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32 Cards in this Set
- Front
- Back
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Issue $100 debt, buys machinery at $50, and pay 5% interest the next 5 years, with 5-year useful life. Walk me thru the 3 FS |
must pay interest expense on the entire $100mm |
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more costly? CoD vs CoE
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1. Intersts associated with debt are t-d, creates t-s 3. and are last in line at liquidation |
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Numerator for a rev multiple? |
EBIT, EBITDA, unlevered cash flow, and revenue multiples all have enterprise value as the numerator |
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why do you use a pre-debt measure of profitability when using multiples involving EV |
because denomonator is an unlevered measure of profitability |
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Asset $100 vs Asset $200 Can I assume ____ Do they have identical_____5____ They are on the same level from the _________standpoints |
*Industry *Asset turnover rate/Return on asset/Profit margin/Leverage/Reinvestment Rate *Return on Capital, Cost of Capital, LT GR They are converting assets into profit at the same rate. |
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What is a deferred tax asset and why might one be created? [3 pts to hit] |
Differences in revenue recognition, expense recognition (such as warranty expense), and net operating losses (NOLs) can create deferred tax assets. |
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Goodwill is...? |
Eazy |
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What gives you tax shields? |
holding debt and physical capital |
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Q: What is a deferred tax liability and why might one be created? |
A: It’s created when the tax a comp reports using book accounting under GAAP is different from the actual amount paid to the IRS, but is expected to be paid in the future.Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting period. *Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS. |
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Q: I buy a piece of equipment, walk me through the impact on the 3 financial statements. |
A: Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement) |
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Over the life of the asset: depreciation ____ net income (income statement); ………………….. |
keep going bro. you eloquent |
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Q: Why are increases in accounts receivable a cash reduction on the cash flow statement? |
A: Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to reflect the fact that the company never actually received those funds. |
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Q: Is it possible for a company to show positive cash flows but be in grave trouble? |
unsustainable improvements in working capital (a company is selling off inventory and delaying payableslack of revenues going forward |
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Q: How is it possible for a company to show positive net income but go bankrupt? |
deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable) |
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Q: consistantly reporting postive EBITDA? [4 possibilities] |
-credit crunch -litigation or other overwhelming 1time cost -leverage (unreasonably highly levered and cant afford the intests and debt payment) -investment in CAPEX |
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Why CAPEX CAPITALIZED, while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings |
because of the life of estimated benefits. "The employees’ work, on the other hand, benefits the period in which the wages are generated only and should be expensed then" |
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walk thruCFS 2 3 |
X, Y & deferred taxes to arrive at cash flows from operating activities. X, Y, asset sales, purchase/sale of investment securities to arrive at cash flow from investing activities repurchase/issuance of debt and equity, and DIV to get to CFF BOP + CFS = EOP |
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Walk thru the 3 FS |
IS covers a period of time & illustrates a company's profitability BS is a snapshot of a company's financial position at a specific time. It shows the resournces(asset) and funding of the resources(L+E) CFS accounts for a given period reconciling the difference b/w BOP and EOP cash balance. Starts with NI to ... |
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3. Why add minority interest to calculate EV? |
you know |
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4. Why look at both EV and EquityV |
provides different insights into a company's value
EV...true value of a comp EqV...market cap |
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How to calculate fully diluted shares? |
add the dilutive effect of stock options and any otherdilutive securities, such as warrants, convertible debt or convertible preferred stock. |
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Treasury Stock Method is used to calculate the dillutive effect of |
options |
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6. Let’s say a company has 100 shares outstanding, at a share price of $10 each. It alsohas 10 options outstanding at an exercise price of $5 each – what is its fully dilutedequity value? |
fully diluted share count is 105, and the fully diluted equity value is $1,050. |
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when getting EV, is subtracting cash from Equity Value always right? Official reason? Why is it not 100% correct? |
The “official” reason: Cash is subtracted because it’s considered a non-operating assetand because Equity Value implicitly accounts for it. You subtract the "excess cash", not all cash. |
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9. Is it always accurate to add Debt to Equity Value when calculating Enterprise Value? |
In most cases, yes, because the terms of a debt agreement usually say that debt must be refinanced in an acquisition. And in most cases a buyer will pay off a seller’s debt, so it is accurate to say that any debt “adds” to the purchase price. |
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12. Why do we add Preferred Stock to get to Enterprise Value? [2 reasons] |
Preferred Stock pays out a fixed dividend, and preferred stock holders also have ahigher claim to a company’s assets than equity investors do. As a result, it is seen asmore similar to debt than common stock. |
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how to account for convertible bonds dilutive effect? |
if the convertible bonds are in-the-money, then you count them as additional dilution to the Equity Value if they’re out-of-the-money then you count the face value of the convertibles as part of the company’s Debt |
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Ex. A company has 1 million shares outstanding at a value of $100 per share. It also has $10 million of convertible bonds, with par value of $1,000 and a conversion price of $50. How do I calculate diluted shares outstanding? |
oh damn |
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Equity V vs SH’s Equity? [Math? 2 Sources of SH’s Equity?] |
Equity Value is the market value and Shareholders’ Equity is the book value. Shareholders' equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time. |
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2. Should you use the book value or market value of each item when calculating Enterprise Value? |
Technically, you should use market value for everything. In practice, however, you usually use market value only for the Equity Value portion, because it’s almost impossible to establish market values for the rest of the items in the formula – so you just take the numbers from the company’s Balance Sheet |
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3. What percentage dilution in Equity Value is “too high?” |
There’s no strict “rule” here but most bankers would say that anything over 10% is odd. It’s not necessarily wrong, but over 10% dilution is unusual for most companies. If your basic Equity Value is $100 million and the diluted Equity Value is $115 million, you might want to check your calculations – i |
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EV full formula? |
haha |
