prepping for sa 28 interviews
Assume you are running a DCF and you can choose between accelerated depreciation and straight-line depreciation. Which would lead to a higher valuation and what assumptions are you making? Does your answer change if I say we are using the multiples method or gordon growth? Under which two assumptions would it not matter whether we use straight-line or accelerated depreciation?
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accelerated depreciation would give you higher valuation since you are saving on taxes in early years. Depreciation lowers your NI but is added back to get to FCFs, so you get a larger tax shield in early years where FCFs are not discounted as much. I guess we are assuming that there are taxes and a positive discount rate and that capex isn't changing, just our accounting of the depreciation.
Under multiples method(if doing EV/EBITDA) it wouldn't matter since you're going to take final year EBITDA(before depreciation) and slap a multiple on it. It would still matter if doing a P/E multiple, and straight line might give a higher val. there since terminal earnings are higher
If there are no taxes and no discount rate, then it wouldn't matter.
I would go back and look at DCF part of the guides, as this q tests you knowing the drivers rather than memorization but isn't super hard once you have your basics down
agreed with everything you said. one thing I was thinking about is what would happen under the Gordon Growth method. My initial thought is that, since GG is calculated off the terminal year FCF and then compounds forever at some growth rate, straight-line depreciation would yield a higher valuation - right since we want the terminal year FCF to be as big as possible?? in that case, would the perpetuity effect from having a higher terminal FCF could outweigh the benefit of the larger near-term FCF from accelerated depreciation. is that the right thinking there or is that not correct?
Correct. Also depends over which time frame. The answer is likely to be different for a DCF with a 3 year forecast period vs one with a 20 year forecast period
u use perp growth when the co. has reached a "steady state" growth rate, meaning even though if your terminal year doesn't have capex = to d&a, you should adjust terminal fcf for perp growth formula so dep = capex (since having them unequal implies weird l-t growth since they should be equal when a company is mature enough). So long answer short, accelerated helps ufcf b/c of tvm and doesn't affect perp growth formula since capex should = d&a, wether your forecast says that or not.
No one is asking this
not a very difficult question. just goes to show that all people do is memorize the guides. definitely fair game at EBs i would think since my friend got asked this
Huh? Has nothing to do with difficulty. It’s just that your odds of getting a question like this is so low, hints why I said nobody is going to ask that. In theory, yes you could be asked. But in practice, you very rarely see a q like this, esp if you’re interviewing for a generalist role. Much more standard difficult questions get asked like mental math, complex paper LBO’s, Long Q on mergers, etc etc.
Me alongside my buddies had many interviews w EB’s, and were never asked some dumb shi like this
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