Take home case study question

Hey guys,

For those of you that have had the pleasure of working on a HF case study , is it worth building a full 3 statement model? The particular company i got is not a balance sheet driven business and I can complete a valuation with an earnings model (Revenue down to EBITDA and FCF) and a debt waterfall. A 3 statement model obviously would be nice but time is a constraint and there are certain factors prevent it from being a straight forward exercise.

Let me know your thoughts. Thanks !

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Best Response

I think you should build in the balance sheet with fairly simplistic (but defensible) assumptions. If this were an in office case study where you are under more time pressure, then you might be able to get away with not having a balance sheet. That said, I don't think inserting a balance sheet will take much time. Show at least one or two years worth of historicals and the projections. I think the two most important things to capture are changes in net debt and changes in working capital, the latter of which you will need to capture as they can impact cash flow quite a bit in some businesses.

My question to others is in your case study balance sheets, do you typically show each tranche of debt (so not just revolver, senior vs. junior but also each specific instrument and its maturity), or do you just lump it all into "total debt" and use the weighted average interest rate to calculate interest expense? The latter is not as exact but should be a decent approximation (unless the current debt was put in place a while ago when rates were higher and the company has announced plans to refinance in the near future which will lower their rates).

 
basketballbanker:

I think you should build in the balance sheet with fairly simplistic (but defensible) assumptions. If this were an in office case study where you are under more time pressure, then you might be able to get away with not having a balance sheet. That said, I don't think inserting a balance sheet will take much time. Show at least one or two years worth of historicals and the projections. I think the two most important things to capture are changes in net debt and changes in working capital, the latter of which you will need to capture as they can impact cash flow quite a bit in some businesses.

My question to others is in your case study balance sheets, do you typically show each tranche of debt (so not just revolver, senior vs. junior but also each specific instrument and its maturity), or do you just lump it all into "total debt" and use the weighted average interest rate to calculate interest expense? The latter is not as exact but should be a decent approximation (unless the current debt was put in place a while ago when rates were higher and the company has announced plans to refinance in the near future which will lower their rates).

I generally bucket by tranche- secured, senior, unsec, Pik/Mezz/ etc. Generally b/c this is how i've done with my senior analysts in the past. Also considering that some firms have 10+ bond structure which would look sloppy breaking out separately.

That being said, most of my case studies have been for smaller companies with one or two loans/bonds, in which case I broke it out separately

As for the OP's question, I would model the BS, especially outstanding debt. Just keep the assumptions simple and straight forward.

"Sounds to me like you guys a couple of bookies."
 

I'd want to see a full 3-statement model for a take-home with any reasonable amount of time. We usually do in-office cases so the expectations are lower.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

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