Modelling Equity or Debt Raises
Hi, I have been trying to grasp the modelling that is involved with different types of transactions and have read a lot of literature on topics such as IPOs, M&A and LBOs, but I have been having some trouble understand the type of modelling that should be done for an equity or debt raise and was hoping someone would provide some information on these topics.
I understand that an IPO involves determining a valuation for a company in order to potentially determine the share price, while for M&A things like a merger model may come into use. What about equity raises and debt raises? What type of modelling is done there? Is there any valuation and if so what is the purpose of it?
I managed to find two examples, but am unsure as to why they were approached so differently. In one example a company was looking for an equity raise and the model involved fairly typical projected financial statements and a valuation done through comparable companies, precedent transactions and DCF. What is the purpose of the valuation in relation to an equity raise? role of the valuation? Is it to find the value of the company and show the relation ebtween its total value and the amount of equity it is seeking?
The other example was also a company looking to perform an equity raise, but the entire purpose of that model seemed to be to strictly project cash flows. There was no valuation done at all. Why the difference in approach in these two examples? Is it to model how an equity capital injection will affect cash flows in later years and to show to investors that an equity investment would be valuable?
What about debt raises? What kind of modelling is involved there?
Thanks to everyone for the help. Any explanation of these concepts would be great.
Pick IPO price -> Work backwards to BS valuation -> profit
for debt raises, the main purpose is to determine how much debt service the company can handle with its cash flows, and to test against covenants in the loan doc that disallow the borrower to exceed certain coverage / leverage ratios (i.e. EBITDA / Interest must be EBITDA must be
That's awesome, thanks for the information, particularly about debt raises. I still have some questions for equity raises though.
What if the companies were private, such as the ones in the two examples I mentioned above? Would valuation still play the same role and calculate share price? In the model I saw for the first example I described, there were no share price calculations, just equity and enterprise value. As for the second example, modelling out cash flows seemed to be the emphasis of the model and there was no valuation. I am unsure as to how that plays into an equity raise.
Thanks again for any help and sorry if anything has come across as unclear.
equity value is the same thing as share price (share price = total equity value / # equity shares outstanding). In a DCF valuation model, it is common to calculate enterprise value using unlevered free-cash-flow, or equity value using levered free-cash-flow (levered FCF = unlevered FCF - debt servicing and interest costs). Either way the goal in an equity offering is the same --> determine the range of value for the equity of the company, either on a per-share basis or in aggregate, and sell that equity to investors.
your second model was likely built to measure impact to EPS as a result of the offering, aka an accretion / dilution analysis. This is because when new equity shares are sold, the same amount of company net income (earnings) is now spread across a greater number of shares, so the immediate impact is to dilute (decrease) EPS (earnings / # shares outstanding). Over the longterm though, the new cash from the equity offering is intended be invested to generate enhanced revenue and earnings growth, leading to greater profit potential down the road, at which point EPS will be greater than it would have been if the new equity hadn't been raised at all.
Hi ,
I have a question regarding to real estate development project.
I am looking at a real estate development project whereby the current equity investors have already pumped in equity to buy the land (construction not started). There is an opportunity for me to inject fresh equity to acquire 49% stake from the current equity holder (i.e. dilution for them), how do I model out to arrive at the fair valuation for my equity amount to be paid to them based on a certain IRR that I wish to achieve at the end of my holding period?
thanks!
Just look over this. http://macabacus.com/excel/templates/ipo-model
Thanks!
But do you have a template for private investments? the attached template is relating to public IPO.
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