Key Rule #4 to #6 Flashcards
What do dilutive securities do?
create more shares
Why do companies issue dilutive securities?
decrease cash operating expenses b/c can pay less salaries
increase retention
What is diluted equity value?
Decrease in equity ownershp that occurs when a company issues new shares
How to calculate dilution for everything except convertible bonds?
Treasury Stock Method
How do you use the treasury stock method?
- if current share price > exercise price
- ees pay co price x options to exercise, get 1 share/ option
- co uses proceeds to repurcahse newly created shares at the current share price
- shares that don’t get bought are the net dilution
What are the cons of the treasury stock method?
- cos/ ees don’t necessarily act like this
- still use b/c standardizes things, better comparison
For a public co what do you calculate first?
EqV, before moving to TEV
For TEV what values do you use?
use market value
if not available, book value (except for eqv)
What is restricted stock?
incentive compensation for ees
What are RSUs?
Restricted stock units- bound by time
What are performance shares?
Performance goal restriction
Which securities use the treasury stock method to calculate dilution?
Restricted Stock, RSUs, Performance Shares
Do you add restricted stock to common stock count?
Y
Do you add restricted stock to diluted share count?
N
What is a convertible bond?
- alternative form of debt
- co pays lower interest rates in exchange for giving holders option to convert into new shares if share price reaches a level
What are the pathways by which a convertible bond could reach diluted shares?
- if current share price > converstion price= all convert
principal / conversion price - capped call
What happens in a capped call?
- if share price reaches conversion price, co buys back all the newly released shares
- dilution cancelled
- share price climbs and reaches warrant exercise price
- warrants are sold, creating new stock as they are exercised
- some dilution but less than initial
- use TSM to calculate dilution on warrants
Why do we need to find diluted share count?
Find implied EqV and TeV to find implied share price
Why is implied share price so important?
compare to current stock price to see if undervalued.
How do you calculate implied share price?
EqV/share count
Is it accurate to minus 100% of cash balance when EqV -> TEV?
- no b/c some cash is an operating asset b/c need minimum cash to run biz
Why do we minus all cash?
b/c the amt of cash as OA is seldom disclosed and varies, so subtract
Why do you not subtract goodwill when moving from EqV to TEV?
- if subtract, saying “this acq is not part of core biz anymore”
When do u subtract goodwill when moving from EqV to TEV?
if acq has been sold/ shut down
How do you factor in working capital when going to EqV to TEV?
don’t adjust anything
each WC item counts in both net assets and net operating assets -> EqV and TEV include full value of WC
Why subtract equity investments when EqV to TEV?
- they’re non-operating assets since parent company has minority status and can’t control them
- compatability- EqV implicitly includes value of the stake. But TEV-based multiples w numerators eg. EBITDA don’t include so subtract away to let TEV mults match it
What is a valuation allowance?
an account that offsets a DTA when it is more likely than not that some/ all of DTA will not be realized
Why subtract only part of co’s DTA when calc TEV?
- only subtract NOL b/c they’re non-operating assets- less related to operations than DTA’s other items
- also decrease NOL in proportion to Valuation Allowance/ DTA as VA indicates that co doesn’t expect to realize full DTA benefit
What is basic equity value vs diluted equity value?
diltued shares outstanding x common share price vs just common shares outstanding
more accurate measure of co’s net assets are worth to common shareholders
Why do you add noncontrolling interests when EqV to TEV?
- NCI presents another investor group- minority share holders of the other co which co owns a majority of
- they are investors b/c co controls other co b/c of majority stake
- comparability- financial statements are 100% consolidated when co owns majority stake in other co -> rev, EBIT, EBITDA include 100% of financials
- But EqV only has the % of the ownership
- remaining %tage is added when creating TEV to bring it to par with numerators of TEV mults whihch reflect 100%
