Accounting
Walk me through $100 in depreciation with 20% tax rate
IS: Pretax income down 100, net income down 80
CFS: net income down 80, D&A add back 100, cash up 20
BS: cash up 20, PPE down 100, retained earnings down 80
When would you use EV/EBIT over EV/EBITDA?
If capital intensive, want to use EV/EBIT --> D&A subtraction reflects maintenance capex.
Walk me thru DCF, comparables and precedents, and rank DCF, comps and precedents.
DCF: free cash flow forecast and discount using WACC; TV using gordon growth / multiples method
Comparable: screen for comps in same industry, geography, similar revenue / EBITDA; 5-10 comps; multiples for Q1, Q2(median), Q3
Precedents: same as comparable but for acquisition
ranking: precedents, and DCF/ comparable varies.
dilutive
Issue $400 dividends. Walk through 3 FS.
IS no impact; CFS CFF decreases by $400; cash down by $400
BS: cash down $400; retained earnings down $400
Company A trades at 10x EBITDA, 50mn ebitda, 50mn cash, 40mn debt, 100mn DSO --> stock price?
EV = 10 * 50 = 500mn
EQV = 500 - 40 + 50 = 510
share price = 510/100 = 5.1
impact of switching from FIFO to LIFO in inflationary environment on DCF? How does tax rate affect this?
If no tax then no impact.
Switch from FIFO to LIFO in inflationary environment will increase COGS, but change in NWC added back, so UFCF increases and valuation increases.
acquisition announced or $10 and stock trades at $5 - why would it only rise to $8? why would it increase to $12?
execution risk - FTC regulations blocking the deal. if 12, investors might believe there may be other biddes that could outbid the existing price.
Sell $100 of inventory for $200, and purchase $100 more in inventory during same time period. Walk me through FS. 20% tax rate.
IS: Revenue 200, COGS 100, pretax income up 100, net income up 80.
CFS: Net income up 80; add back 100 from inventory sale, and subtract 100 from inventory purchases; cash up 80.
BS: Cash up 80; inventory no change; retained earnings up 80
Bridge from EQV to EV (9 items in total; should be at least 6)
EQV + debt - cash + pref stock + unfunded pensions + capital / operating leases - NOLs + NCI - equity investments - ST investments
$10 revenue, $10 gross profit, $10 capex --> impact on DCF
Capex, gross profit and revenue depends on if revenue is price vs. volume
Is Debt always cheaper than stock? Why is CoD usually lower than CoE?
No; if share price really high then 1/(P/E) could be lower than Debt in an acquisition.
Lower than COE because higher in cap stack and tax impact.
$200 in interest expense; 50% cash 50% PIK and $100 interest income.
Net interest expense 100, NI down 80
CFS: NI down80, add back 100 non cahs interest from PIK; up 20
BS: cash up 20, additional PIK debt of 100; retained earnings down 80
2 comps have same EBITDA, but one funded by 50% equity 50% debt; other is 100% equity; which one has higher P/E ratio.
3 diff areas tax affects DCF. Impact of increasing tax rate?
EBIT --> NOPAT
Beta (CAPM)
WACC (lower cost of debt)
Tricky - not set in stone, but usually will decrease valuation
What happens to Deferred Revenue in an M&A?
Deferred revenue written down to cost of servicing
Let's say company bought some debt cus we believe price will go up within next few quarters. So far, debt / equity has risen by $100, but we haven't sold yet. Walk through FS. 20% tax rate.
Assume that this debt would be considered trading security because we bought it with intention of realizing ST profits. Need to mark to market for each reporting period.
IS: pre tax income up 100, NI up 80
CFS: up 80, subtract 100 from because non cash gain; cash down 20
BS: cash down 20; short term investments up 100; asset side up 80; retained earnings up 80 due to Net Income.
debt waterfall: 60 EBITDA, 5x multiple, 200 bank debt, 200 HY debt - what is each tranche trading at?
EV is 60 * 5 = 300; covers Bank debt so its trading at 100;
100 remaining in distributable value for 200 in HY debt; trading at 100/200 = 50 cents.
Can you value a bank with a Levered DCF?
No; different inherent operating models becuase EV and EQV doesn't work as expected; debt is an operating asset which banks use to generate revenue
I.e. acpex and workign capital don't represent "reinvestment in the biz" for banks
Should just use DDM
C has NI of 200, share price of $6 and 10 shares outstanding
D has NI of 200 and share price of $5 and 6 shares outstanding. C buys D in all stock deal at 20% premium.
How accretive or dilutive is this?
C's EPs = 200 / 10 = 20
D purchase price: 5 * 6 = 30 market cap; 20% premium = 30 * 1.2 = 36
all stock deal, so divide D's $36 purchase by C's $6 share price. 6 new shares created and given to D's sharehodlesr - add it to C's 10 sharecount so pro forma 16
pro forma earnings = 200 + 200 = 400. divide this by pro forma shares of 16 at EPS of 25. 25 / 20 = 25%