depreciation, Amortization & Exploration Expense), EV / Daily Production, EV / Proved Reserve Quantities

EV/EBIT versus EV/EBITDA

EV/EBIT is better when we want to take into account depreciation and appreciation, especially in industries like manufacturing or infrastructure where these non-cash charges drive the value for companies. Sometimes, Free Cash Flow can increase yet net working capital change is negative and it is because of high non-cash charges that has been added back to FCF but high depreciation might be considered unfavorably in some industries EV/EBITDA, therefore, exclude all the items like capex, D&A and capital structure. EBIT deducts Opex and the after-effects of Capex such as D&A but not Capex entirely P/E shows the completeness as it reflects the company's true bottom line. It reflects a variety of factors such as tax rate, capital structure and non-core business activities. Interest expenses and income are crucial in the commercial banking and insurance industries so P/E is applicable Net Income and EBIT, deduct opex and depreciation but not the entire capex. EBIT and NI are more useful than EBITDA in reflecting the company's capital spending

Without doing any math, what ranges would you expect for the Combined EV/EBITDA and P/E multiples, and why?

EV/EBITDA should be within the range of buyer multiples and seller's purchase multiples. It is not a simple average due to the relative sizes of the buyer versus the seller P/E multiples are when the purchase method (all stock/ 80% stock, 20% cash, etc/all cash) also play a role

What is the appropriate numerator for a revenue multiple?

Everything above the minus interest expense line is available to all investors (equity, debt, preferred stock), whether it is revenue, Gross profit or operating profit. So Enterprise value is more appropriate EV = Equity Value + Net Debt = Equity Value + Gross Debt and Debt Equivalents - Excess Cash For Net Income, Equity will be used as debt and taxes have all been paid. EPS, after tax cash flow and book value of equity all have equity value as the numerator because the denominator is levered or post-debt

Renewables projects/assets (risk profile)

Finite period (20-30 years, affect the use of free rate) Low financial leverage: Core infrastructure assets are often highly geared, comprising as much as 60-70 % debt or even up to 90% in some government-backed sectors. . Low construction risk = shorter lead time, higher pace of technology development. Observed little to no construction risk premium for greenfield transaction Low operational cost volatility: Renewable energy assets have lower volume and input price risks compared to infrastructure assets. Energy generate electricity from renewables are from sources with zero input price with little to no volatility, like solar, wind and hydropower.

When would we discount levered cash flow using cost of equity to arrive at current free cash flow to equity instead of deriving equity value from EV - net debt? or shares price * shares outstanding

For private firms, their shares are not publicly traded. If there are public traded shares and share price, we should use shares price * outstanding number of shares DCF is for private equity, we should calibrate the model and adjust for variables within WACC to see how they impact the fair value

Pros and Cons of forward-looking models

Forward looking models link current stock prices (P) to expected cash flows by discounting CF at cost of equity. The implied cost of equity thus becomes a function of known current shares values and estimated future cash flows.

What is free cash flow to equity?

Free cash flow - tax adjusted interest expenses + tax adjusted interest income We use free cash flow to equity to arrive at common equity. (net income * multiple) If we use free cash flow to firm (not equity) model, then we estimate the value of the firm and subtract non-common stock capital = net debt.

Why is cost of equity based on p/e and dividend capitalization (d1/r-g) preferable?

Future growth rate is reflected, which in turns reflects the required/expected returns by investors. Drawback: Might overstate future growth assumptions (long term growth of earnings or dividends)

Growth in green and energy renewable EV/EBITDA multiple from 2019 to 2022 (average)

Green Energy: 10.86x in 2019 to 15.85x in 2022 with 18.2x peaking in 2020 Q4. Environmental and Waste Services EV/EBITDA from 11.23 in 2019 to 14.66 in 2021 and 15.38 in 2022, pretty comparable but lags behind the green energy a bit Power: 9.16x in 2019 to 10.39x in 2022

DCF versus LBO

Here's the easiest way to think about it: with an LBO, you do not get any value from the cash flows of a company in between Year 1 and the final year - you're only valuing it based on its terminal value. With a DCF, by contrast, you're taking into account both the company's cash flows in between and its terminal value, so values tend to be higher. Note: Unlike a DCF, an LBO model by itself does not give a specific valuation. Instead, you set a desired IRR and determine how much you could pay for the company (the valuation) based on that.

