IB Questions Help
How would a change in LIFO/FIFO flow through the financial statements?
What are the drawbacks of using WACC in valuing companies? (What can I use other than WACC?)
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If you change to LIFO from FIFO, you are recognizing the most recent inventory purchases in the COGS expense. Inventory will be reduced on the BS, COGS increased on the IS. Higher expense = understated net income and EPS = lower tax expense. The tax break results in an increased cash flow. A company would want to use LIFO inventory accounting to lower taxes and increase CFs, albeit while taking a hit on the bottom.
Anyone please correct me if I missed anything.
You don't value a company using WACC, you can discount their FCF at WACC (DCF). If you are valuing a company that is solely comprised of equity, rather than with debt and equity, you can use Ke (Cost of equity) as the discount rate. You can derive Ke using CAPM. You can use IRR to value a company. One drawback of WACC is that it doesn't account for flexibility and in this case you can use a real options valuation to value a project or a co. You won't use real options in IB, but just another options. For IB and IB interviews (at least what I have seen, only a SA), knowing WACC is fine.
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