IBIG-04-08-Everything-Else (JG)

P/E 25x, tax rate 25%, revenue 4000, Gross Margin 50%, 100 shares outstanding, EV/EBITDA 10x, Opex (including D&A): 1050, Senior debt 1000 (5% interest), Junior debt 1000 (10%), what is the share price?

$4000 revenue, $2000 gross profit $950 EBIT (subtracting OpEx), then $800 EBT (subtracting interest payments) Applying a 25% tax rate, net income = $600 EPS = $600 / 100 = 6 PE = price/EPS, 25 = price/6, $150 = price (Answer: $150)

A company has: - $2,000 in revenue - 30% EBITDA margin - 8x EBITDA multiple - $600 in debt - $200 in cash - $100 of non-controlling interest - 100 shares outstanding What is the company's share price?

$600 in EBITDA ($2,000 x 30%) $4,800 in TEV ($600 x 8) $4,300 IN EQV ($4,800 - $600 - $100 + $200) $43 per share ($4,300 / 100) (Answer: $43)

What is the relationship between the dollar and bond yields?

As yield increases, the dollar typically gets stronger. This is because borrowing becomes more expensive if interest rates rise, therefore the supply of money is constricted. If there is less supply, the dollar gets stronger (it can essentially buy more of another currency than it could before). (Answer: Positive relationship)

A company has a 10x PE ratio, a market cap of 1,000mm, a 10% interest rate, a 50mm interest expense, 50mm of D&A, and an EV/EBITDA ratio of 5x. What is the tax rate?

Given a 10x PE ratio and a market cap of 1,000mm, we know that net income must be 100. Since 50mm represents 10% of the overall debt balance, we know this company has 500mm in debt, giving us an enterprise value of 1,500mm (1,000 + 500). Given an EV/EBITDA ratio of 5x, this gives us an EBITDA of 300. Subtracting D&A gives us an EBIT of 250 and subtracting our interest expense gives us an EBT of 200. Comparing that with our net income of 100 gives us a 50% tax rate (Answer: 50%)

Net Debt / EBITDA = 3x, EV/EBITDA = 10x, Market cap = 560M. What is enterprise value?

Net Debt / EBITDA = 3x --> Net debt = 3 * EBITDA EV/EBITDA = 10x --> TEV = 10 * EBITDA Market cap = 560M TEV = EV + Net Debt 10 x EBITDA = 3 x EBITDA + 560mm 7 * EBITDA = 560mm EBITDA = 80mm TEV/80 = 10, enterprise value = 800 (Answer: Enterprise value = 800)

We have a company with: Current EV = $250 1st Lien Term Loan: $150 2nd Lien Term Loan: $150 What is equity value? What is the debt trading at?

The first lien term loan will be trading at par. The second lien term loan will have a remaining $100 of TEV for $150 of debt, so it will trade at 66 cents on the dollar. In this case, the equity value is 0

You have an EPS of 2x, a PE ratio of 30x, 100 shares outstanding, and you go from a 50% to 25% tax rate. What is your new share price?

EPS = Net income / shares outstanding 2 = Net income / 100 --> 200 = net income --> 400 = pre-tax income --> net income under 25% tax = 300 300 / 100 = 3 (New EPS) PE ratio = Price / EPS 30 = Price / 3 --> 90 = price (Answer: $90)

$6 EPS, P/E 40x, 100 shares outstanding, Tax goes from 50% to 30%, What is the new share price?

EPS = net income / shares outstanding 6 = net income / 100 600 = net income, so pre-tax income = 1200 1200 * 0.7 = 840, which is new net income EPS = new net income / shares outstanding EPS = 840 / 100 = 8.4 PE ratio = price / EPS 40 = price / 8.4, 336 = price (Answer: $336)

EV/EBITDA is 5x and EV/Revenue is 2x. What is the EBITDA margin?

EV = 5 * EBITDA EV = 2 * Revenue 5 * EBITDA = 2 * Revenue EBITDA / Revenue = 2/5 = 40% (Answer: 40%)

Company has EV/EBITDA of 5x, EBITDA of 100. It has 400 term loan, 300 senior secured by 100 collateral, 100 subordinate debt, and 100 equity. What is each tranche trading at.

With a 5x multiple on $100 of EBITDA, this would give us a TEV of $500 The $400 term loan is trading at par, giving us $100 of TEV remaining for the $300 of senior secured. Given that it is backed by $100 in collateral, this means that it is trading at $200/$300 or 66.7 cents on the dollar The subordinate debt and equity would be trading at 0

If there are two companies, one with 20% equity and 80% debt, and the other with 50% equity and 50% debt, and the company doubles in size, which one would you rather own?

