Accounting
Two condition for item to appear on the income statement
Current year and effected by taxes
Added/subtracted to equity value to get enterprise value
Debt, preferred stock, cash, non-controlling interest
The opportunity cost in a DCF
Discount rate
Three ways to finance a M&A deal
What are cash, debt, and equity?
Reason firms use leverage when buying companies
To amplify their returns
What is NWC
Current assets-current liabilities
Can enterprise value be negative
Yes
Two components of capital structure
Market cap an debt
The reason to use equity in a M&A deal.
The company is currently trading at a high multiple.
Legal structure created during a LBO
LLC
How to calculate days receivable outstanding
AR/Sales*365
What effect does issuing dividends have on equity and enterprise value.
Lowers equity value
Calculation for UFCF starting from EBIT
EBIT+D&A-taxes-change in NWC-capex
Assume that Company A has 10 shares outstanding at a share price of $25.00, and its Net Income is $10.
It acquires Company B for a Purchase Equity Value of $150. Company B has a Net Income of $10 as well.
Assume the same tax rates for both companies. How accretive is this deal?
The Combined EPS, therefore, is $20 / 16 = $1.25, so there’s 25% accretion.
Biggest impact to the IRR
Purchase price, debt, and exit multiple
Name a contra-asset (i.e treasury stocks)
Acc dep, allowance for doubtful accounts
Equity decreases, enterprise stays the same
Discount rate using the mid-year convention
0.5, 1.5, 2.5, etc
Company A has a P / E of 10x, a Debt Interest Rate of 10%, a Cash Interest Rate of 5%, and a tax rate of 40%.
It wants to acquire Company B at a purchase P / E multiple of 16x using 1/3 Stock, 1/3 Debt, and 1/3 Cash. Will the deal be accretive?
The Weighted Cost of Acquisition is 10% * 1/3 + 6% * 1/3 + 3% * 1/3 = 3.33% + 2% + 1% =6.33%.
Since the Weighted Cost is slightly above Company B’s Yield, the deal will be dilutive.
IRR if I triple my money in 3 years
45%
How to calculate levered free cash flow
Net income+D&A-change in NWC-capex-debt repayments
P/E ratio of JACK
17ish
Three differences in a DCF model using levered free cash flow vs UFCF
Cost of equity, exit multiple, implied equity value
Company A buys Company B using 100% Debt. Company B has a purchase P / E multiple of 10x and Company A has a P / E multiple of 15x.
What Debt interest rate is required to make the deal dilutive?
16.67%
A PE firm acquires a $200 million EBITDA company using 50% Debt, at an EBITDA purchase multiple of 6x.
The company’s EBITDA grows to $300 million by Year 3, and the exit multiple stays the same.
Assuming the company pays its interest and required Debt principal but generates no additional Cash, what is the MINIMUM IRR?
The Purchase Enterprise Value is $200 million * 6x = $1.2 billion, and the PE firm uses $600 million of Investor Equity and $600 million of Debt.
The Exit Enterprise Value in Year 3 is $300 million * 6x = $1.8 billion.
$1.8 billion – $600 million = $1.2 billion, which is a 2x multiple over 3 years.
25% IRR