Memorize Flashcards
Revenue from COGS & gross profit margin?
Revenue = COGS / (1 - gross margin)
EBITDA Margin
EBITDA / Total Revenue
CAPM
Cost of Equity
= Rf + (Levered Beta)*(Equity Risk Premium)
Equity Risk Premium =
Rm - Rf
excess return of the market over the risk-free rate
Levering and Unlevering Beta
Income Statement
Revenue
- COGS
= Gross Profit
- Operating Expenses (including all non-cash expenses)
= Operating Income (EBIT)
- Net Interest Expense
+/- Gain or Loss on Investments (PP&E)
= Pre-Tax Income
*(1-TaxRate)
= Net Income
Revenue to UFCF
Revenue
- COGS
- Operating Expenses
= EBIT
EBIT(1 - TaxRate)
= NOPAT
+ D&A, non-cash charges
+/- net change OWC (Assets larger, subtract. Liabilities larger, add)
- CapEx
Revenue to LFCF
Revenue
-COGS
-Operating Expense
= EBIT
- net interest expense
= EBT
EBT(1-Tax Rate)
+ D&A
+/- net change in OWC
- CapEx
- Mandatory Debt Repayments
Gross Margin
Revenue
proportion of revenue that is not COGS
DCF Terminal Value Perpetual Growth / Gordon Growth Method GGM
DCF Terminal Value Multiples Method
What are the most common dilutive securities, and how are they converted to diluted share count?
in-the-money: exercise price < share price
1) options - Treasury Stock Method
2) warrants - Treasury Stock Method
3) convertible bonds - either 100% debt (out-of-the money) or 100% shares (in-the money)
4) convertible preferred stock - same as convertible bonds
5) restricted stock units - straight addition, employee just has to wait a set time
6) performance shares - only count if price is above a threshold, below nothing towards share count
PP&E Question (Change numbers if needed)
You buy PP&E for $1000 with a 10-year useful life. Walk me through the 3 financial statements at the end of year 1. Assume a 20% tax rate.
At the beginning of year 5 you sell the PP&E for $1000. Walk me through the 3 statements.
End of Year 1
* depreciation expense 1000/10 = 100
* purchase of PP&E with cash
IS
depreciation expense -100
pre-tax income -100
net income (20%) -80
CF
CFO
net income -80
non-cash depreciation +100
CFI
purchase of PP&E -1000
CFF no change
net change in cash -1080+100 = -980
BS
A = cash -980
A = PP&E +1000-100 = 900
SE = RE -80
Beginning of Year 5
* 4 years accumulated deprecation, PP&E book value = 1000 - 4(100) = 600
* no 5th year depreciation
* gain = 1000 - 600 = 400
IS
gain +400
pre-tax income +400
net income (20%) +320
CF
CFO
net income +320
reverse non-cash expense -400
CFI
sale of PP&E +1000
CFF no change
net change in cash +920
BS
A = cash +920
A = PP&E -600
SE = RE +320
A company has 1 million shares outstanding at a value of $100 per share. It also has $10 million of convertible bonds, with a par value of $1000 and a conversion price of $50. How do I calculate diluted shares outstanding?
convertible bonds
= bond value / par value
= (10*10^6) / (10^3)
= 10^4
= 10,000 bonds
shares / bond
= par value / conversion price
= 1000 / 50
= 20 shares per bond
shares
= # bonds * shares/bond
= 10,000 * 20
= 200,000 shares
1.2 million diluted share count
What is the role of an associate process in a sell-side M&A? (Especially important at Goldman)
1) Bake-Off
2) Preparation
Associates = reviewing financial statements, projections, underlying assumptions, other areas of risk, build sensitivity models, and identify key issues and discrepancies
3) Identifying the Buyer Universe
Associates = helping find potential buyers within a space, marketing materials (teaser, information memorandum, decks for management presentations)
4) Launch
Associates = Data room prep & management, NDAs
5) Diligence
Associates = manning diligence meetings and calls, identifying areas of information gaps, working with the company to address all buyer questions. Usually the junior bankers are the first line of defense when detailed diligence lists come in so as not to overwhelm the client
6) Bids
Associates = analyzing as they come in, especially if not apples-to-apples comparison (deal funding composition)
7) Evaluation & Signing
8) Closing
How do you calculate Unlevered FCF from NI?
FCF =
Net Income
+ D&A
– ΔWorking Capital
– CapEx
+ Interest Expense (1 – t)
OR
FCF =
EBIT – (EBIT X T)
+ D&A
– ΔWorking Capital
– CAPEX
What is the shortcut for determining Accretion/Dilution for all deals via costs? What are the problems with this shortcut?
