Ask me your technicals

Cash will decrease on the cash flow statement thru cash for investing activities.

Cash will decrease on the balance sheet, PP&E will increase in the asset section to offset that.

The income statement won't be immediately affected but will decrease thru depreciation in the future.

How was that? Anything I miss/get wrong? Thanks for the question

From revenue, deduct operating expenses.

Get your EBIT (earnings before interest and taxes)

Take affect your ebit EBITA *1-tax rate

Add D&A back to get Net Operating Profit After Tax Rate (NOPAT)

Account for adjustments in net working capital and capex 

That should be your unlevered free cash flows.

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Working capital is a measure of what your company can use readily, after reinvestments and other payments like interest/tax/credits.

If your working capital goes up, it would mean you have more cash readily available. For example, if your accounts receivable was paid down and decreases, your working capital would increase so overall it would be a positive result. 

Thanks for the question, really helps me. Anything I mess up or miss?

1. CAPM, Covariance of the asset and market divided by the variance of the market

2. In an LBO, you purchase a company with ~2/3 debt, 1/3 equity. You pay off the debt progressively, using the companies FCF. And exit the company during a 4-8 year period. In an LBO, you're able to take advantage of the tax shield from debt cost and leverage to generate a return on invested equity.

3. Increase an IRR in an LBO by paying less for comp, selling for more, increase operational prospects, contributing less equity (more debt)

Little rusty but I think this is accurate

Another good one — what are the differences between an M&A Premiums analysis and using Precedent Transactions?

1. IRR

2. 1-3%, in line with the long term economic growth rate

3. Midyear conventions and stub years affect the time you discount your cash flows(ex. 0.5 years instead of 1). Midyear convention to account for the equal distribution of cash collected throughout the year. Stub to account for the time of year you're performing the analysis.

Cant believe I completed my entire bachelors and some professional exams without hearing about midyear convention / stub periods. Looking into it now. Thanks.

Equity Value is zero. Company is distressed. Debt only worth 50.

Equity Value = EV - Debt + Cash

So equity value = 100 - 200 + 50 = -50

Market Cap can’t be negative because share price and basic/diluted shares outstanding both can’t be negative.

Thus, since this is a theoretical example I would say that this is probably an distressed company that is saddled with too much debt

1. A sales-leaseback is done for the purpose of capital providing & an influx of cash. During a sales-leaseback one company will sell their facility and then lease it back.

2. PIK stands for Payment-in-Kind interest. The interest of dividend paid on this is not typically cash, but instead a security or equity.

3. I'm not sure for this, gonna have to come back to it. 

Thanks for the questions! If I missed anything, please lmk.

What is the interest rate?

bro this question is wrong asf

I mean, with LBOs, aren't sponsors looking for companies with stable cash flow? My assumption is that doing an LBO on a brand new startup will be extremely risky, unless you can minimize leverage, which eats away at returns. I guess apart from that, its important to look into what caused net income to be negative - was it special items, or regular expenses generally being higher than revenue? Plus, would having negative net income pass the lender's test? I know that lenders will usually look at EBITDA for financial covenants, but wouldn't net income either make it impossible to obtain a loan or make it inhibitively expensive?

I mean overall, I think it's a bad candidate, due to unreliability of cash flows to pay down debt, and difficulty finding financing at a reasonable interest rate.