There are 2 approaches to estimating the cost of equity and market risk premium, what are they

Historical (capm - beta) based on what equity investors have earned in the past Forward-looking, based on projections implied by current stock prices relative to earnings/cash flow and future growth

Does adding net debt increase enterprise value?

If that's the case, doesn't adding debt and subtracting cash increase a company's enterprise value? How does that make any sense? The short answer is that it doesn't make sense, because the premise is wrong. In fact, adding debt will NOT raise enterprise value. Why? Enterprise value equals equity value plus net debt, where net debt is defined as debt and equivalents minus cash.

. Can you give examples of major line items on each of the financial statements?

Income Statement: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Net Income. Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt; Shareholders' Equity. Cash Flow Statement: Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing.

Why not pay with all cash?

It might be saving its cash for something else or it might be concerned about running low if business takes a turn for the worst; its stock may also be trading at an all-time high and it might be eager to use that instead (in finance terms this would be "more expensive" but a lot of executives value having a safety cushion in the form of a large cash balance).

Other valuation ,methodologies

M&A premium analysis: Analyzing M&A deal and figuring the premium that each buyer paid, use this to establish how much a company is worth Future share price analysis: Company's share price based on the P/E multiples of the public company comparables, then discounting it back to PV SUm of parts: Value each division of the company

Why does the use of dividend cash flows to project cash flows to equity cause problems?

Many corporations have moved from paying cash dividends to buying back shares and finding other ways to return cash to shareholders, so estimates based on ordinary dividends will miss a substantial portion of what is paid out

Two methods of valuing renewable energy assets

Method 1: CAPM model - Financed by private capital, asset investment set up as SPV (special purpose vehicle), holding either a single asset or a portfolio of assets with a finite lifespan - Scarcity of comparable or available public information for renewable energy assets means that it is difficult to test them against the assumptions of CAPM Method 2: Implied internal rate of return (IRR) - limitations of CAPM indicates it is more appropriate to use the IRR implied by comparable transactions as a proxy for cost of capital - IRR renewable assets comprises the risk fee rate plus required return for technology, geography, incentive scheme and other asset-specific risks - Impacted by the level of supply and demand in the investment market

Walk me through the OVO energy deal and Mitsubishi Corporation Bank in Japan

Mitsubishi Corporation (at this time had 6.2 gigawatts of energy assets under management, equal to energy supply for 8.5 million households) bought a 20 percent minority stake in British power supplier OVO Energy for 200 million - Synergies: --> market expansion for Ovo energy to Europe and Asia, besides speeding up the development for its new energy technologies unit called Kazula. Kazula helps both energy retailers to optimize their products with cost reduction and agility besides offering Kazula Flex - managing the charging of smart home devices to create a flexible, zero carbon grid - Kaluza Flex shifts device charging in response to customer needs and real-time market signals such as grid supply, weather forecasts and pricing data. = flexibility for network operators during off-peak hours, reducing the price of energy for device owners and cutting carbon emissions - Mitsubishi Corporation in turn gains a more diversified presence across the renewable energy value chain, from energy equipment manufacturing to upstream renewable nergy generation, energy trading and retail energy supply and services

Do we use FCFF or FCFE

Most valuations use FCFF because FCFE is only available to equity holders after debts have been repaid. But debt issuance or refinancing are managerial decision. and we cannot know for sure. So FCFF (usually UNLEVRED CASH FLOW) will be used in DCF as it is more accurate FCFE can be used in infrastructure and renewables given debt issuance and debt schedule are more predictable

How do the 3 financial statements link together?