BUYER
* CostCash = (Foregone Interest on Cash)(1-Buyer Tax Rate)
* CostDebt = (Interest on New Debt)(1-Buyer Tax Rate)
* CostStock = E/P = (Net Income) / (Equity Value)
SELLER
* Seller’s Yield = E/P at purchase price
SHORTCUT
Buyer Cost = weighted average of transaction components
Buyer Cost > Seller Yield DILUTIVE
Buyer Cost < Seller Yield
ACCRETIVE
PROBLEMS
1) assumes buyer/seller have same tax rates
2) doesn’t account for other acquisition effects = synergies, D&A
3) doesn’t account for premium paid for the seller UNLESS the Seller’s Yield is calculated at Purchase Price
4) no transaction fees/synergies
Walk me through a merger model (accretion/dilution analysis).
1) In a merger model, you start by projecting the financial statements of the Buyer and Seller.
2) Then, you estimate the Purchase Price and the mix of Cash, Debt, and Stock used to fund the
deal.
3) You create a Sources & Uses schedule and Purchase Price Allocation schedule to estimate
the true cost of the acquisition, its funding sources, and its after-effects.
4) 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 and write-downs.
5) You then combine the
Income Statements, reflecting the Foregone Interest on Cash, Interest Paid on New Debt, and
Synergies. If the New Debt balance changes over time, the Interest Paid on New Debt should reflect that.
6) 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 number by (the Buyer’s Existing Share Count + New Shares Issued in the Deal).
7) You calculate the accretion/dilution by taking the Combined EPS, dividing it by the Buyer’s standalone EPS, and subtracting 1 to make it a percentage
How can you tell whether an M&A deal will be accretive or dilutive?
You compare the Weighted Cost of Acquisition to the Seller’s Yield at its Purchase Price.
- Cost of Cash = Foregone Interest Rate on Cash * (1 – Buyer’s Tax Rate)
- Cost of Debt = Interest Rate on New Debt * (1 – Buyer’s Tax Rate)
- Cost of Stock = Reciprocal of the Buyer’s P / E multiple, i.e., Net Income / Equity Value.
- Seller’s Yield = Reciprocal of the Seller’s P / E multiple, calculated using the Purchase
Equity Value.
Weighted Cost of Acquisition = % Cash Used * Cost of Cash + % Debt Used * Cost of Debt + %
Stock Used * Cost of Stock.
If the Weighted Cost is less than the Seller’s Yield, the deal will be accretive; if the Weighted Cost is greater than the Seller’s Yield, the deal will be dilutive.
Paper LBO?
Step 1) Get Transaction & Operational Assumptions
* Purchase Price
* Entry Multiple
= gives you LTM EBITDA
* Leverage Multiple
- LTM Revenue
- Annual Revenue Growth
- EBITDA Margin %
- D&A % of Revenue
- Interest Rate
- Tax Rate
- CapEx
- Change in NWC
Step 2) Sources & Uses Table
Sources
* Debt Financing = (LTM EBITDA)(Leverage Multiple)
* Sponsor Equity = Purchase Price - Debt Financing
Uses
Equity Purchase Price
Step 3) Project Financials (ask how many years, between 3-5 is reasonable) for each year
* Revenue = Prev Revenue + Growth
* EBITDA = % Revenue
* Less D&A
* Less Interest = Debt Financing * Interest Rate
* Less Taxes = EBT * Tax Rate
* Net Income
Step 4) Calculate Free Cash Flow for each year
* Net Income
* Add D&A
* Less Capex
* Less Change in NWC
Step 5) Returns Analysis
Exit Valuation
* Last Year EBITDA (calculated)
* Exit Multiple (assumed)
* Exit Enterprise Value = (Last Year EBITDA) * (Exit Multiple)
- Initial Debt Amount
- Less Accumulated FCF
- Final Year Net Debt = Init Debt - Accumulated FCF
- Exit Equity Value = Exit Enterprise Value - Final Year Net Debt
Return Metrics
* Cash-on-Cash Returns = (Exit Equity Value) / (Sponsor Equity)
* IRR = (Cash-on-Cash Returns)^(1/t)-1
EBITDA margin
EBITDA / Revenue
Revenue Multiple
TEV / Revenue
Debt Multiple
Debt / EBITDA
Interest Coverage Ratio
EBIT / interest expense
Gross Margin
Revenue
Operating Margin
Revenue
Net Gross Margin
Revenue
EBITDA Margin
Revenue