You would rather own the company with 50% equity in order to participate more in the upside (all else held equal)

Let's say you've invested $400mm in the debt of a company with a 20% chance of being worth nothing, a 50% chance of doubling in value, and a 30% chance of tripling in value. What is the value of your debt investment? How would it be different if it were an equity investment?

Your debt investment has a 20% chance of being worth nothing, and the company has an 80% chance of being worth more than it is now. Therefore, your debt is worth $400mm * 0.8, or $320mm. (Answer: $320mm) With an equity investment, we can use the expected value formula. 0(0.2) + 800(0.5) + 1200(0.3) = $760mm (Answer: $760mm)

You made a $100mm debt investment in a company that has a 50% chance of being worth nothing and a 50% chance of doubling in value. What is your debt investment worth today? What if that was an equity investment?

Your debt investment is limited to $100mm, so since there's a 50% chance of going bust, your debt investment is worth 50mm. (Answer: 50mm) For an equity investment, you would use the expected value formula. 0(0.5) + 200(0.5) = 100 (Answer: 100mm)

A company has: - 20x PE Ratio - 25% Tax Rate - $2,000 Revenue - 50% Gross Margin - $500 SG&A (including D&A) - 100 Shares Outstanding - 7.5x EV / EBITDA - $1,000 of Debt - 10% Interest Rate What is the company's stock price?

$2,000 in revenue $1,000 in gross profit (50% gross margin) $500 in EBIT ($500 in SG&A) $100 in interest expense ($1,000 debt, 10% interest rate) $400 earnings before taxes ($500 - $100) $300 net income (75% tax rate) $6,000 in equity value ($6000 / $300 = 20x PE ratio) $60 share price ($6000 EQV / 100 shares outstanding) (Answer: $60)

25x PE, 25% tax rate, $2,000 in revenue, 100 shares outstanding, 50% gross margins, EV/EBITDA 10x, $1,000 in debt, 10% interest rate on debt, SG&A expense of $500. What is equity value?

$2,000 in revenue, $1,000 in gross profit, $500 in operating income, $400 in pre-tax income, $300 in net income. PE ratio = equity value / net income --> 25x = equity value / $300 (Answer: $7,500 equity value)

What is the beta of a casino? What about Russian roulette?

0, as it is uncorrelated with the market

What is it called when a security gets full recovery in waterfall, what is it called when it does not, what is it called when a secured debt security outvalues its collateral

Made whole Impaired Deficiency claim

If you had $20,000 to invest in a security earning 10% and a security earning 5% and your targeted returns were 8%, how would you allocate your capital?

20,000 * 0.08 = 1,600 (targeted returns) x(0.05) + y(0.10) = 1,600 x + y = 20,000 x = 20,000 - y (20,000 - y)(0.05) + y(0.10) = 1,600 y = 12,000 (Answer: 12,000 in 10% and 8,000 in 5%)

You have a company with $100 in EBITDA, bank debt of 4x EBITDA, high yield bonds of 2x EBITDA, and debt is 60% while the rest is equity at 40%. What is the EV / EBITDA multiple?

4x bank debt = $400 in bank debt, and 2x high yield bonds = $200 in high yield bonds, giving us a total debt balance of $600. Given that debt is 60% of the capital structure, this means that there is $600 in debt and $400 in equity, for a total enterprise value of $1,000. $1,000 / $100 is 10x, so our EV / EBITDA multiple would be 10x.

Let's say that your company has 100mm in EBITDA and trades at a 6x EV/EBITDA multiple. It has 275mm in secured debt, 125mm in unsecured debt, and 150mm in cash. What is your equity value in this scenario? What happens when the multiple drops to 3x?

600mm in TEV, 275mm in secured, and 125mm unsecured, and 150mm in cash means that your equity value is 350mm (600 - 275 - 125 + 150 = 350). If your multiple drops to 3x your TEV becomes 300mm, leading the 275mm in secured to trade at par and your unsecured debt to trade at 20 cents on the dollar (300 - 275 = 25 25/125 = 0.20) and your equity value to be near 0. (Answer: 350mm EQV, 20 cents on the dollar, EQV near 0)

What is the difference between a loan and a bond?

A bond is a tradable investment product or security that yields interest, while the other is a form of credit that the borrower is required to pay back with interest

Company has EV/EBITDA of 5x, EBITDA of 100. It has 200 term loan, 200 senior secured, 100 subordinate debt, and 100 equity. What is each tranche trading at.

All debt at par, equity at 0

How do we get to unlevered free cash flow from the bottom of cash flow from operations?

Bottom of CFO + tax effected interest - CapEx = unlevered free cash flow

What does capital structure mean?

Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Debt investors sit at the top of the capital structures and equity investors are at the bottom, meaning that in a bankruptcy scenario debt investors will be paid out first

A company has an EPS of 2, a PE of 30x, 100 shares outstanding, and tax rates go from 50% to 25%. What is the new share price?

Given an EPS of 2 and 100 shares outstanding, we know that net income is $200 because EPS is equal to net income / shares outstanding. Given that our original net income was $200 under the 50% tax regime, this would represent a pre-tax income of $400. Transitioning to a 25% tax rate gives us a new net income of $300. This brings EPS to 3, and given that our PE ratio is 30x and PE is equal to price divided by EPS, we know that the new share price is $90 (30 = p / 3)

Company has EV/EBITDA of 3x, EBITDA of 100. It has 400 senior secured (1L), 400 senior unsecured (1L), 200 equity. There is 200 of collateral available. What is each tranche trading at.

Given that we have a TEV of 300 and 200 in collateral, we can use 200 to pay down the senior secured, bringing it to 200. Given that the senior unsecured is at 400, this means that it makes up 2/3 of the senior debt, whereas the secured makes up 1/3 of the senior debt. This means that 200 of the TEV is allocated to the unsecured debt and 100 is allocated to the secured debt. This brings unsecured down to 200 and secured down to 100. Therefore, with secured debt at 300/400 repaid, it trades at 75¢ on the dollar, and with unsecured debt at 200/400 repaid, it trades at 50¢ on the dollar.

You made a $250mm debt investment in a company that has a 50% chance of being worth nothing and a 25% chance of doubling in value and a 25% chance of tripling in value. What is your debt investment worth today? What if it was equity?

Given that you can't participate in the upside with a debt investment and you have a 50% chance of losing everything, your debt investment would be worth $250mm * 0.5 or $125mm (Answer: $125mm) With an equity investment, you can apply the expected value formula. 0(0.5) + 500(0.25) + 750(0.25) = $312.5mm (Answer: $312.5mm)

You have $5 in interest expense and the interest rate is 4%. The equity value is $300, and the EV/EBITDA multiple is 10x. Your net income is $10 and you have $22.5 in depreciation. What is the tax rate?

If $5 equals 4%, then the total debt balance is $125. Given an equity value of $300, this brings total enterprise value to $425. Applying the multiple of 10x gives us $42.5 in EBITDA, and by subtracting depreciation we arrive at an EBIT of $20. Factoring out the interest expense to get EBT, we get $15 in pretax income. Since our net income is $10, this must mean that the tax rate is 33.3%.

How is current yield calculated? How about yield to maturity?

Interest rate/current price ((Annual interest + (redemption value - bond price))/#Years to Maturity)/(Redemption value + bond price)/2

Would you rather take 200mm now or 40mm over 5 years?

It depends on the discount rate. When valuing something we can use the formula (Cash Flows x Growth Rate) / (Growth Rate - Discount Rate). Therefore, plugging 40mm into our equation and assuming a 20% discount rate with no growth rate, we get (40 / 0.2) = 200—therefore, if the cash flows don't grow and we have a 20% discount rate, then we are indifferent between the two. If the discount rate is greater than 20%, we would prefer the 200mm, but if it is less, then we would prefer the 40mm over 5 years.

A company's EV/EBITDA goes from 10x to 20x, and EV/Revenue goes from 2x to 4x. What is happening to the company and its EBITDA margins?

Let's say that enterprise value is 100. This would mean that EBITDA is initially 10 but then becomes 5. If we follow the same logic, revenue is going from 50 to 25. In the first scenario, 10/50 represents a 20% EBITDA margin. 5/25 is also a 20% EBITDA margin—therefore, one possible explanation could be that the company is losing revenue and that its EBITDA margins are remaining constant

You have an EV/EBITDA of 12x and a leverage ratio of 8x. What is your Debt/EV ratio? Given this, if your EV is 600, what would be your equity value?

Let's say that you have 100mm in EBITDA. This gives you a TEV of 1,200mm, and given that the leverage ratio is Debt/EBITDA, an 8x multiple means that your debt is 800mm, giving you a Debt/EV ratio of 800/1,200 or 2/3. Given a 2/3 Debt/EV ratio, this means that 1/3 of the capital structure is comprised of equity, meaning that there is 400mm in debt and 200mm in equity (Answer: 8x, 200mm)

Given an EV/EBITDA of 10x and an EV/Revenue of 2x, what is your EBITDA margin?

Let's say that your EV is 100. This would give you an EBITDA of 10 and a revenue of 50, resulting in an EBITDA margin of 1/5 or 20%.

30mm levered FCF, 210mm EBITDA, 65mm in taxes, 50mm CapEx, change in working capital +50, and leverage ratio 5x. What is the interest rate?

