Accounting
What are the 3 statements?
CFS
IS
BS
Can equity Value be negative?
Yes and No, by SO times SP no never, but by SE part yes
What are the 4 valuation methods?
DCF, Precendent Trans, Comps, LBO
What drives M&A?
You tell - i do not want to type
Where is Josh from?
Humble
Walk me through the depreciation of a piece of land that is worth $100 straight line depreciated at 10 years, across the 3 statements in year 1
HAHAHHAH...No change
What is formula for Enterprise Value?
QV +Debt - Cash
How is UFCF and LFCF different?
UFCF is cash flow available to both debt and equity holders of the company while LFCF is cash flow only available to equity holders. Therefore, the difference between the two are tax affected interest expense and debt repayments
Why might an Acquirer choose to use Stock or Debt even if it could pay for the Seller in Cash?
he Acquirer might not necessarily be able to draw on its entire Cash balance if, for example, much of the Cash is in overseas subsidiaries or otherwise locked up. Also, the Buyer might be preserving its Cash for a future expansion plan or Debt maturity. Finally, if the Acquirer is trading at very high multiples – e.g., a 100x P / E multiple – then it might be cheaper to use Stock to fund the deal.
Where is Yashi from?
The Woodlands
Why is accounts receivable an asset and deferred revenue a liability?
AR: you are going to get it
DR: you still owe service
A company issues $200 in Common Shares. How do Equity Value and Enterprise Value change?
CSE increases by $200, so Eq Val increases by $200.
NOA does not change because neither Cash nor CSE is operational, so TEV stays the same.
Alternatively, in the TEV formula, the extra Cash offsets the higher Equity Value.
Why would you use comps/precedents instead of intrinsic valuation?
Two biggest reasons: Comps are better for determining a valuation in a timely and easy manner. Additionally, a DCF can be less helpful for companies with unpredictable cash flows
What is the formula for WACC?
I know it but i dont want to type it...
Let’s say your a heavy investor in a particular company, would you rather have an increase in the share price or an increase in the trading volume?
Trading Volume
How can you tell whether or not an item should appear on the Cash Flow Statement?
You list an item on the Cash Flow Statement if:
1) It has already appeared on the Income Statement and affected Net Income, but it’s non- cash, so you need to adjust to determine the company’s real cash flow; OR
2) It has NOT appeared on the Income Statement, and it DOES affect the company’s cash balance.
A company issues $200 in Common Shares, and it uses $100 from the proceeds to pay Dividends to the common shareholders. How does everything change?
CSE increases by $100 after both changes, so Eq Val increases by $100.
NOA does not change because neither Cash nor CSE is operational, so TEV stays the same.
Alternatively, in the TEV formula, the extra Cash offsets the higher Equity Value.
Where does the tax rate change the DCF value(hint 3 places)?
Debt portion of WACC
UFCF
Beta - relever to unlever
Walk me through a merger model (accretion/dilution analysis).
In a merger model, you start by projecting the financial statements of the Buyer and Seller. Then, you estimate the Purchase Price and the mix of Cash, Debt, and Stock used to fund the deal. You create a Sources & Uses schedule and Purchase Price Allocation schedule to estimate the true cost of the acquisition and its effects.
Then, you combine the Balance Sheets of the Buyer and Seller, reflecting the Cash, Debt, and Stock used, new Goodwill created, and any write-ups. You then combine the Income Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and synergies. If Debt or Cash changes over time, your Interest figures should also change.
The Combined Net Income equals the Combined Pre-Tax Income times (1 – Buyer’s Tax Rate), and to get the Combined EPS, you divide that by the Buyer’s Existing Share Count + New Shares Issued in the Deal.
You calculate the accretion/dilution by taking the Combined EPS, dividing it by the Buyer’s standalone EPS, and subtracting 1.
Three people check into a hotel room that costs $30. They each contribute $10, handing $30 to the hotel clerk. Later, the hotel clerk realizes that there was a mistake, and the room only costs $25. The hotel clerk gives $5 to the bellboy and asks him to return it to the guests. However, the bellboy decides to keep $2 for himself and gives $1 back to each guest. Now, each guest has paid $9 (totalling $27) and the bellboy has kept $2, making $29. What happened to the missing dollar?
There is no missing dollar. The guests have paid a total of $27 ($25 to the hotel and $2 to the bellboy).
Walk me through what $10 of PIK interest looks like on the 3 statements?
IS: Ni down by 8
CFS: Cash down by 8, PIK add back 10 so up by 2
BS: Cash up by 2 L up by 10 SE down by 8
An Acquirer with an Equity Value of $500 million and Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and Purchase Enterprise Value of $150 million.
The Combined Enterprise Value equals the Enterprise Value of the Buyer plus the Purchase Enterprise Value of the Seller, so it’s $600 million + $150 million = $750 million.
You can’t determine the Combined Equity Value because it depends on the purchase method: Combined Equity Value = Acquirer’s Equity Value + Value of Stock Issued in Deal.
If it’s a 100% Stock deal, the Combined Equity Value will be $500 million + $100 million = $600 million, but if it’s 100% Cash or Debt, the Combined Equity Value = $500 million.
And if the % Stock Used is above 0% but less than 100%, the Combined Equity Value will be between $500 and $600 million.
24. Rank the following by how much they’d increase the value of unlevered FCF: a $100 increase in revenues, a $100 decrease in SG&A, or a $100 decrease in capex?
Now what if this was in final year and we used multiple method for Gordon Growth
Think about where each of these line items fall within an unlevered FCF calculation. Revenues
and general expenses are pre-tax, while capex is post-tax.
So, right off the bat, we know the capex must provide the biggest increase to FCF as it isn’t
reduced by taxation. It simply increases unlevered FCF in a year by $100.
After that, we would have the cutting of SG&A. These are pre-tax expenses, so would increase
FCF by $80 (assuming a 20% tax rate).
Finally, an increase of revenue would have the smallest impact of the three. Not only would it be
impacted by taxes, but an increase in revenue would generate COGS. So, if COGS were 30% ($30)
of revenue that’d leave us with a $70 gain pre-tax, which would lead to a FCF increase of $56
assuming a 20% tax rate.
Now what if this was in final year ad we used mutiples method for Gordon Growth - you would want decrease in costs.
Company A has an Equity Value of $1,000 and Net Income of $100. Company B has a Purchase Equity Value of $2,000 and Net Income of $50. For a 100% Stock deal to be accretive, how much in synergies must be realized?
Company A’s P / E is $1,000 / $100 = 10x, so its Cost of Stock is 10%. Company B’s P / E is $2,000 / $50 = 40x, so its Yield is 1 / 40, or 2.5%. Without synergies, this deal would be highly dilutive. For the deal to turn accretive, Company B’s Yield must exceed 10%. That means that its Purchase P / E multiple must be below 10x, which means its Net Income must be above $200 rather than $50. So there must be $150 in after-tax synergies for this deal to be accretive. At a 40% tax rate, there must be $250 in pre-tax synergies.
When was UFA Associates started?
2024