GIJeopardy

Accounting

100

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

200

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

300

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

400

$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

500

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.

EV/EQV

100

When would you use EV/EBIT over EV/EBITDA? 

If capital intensive, want to use EV/EBIT --> D&A subtraction reflects maintenance capex.

200

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

300

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

400

2 comps have same EBITDA, but one funded by 50% equity 50% debt; other is 100% equity; which one has higher P/E ratio.

company w/ more equity will have higher P/E ratio because EQV is 2x that of company partially funded by debt; interest expense is higher in debt-funded company, reducing net income, but this has smaller impact on denominator than doubling the numerator does.

500

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.

Valuation

100

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.

200

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.

300

$10 revenue, $10 gross profit, $10 capex --> impact on DCF

Capex, gross profit and revenue depends on if revenue is price vs. volume

400

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

500

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

M&A

100

A buys B. A has 10x PE. B has 20x PE. Stock. Accretive dilutive?

dilutive

200

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.

300

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.

400

What happens to Deferred Revenue in an M&A? 

Deferred revenue written down to cost of servicing 

500

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%