Midterm Exam

Question 1

If using the financing approach for invested capital, how do you treat an unfunded pension liability?

Answer 1

Debt equivalent

Include in balance sheet

Question 2

If using the financing approach for invested capital, how do you treat an overfunded pension liability?

Answer 2

Non-operating asset

Subtract from balance sheet

Question 3

If using the financing approach for invested capital, how do you treat a deferred tax liability?

Answer 3

Equity equivalent

Include in balance sheet

Question 4

If using the financing approach for invested capital, how do you treat a deferred tax asset?

Answer 4

Negative equity equivalent

Subtract, or add the negative number from balance sheet

Question 5

Net Working Capital

Answer 5

Operating Current Assets - Operating Current Liabilities

Question 6

Is excess cash included in Net Working Capital?

Answer 6

No

Question 7

What types of non-operating liabilities get excluded from Net Working Capital?

Answer 7

Interest bearing debt, such as notes payable and current portion of LTD

Question 8

What’s the difference between EV (in EV/EBITDA) and Invested Capital?

Answer 8

EV = Debt + Equity - Cash

IC = Debt + Equity - Non-Operating Assets

Question 9

Is EV (in EV/EBITDA) based on market values or book values?

Answer 9

Market values

Question 10

Is IC based on market values or book values?

Answer 10

Book values

Question 11

Capitalizing operating leases after 2019

Answer 11

 Since operating leases still expense the lease payment and do not
record depreciation and interest, we should make the adjustment
to do this. We make a ‘net zero’ adjustment – in other words, this will have NO effect on net income, but it does affect EBIT and
EBITDA

 Use the historical cost of debt and apply that to the debt amount on the balance sheet.

Question 12

What should you do specifically for capitalizing operating leases after 2019?

Answer 12

 Removing (crediting) the rent expense of $900
 Adding (debiting) the interest expense of $400 ($10,000 * 4%)
 Adding (debiting) depreciation expense of $500 (the plug that gets
us back to a $900 expense.

Question 13

FCF Formula

Answer 13

= EBIT (1-t) + Depreciation - CapEx - Changes in Net Working Capital

Question 14

CapEx Formula

Answer 14

= Ending PP&E - Beginning PP&E + Depreciation (current)

Question 15

Changes in Net Working Capital Formula

Answer 15

= Ending Operating Working Capital - Beginning Operating Working Capital

Question 16

When using Exit Multiple, you should base your numbers off

Answer 16

EBITDA

Question 17

How do you calculate Terminal Value in the Gordon Growth model?

Answer 17

Multiply the last FCF * (1 + g), divided by WACC - g

Question 18

DCF Steps

Answer 18

1. Find Free Cash Flows
2. Determine Terminal Value using appropriate method
3. Find PV of cash flows and terminal value
4. Add excess non-operating cash
5. Subtract debt (including capitalized operating leases)
6. Divide by number of shares outstanding

Question 19

How do you calculate Terminal Value in the Exit Multiple model?

Answer 19

EBITDA for final period * Exit Multiple