technicals

how do you calc fcf from net income of a levered firm

+dep and amort +int expense - capex -inc in nwc / dec in nwc

What kind of financial modeling have you done in the past?

I used to walk the runway wearing nothing but cashmere socks and wingtips.

how can lbo analysis be used to value a company

Leveraged Buyout looks at what a financial sponsor could pay considering a target IRR and the debt capacity of the firm.

Why might two companies have a different cost of equity?

They have different betas. The beta of a stock measures that stock's sensitivity to movements in the overall stock market. More volatile stocks have a beta higher than one; less volatile stocks have a beta less than one.

what is a beta and what are its limitations

a measure of systematic risk and the standardized covariance between market return and individual security return limitations are its based on historical performance and might not be a great predictor for the future

when a company with a higher pe ration acquires a firm with a lower pe ration it is

an accretive merger

why can't you use ev/earnings

because ev isn't dependent on capital structure

why is the cost of debt lower

because it is senior in the cap structure and has first claim on assets in the event of bankruptcy so it demands a lower return

why do you subtract cash in the formula for ev

because its considered a non operating asset and because equity value implicitly accounts for it

why do you start with ebit when calculating fcf

because its unlevered and doesn't take in to account capital structure. you want it to be unlevered because when you're discounting it back with wacc, wacc is levered, so its already accounting for the cost of debt

how many years of cash flows would you need to forecast for a tech start up and why

beyond 5-10 years because it is a high growth firm

where can you find dep and amort of a firm

bs, is, and cf stmt

how does fcf differ from cash from operations

cash from op doesn't include capex, it is levered because it includes int exp, includes tax effects of non cash items

In an debt transaction, a company with a lower P/E is buying a company with a higher P/E. What is the effect of this transaction?

combined company will have a higher p/e ratio then acquirer originally did, and since no additional shares had to be issued by the acquirer then eps would increase as well, making it an accretive transaction

In an all-stock transaction, a company with a lower P/E is buying a company with a higher P/E. What is the effect of this transaction?

combined company will have a higher p/e ratio then acquirer originally did, but since the acquirer would have to issue lots of shares to finance the acquisition then the eps would be lower, thus making it a dilutive transaction

which valuation method would you focus on for an ipo

comparable companies bc you can see what similar stocks are trading at

which valuation technique will give you the hightest value of a company

comparable transactions because of strategic value and synergies; also because they are paying a premium to buy the company called a control premium

what is nwc

current assets - current liabilities

what are the 3 most commonly used valuation techniques

dcf, comparable companies multiples, precedent comparable transactions method

what are some examples of intrinsic valuation methods

dcf, dividend discount model, net asset value

what valuation technique is the most theoretically correct

dcf; however minute changes will have drastic impacts

company has debt 6 times ebitda. they sell an asset that is value at 4 times edit and use the money to pay down debt. what happens to debt equity ration?

debt equity ratio is now only 400mm/50mm or 8 times ebitda; ration has increased

how do you calc net debt

debt-cash+minority interest+preferred stock

what are deferred tax liabilities

deferred tax liabilities represent increases in future taxes payable and show up as a line item under liabilities

a company with a lower P/E is buying a company with a higher P/E. What is the effect of this transaction?

depends on how much debt and equity you're using to finance it. more equity means it might be dilutive

walk me through a dcf

determine current fcf project out in to the future using growth expectation determine terminal value discount all fcf and terminal value to present using wacc this gives you present enterprise value

how would you value a company with no revenues

determine liquidation value; comparable transactions with similar companies, if there are prospects for revenue you could dcf

how would you value a company

discounted cash flow comparable companies multiples comparable transactions (m&a comps)

how do you calculated a unleveraged beta

divide levered beta by 1 plus 1 minus t times debt over equity

a company with an earnings yield of 12% acquires a company with an earning yield of 13%. this is an all stock deal. will this be accretive/dilutive/neutral what if it is an all debt deal. tax 30%. what is the highest rate of debt the acquirer can borrow before the deal stops being accretive

earnings yield is inverse of pe pes would be 1/13 and 1/12 the aquifer pe is higher than the target so it is accretive for every

how do you calc fcf

ebit -tax +dep and amort -capex -inc in nwc / +dec nwc

how does $10 dep affect fcf

ebit down 10 tax rate is 40 so at ebit down 6 add back dep to get fcf up 4

dep expo inc by $10. 40% tax rate. impact on 3 stmts

ebt is down 10 tax rate is 40 so ni down 6 ni flows to top line of cf stmt but you add back dep since its not cash so cf is up 4 cash on bs is up 4 and dep is up 10 overall assets are down 6 ni flows to re on bs so equity is down 6

microsoft sells computer for 20 with a cogs of 10. assume 25% tax rate. how does that affect the 3 financial statemnts

ebt is up 10 ni up 7.5 after tax ni flows into top line of cf statement inventory fell by 10, which is a reduction in nwc and an addition to cash from ops cash from ops up 17.5 cash on bs up 17.5 and inventory is down 10 assets up 7.5 ni flows in to re so equity value up 7.5

company sells asset for 100. bv was 60. assume 10% tax. how does that effect 3 fine stmts

ebt up 40 for the gain and ni will be up 36 after tax on cf from ops, ni is up 36 deduct gain of since it will be accounted for in cf from investing, so cf from ops is down 4 cf from investing is up 100 overall cash is up 96 cash from bs is up 96 and ppe is down 60 overall assets re up 36 equity is up 36 form the ni flowing to re

what are some common valuation metrics

enterprise value / ebitda ev/ ebit ev/sales p/e

when looking at an acquisition of a company, do you pay more attention to enterprise or equity value

enterprise- its the cash amount actually paid for the firms total assets - both debt and equity

what is the difference between enterprise value and equity value

equity represents value attributable only to the equity owners of the business, enterprise represents value of business before accounting for any obligations to creditors

how do you find cost of debt and cost of equity

find equity using capm and cost of debt is the yield on the most recent bond issuance