Net income (Revenue - COGS - Operating Expense (including interest expense and D&A) - Taxes = Net income) on Income Statement On Cash Flow, Net Income + non cash charges (D&A) to arrive at cash flow of operation Reflect changes on the balance sheet such as assets might decrease by the before tax value of depreciation, and changes in accounts receivable might increase or decrease the company's cash flow from operation depending on how much they changed. Reflect any purchase of property and equipment from asset (increase in PPE) due to extra purchase in the fiscal year = cash flow of investing outflow Increase in debt or other forms of financing under liabilities will be reflected as a plus to cash flow from financing. Payment of tax deductible interest in the income statement will be cash flow from operation Proceeds from stock issuance will be reflected as cash flow from financing inflow and added to the sharesholder equity in the balance sheet Link Net income on income statement to Retained earning in Shareholder's equity on BS. Link the Cash flow statement net value to the Cash from the asset on the asset. Add non cash charges adjustment like D&A to asset or liability. Subtract the links on asset side and add links on liability and shareholders equity side Link CFI and CFF to the matching item on the balance sheet using the same rules

How are 3 statements linked together

Net income at the bottom of the income statement after subtracting expenses from revenue, flow to top of cash flow statement. Adjusted for net WC and non cash charge to get net change in cash. Change in the Balance sheet appears as change in working capital in the cash flow statement, while investing and financing affects balance sheet items like equty, debt, PPE The cash then flows to asset, while net income flows into equity. Adjust for change in PPE from asset or debt from liability to balance it out. Assets = liability + Equity

When do you use an LBO Analysis as part of your Valuation?

Obviously you use this whenever you're looking at a Leveraged Buyout - but it is also used to establish how much a private equity firm could pay, which is usually lower than what companies will pay. It is often used to set a "floor" on a possible Valuation for the company you're looking at.

What would cause a company's Present Value (PV) to increase or decrease?

PV would increase when expected future cash flow increases in their absolute value, their growth rate becomes faster or their discount rate decreases

EV/Revenue multiples (Deloitte)

Renewables 2016 was about 4.8x and now have almost doubled to 9x within the past 6 years in enterprise valuation. Oil and gas reains at 1.5x back in the day of 2015 and 2016.

EV/EBITDA multiples (Deloitte)

Renewables EV/EBITDA was 9x in 2016 and doubled to 18.2x in 2020 and stabilizes around 15.9x in 2022 so it grew a lot P/E was about 20.6x mean and 17.4x median for renewables compared to 11.7x mean and 10.2x median for oil and gas Net renewable energy capacitiy addition growth 2012 to 2020 - global from 5.5% in 2012 to 45.1% in 2020

Let's say it is a 100% Stock deal. The Buyer has 10 shares at a share price of $25.00, and its Net Income is $10. It acquires the Seller for a Purchase Equity Value of $150. The Seller has a Net Income of $10 as well. Assume the same tax rates for both companies. How accretive is this deal?"

Step 1: The EPS of the buyer: $10/10 shares = $1/share Step 2: To do the deal, the buyer needs to issue an extra of: Purchase equity value/outstanding shares of buyers: 150/25 = 6 shares Step 3: After the deal, EPS = 10 * 2 / 16 = 1.25 Step 4: The deal is accreditive by: 1.25/1 - 1 = 0.25 or 25%

Why do M&A

The buyer wants to gain market share by buying a competitor. • The buyer needs to grow more quickly and sees an acquisition as a way to do that. • The buyer believes the seller is undervalued. • The buyer wants to acquire the seller's customers so it can up-sell and cross-sell to them. • The buyer thinks the seller has a critical technology, intellectual property or some other "secret sauce" it can use to significantly enhance its business. • The buyer believes it can achieve significant synergies and therefore make the deal

What does it mean when a company's free cash flow is growing but its change in working capital is increasingly negative each year?

The company is receiving increasing cash but the Capex is becoming less negative. This means less capex is deployed. It can be positive if the firm actually earns more cash while spending less cash on capital expenditure. However, if there are high non-cash charges as part of Capex, or artificially low Capex are boosing FCF, both of those are negative

Why use market value of Equity in the EV calculation

The market value of equity reflects the demand and supply of the company's shares in the market

What does Equity Value mean?

The value of ALL the company's assets, only available to EQUITY INVESTORS (common shareholders)

What does Enterprise Value mean?