Leverage Ratio = Debt / EBITDA --> 5x = Debt / $210, so debt is $1,050. Interest Rate = Interest Expense / Debt Levered FCF = Net Income + Non Cash Charges - Changes in Net Working Capital - CapEx - Mandatory Debt Repayments $30 = Net Income + 0 - $50 - $50 - 0, $130 = net income, pre-tax income = $195, EBIT = $210, therefore interest expense is $15 15 / 1050 = 1.43% interest rate (Answer: 1.43%)

What is the PE ratio of cash?

One way to think about this is the risk free returns that you can generate on $1 of cash. Given that the PE ratio is equal to equity value / net income, you can think of the equity value of $1 being $1 and the net income being the risk free rate (say 4%). In this case, 1/0.04 = 25x, giving cash a PE ratio of 25x in this instance (Answer: 25x)

10x EV/EBITDA, 20x P/E, 20mm Interest Expense, 5% Interest Rate, 20mm Depreciation, 200mm market cap, what is the tax rate?

PE = equity value / net income 20 = 200 / net income 10 = net income 20 = interest expense at 5% interest rate 20 * 20 = 400 of total debt, 200 + 400 = 600 TEV 10 = 600/EBITDA, EBITDA = 60 EBITDA = 60, EBIT = 40, EBT = 20, net income = 10 Tax rate must be 50% (Answer: 50%)

A company has an EPS of 7 and it trades at a 15x PE. The tax rate goes from 30% to 15%. What is the new share price?

PE is equal to price divided by EPS. Given that the tax rate is going from 30% to 15%, this would mean that our EPS is going from 7 to 8.5, so holding the PE ratio constant, this would mean 15 = p / 8.5, giving us a new share price of $127.5.

5x Interest coverage ratio, 7x leverage ratio, what is the interest rate? What about 5x interest and 5x leverage?

Question 1: Interest coverage ratio = EBITDA / interest expense Leverage ratio = Debt / EBITDA Interest rate = Interest expense / debt 5 = EBITDA / interest expense 5 * interest expense = EBITDA Interest expense = EBITDA / 5 7 = Debt / EBITDA 7 * EBITDA = Debt (EBITDA / 5)/(7 * EBITDA) = 1/35 or 2.85% (Answer = 2.85% or 1/35) Question 2: 5 = EBITDA / interest expense 5 * interest expense = EBITDA Interest expense = EBITDA / 5 5 = Debt / EBITDA 5 * EBITDA = Debt (EBITDA / 5)/(5 * EBITDA) = 1/25 or 4.00% (Answer = 4.00% or 1/25)

EBITDA 60mm, 5x EV/EBITDA. 200mm secured debt, 400 mm unsecured debt. What are tranches trading at?

Secured at 200mm, unsecured 25¢ on the dollar

Rank the types of debt in seniority

Senior and subordinate. Revolver, term loans, senior notes, subordinate/junior notes, mezzanine

A company has a leverage ratio of 10x, 50mm in EBITDA, a levered free cash flow of 0, 20mm of CapEx, +10 of NWC, and 5mm in taxes. What is the interest rate on debt?

Since the leverage ratio is 10x and we know that the leverage ratio is Debt/EBITDA, this means that Debt/50mm = 10x and that debt is 500mm. The formula for levered free cash flow is Net Income + Non-Cash Charges - Changes in NWC - CapEx. Plugging values into our formula, we get 0 = Net Income + 0 - 10 - 20. Therefore, we know that net income is 30mm. With an EBITDA/EBIT of 50mm, a net income of 30mm, and 5mm in taxes, we know that EBT is 35mm. Therefore, there were 15mm in interest payments, and given that 15/500 is 3%, we now know that that is our interest rate (Answer: 3%)

2 companies have the same profiles and a gross margin of 0%. One is growing at 15% while the other is growing at 20%—what metric would you use to differentiate between them?

Since the two companies aren't generating a gross profit, you could use revenue multiples to value them. Or, if you calculate free cash flow and arrive at a positive number (through D&A addbacks or changes in NWC), you could use free cash flow metrics.

Rank these items in terms of their betas: roulette, gold, tech, and utilities

Tech, utilities, roulette, and gold (Although do note that gold's beta is slightly positive right now)

Define fulcrum security, pari passu, and deficiency claim.

The most senior security to be impaired When two or more securities are the same seniority When a security is not made whole after receiving its collateral, i.e. security > collateral

A bond with a coupon of 5% maturing in 5 years has a par value of $100 and a market value of $95. What is the bond's yield to maturity?

We can approximate a bond's yield to maturity using the formula (Coupon + (Par - Market)/Years)) / (Par + Market)/2. Inputting our figures into the formula we would arrive at (5 + (100 - 95)) / (100 + 95)/2, giving us an approximate YTM of 6.153%