Suppose your client had significant excess cash on the balance sheet. How would you recommend its use?

first you would need to determine of it was significant excess cash. for companies in cyclical industries they might want to keep some of it in the books to be prepared for market downturn. if they do in fact have excess cash they can invest in positive npv projects or return money to the shareholders in the form of share repurchases, dividends, and debt repurchases

why would one company have a higher pe multiple than other company in the same industry

growth prospects, steady cash flows, size of company, lower capex, quality of managers and customers

what would make one company riskier than another financially

high leverage

when using capm to calculate wacc, what beta do we use

industry average beta which is the mean of the list of comparable firms this beta will be levered so you'll need to unlever it then reliever it to reflect capital structure of firm you're valuing

why do you use ebitda

its unlettered, doesn't include capex , and you can compare companies easier

chevron is acquiring a company that has a pe of 10. they divide to finance the deal with all debt at 10%. assume a 30% tax rate. would this be accretive/dilutive/neutral?

look at at cost of debt- 10%(1-40%) = 6% for every $1 in debt raised it will cost you .06 you pay $10 for every $1 in earnings, so every $1 you pay will earn you .10 since the deal will cost you .06 and you earn .1 for every dollar, it is accretive

how could a firm reduce their wacc

lower either the cost of debt or equity most likely lever up, or readjust capital structure more towards debt, because the cost of debt is lower

what capex do you use when calculating fcf

maintenance

which valuation technique will give you the lowest value of a company

multiples method

how do you calculate a terminal cash flow

multiply last known cash flow by 1 plus the growth rate, then divide it by interest rate minus growth rate

how do you find wacc how do you find cost of debt and cost of equity

multiply percentage of cs by cost of cs + percentage of ps times cost of ps + percentage of debt times 1 minus tax rate time cost of debt find equity using capm and cost of debt us the yield on the most recent bond issuance

how do you calculated a leveraged beta

multiply unlevered beta by 1 plus 1 minus T times debt over equity

how can you measure a companies efficiency and its short term financial health

net working capital

how do 3 stmts link together

ni flows in to re on balance sheet and into top line of cf stmt changes in bs items appear as nwc changes on the cf stmt investing and financing activities affect balance sheet items such as ppe, debt and share holders equity cash flows in from final line on cf stmt

can equity value be negative

no because ins market cap and its impossible to have negative amount of os shares or a share price below zero

is goodwill amortized

no because its tested for impairment

what happens to stmts when inventory goes up by 10, assuming you pay for it with cash

no effect on is inc in nwc by 10 so cash from op down 10 cash down 10 on bs, inventory up 10

does a change in nwc include cash changes

no, meant to show uses and sources of cash that don't match up with the net income figure

buying 100 worth of new refineries with debt. how are all 3 stmts effected at the start of year one before anything else happens and at the start of year 2. assume debt is high yield so no principal has been paid off. int rate 10% and refineries depreciate at a rate of 10% per year. 40% tax rate

nothing on is cf from investing is down 100 cf from financing is up 100 net effect on cash is 0 on bs assets are up 100 from new refineries and liabilities are up 100 from new debt int exp is up 10 dep exp is up 10 ebt is down 20 tax rate 40% so ni is down 12 add back depreciation so cash from ops is down 2 cash on bs is down 2 and dep is up 10, assets are down 12 ni flows in to re so equity is down 12

what valuation method would you focus on for a merger

precedent transactions bc you can see what multiple companies are being acquired for

what are some examples of relative valuation methods

price methods, comparable transactions

what are deferred tax assets

represent a reduction in future taxes payable and show up as a line item under assets on the balance sheet

name some non recurring charges that need to be added back to companies ebit/ebitda

restructuring charges, goodwill charges, asset write downs, one time legal expenses, excessive bad debt expense, disaster expense, change in accounting policies

how do you calc fcf starting from revenue

rev -cogs -opex -tax +dep and amort -capes -inc in nwc / +dec in nwc

how do you calculate capm

risk free rate plus beta times the market risk premium risk free rate plus beta times average return on the market minus risk free rate

what are attributes of similar companies

same industry same time in industry same cap structure similar size similar region/geographu\y similar cost structure similar age

what decreases stock holders equity

share buybacks, dividends, negative earnings

lets say you pay an employee $100, 50% cash, 50% stock. assume 40% tax rate. how will this effect the 3 financial stmts

wage expense up 100 ni down 60 ni flows into top line cf stmt add back 50 since 50% of expense was non cash cash from ops down 10 cash on bs down 10, assets down 10 ni flows into re so down 60 50 of new equity was issued so up 50 equity down 10

when is a merger dilutive

when eps falls

when is a merger accretive

when the acquiring companies eps will increase after the merger

if dep is non cash why does it affect cash balance

while dep is non cash it is tax deductible. since taxes are a cash outlay, it affects the amount of cash you pay

can shareholders equity be negative

yes- consistent negative earnings, high amounts of unrealized losses on available for sale market securities

how would dcf change if you used levered fcf

you wouldn't discount by wacc, you would discount by cost of equity value ending value would be an equity value not an enterprise value