The value of the CORE-BUSINESS assets, but to all investors/capital providers (equity, debt, preferred stock and possibly others)

Aggressive incorporation of country risk premium while investing in emerging markets

There isn't much of a country risk premium built into the valuation of stocks in some emerging markets. If there were a substantial country risk premium, P/E would have been much smaller than they are Valuations of Brazil companies have incorporated country risk premiums of 3 to 5 percent, plus an inflation differential (compared to US companies) of about 2 to 3 percent. Cost of equity, then would be 8% * 1.59 + 5% = 15%. If P/E = 13 times, then the business would need to grow at 8% in perpetuitity to justify such valuation, which is unrealistic

How much would you pay for a firm generating $100 of cash flow every single year into eternity

This depends on your Discount Rate or targeted yield, into which the risk premium degree of the investment has been built. If the discount rate is 10%, you pay 100/10% = 1000 If the discount rate is 20%, you pay: 1000/20% = 500 The higher the level of discount rate, the lower the value I am likely to pay

What is a time value of money and how is it reflected in WACC?

Uncertain cash in the future is less valuable than certain cash at the present. The higher the uncertainty, the less valuable the dollar is. Higher WACC reflects this higher uncertainty of future cash by giving the riskier dollar the higher discount

Working capital, what is that?

Usually measures changes of net current asset minus current liabilities (operating assets - operating liabilities). Changes in net working capital increases means the difference between oerating and operating liabilities increases each year Quick ratio = current asset/current liabilities. This often poses as a quick indicator of the company's financial health. Changes in networking capital shows whether the company needs to spend more to advance its growth, or if it generates more money as a result of its growth. For change in WC to be positive, it's pretty much about receiving cash in advance or paying less cash in advance before revenue is officially incurred or recorded in the income statement. So technically, more deferred revenue might mean positive change in working capital. Subscription based companies usually receive a yearly subscription revenue in advance before revenue is incurred each month when they service is provided Retail companies who put down their cash to purchase inventory before incurring revenues (selling their products)

Explains what WACC means intuitively and how each component is calculated

WACC is the expected annualized return over the long term if you invest proportionately in all parts of the company's capital structure - Debt, Equity, Preferred Stock, and anything else it has. Cost of debt is calculated in 2 possible ways: - Median YTM on the issuances of peer companies' debt - Risk Free Rate + default spread based on the company's credit rating after it issues more Debt or Preferred Cost of equity: CAPM (rf + (market return - risk free) * levered beta) or dividend capitalization model (D1/P0 + constant dividend growth rate)

Does WACC take into account unsystematic risk?

What's important to note, however, is that WACC may be viewed as the opportunity cost of investing one's capital elsewhere (an investment constituted of a similar risk profile). Therefore, "the future value of cash [isn't] just cash minus inflation" for inflation would simply figure for systematic risk that is naturally ushered into any financial consideration whether be hoarding or investing "cash". The WACC must include unsystematic risk that is unique to the company or parts of the company you choose to intrinsically value. Unsystematic risk may be determined through a myriad of ways and may result in different conclusions.

How do you calculate and sanity check Terminal Value in a DCF?

You apply a Terminal Multiple, such as an EV / EBITDA figure based on the comparable companies, to EBITDA in the final year of the forecast period, or you pick a Terminal FCF Growth Rate and use a variation of the "Company Value" formula: Terminal Value = Final Year FCF * (1 + Terminal FCF Growth Rate) / (Discount Rate - Terminal FCF Growth Rate) To check yourself, back into the Terminal FCF Growth Rate implied by the first method and the Terminal Multiple implied by the second method. If you get, say, a 10% Implied Terminal FCF Growth Rate for a company in a developed country, you're way off and need to pick a lower multiple that results in a growth rate below the long-term GDP growth rate.

How might you select a set of comparable public companies for use in a valuation?"

You screen based on geography, industry, and size. For example, your screen might be "U.S.-based steel manufacturing companies with over $500 million in revenue" or "European legacy airlines with over €1 billion in EBITDA."