Few technical IBD questions
Hello guys, I have collected a lot of technical questions which I think maybe asked for more advanced stages of ibd interviews / very technical groups. Would appreciate all replies!! Thanks...
How are capital leases accounted for in company valuations? Would you convert operating leases to debt (via a multiple on rent) and then value the company? Or would you value the company as if no capital lease was present? 1.a In a DCF, would the valuation obtained be under implicit assumption that we hold the capital lease?
How are hybrids (convertible bonds, equity linked securities etc) accounted for in DCF valuation?
Why would a company want to repurchase its shares? i understand it is an alternative to giving cash dividend to investors for rewarding them. But how would repurchasing its own shares reward investors? Less supply so prices increasing?
For a company, that is planning to sell off a certain subsidiary ("Discontinued operations"), how would we account for this in our DCF?
What is nol and how do they impact valuations?
"pre money" and "post money" valuations. I understand these terms are used quite a lot in the VC industry, but do they hold any relevance in IBD world? For big / mature companies?
How will repayment of debt PRINCIPAL be accounted for in the various financial statements (IS/BS/CFS)? Not interest but the actual debt repayment
Why is EBITDA not relevant for banks? Is it because "I"nterest is main cause of "revenue" and "expenses" of a bank, thus any numbers that exclude interest exclude the core business altogether? Following on, is there any point calculating the Enterprise Value of banks at all?
Practically, how is the rate of debt (for WACC equation) calculated for companies?
I don't know how familiar you are with the two different styles of leasing but this is just a general guideline.
Having an operating lease is easier if you want to create a tax shield by only "renting" the equipment and is also popular in industries where technology becomes obsolete quickly. However, that production equipment is still necessay to make whatever it is you make so you may want to treat it as a capital lease to get a better idea of the capital needed for operations.
The treatment will probably vary from firm to firm. Here's an exerpt from the series of tubes.
Operating lease:
Here the equipment buyer is essentially renting the equipment and will return it at the end of the lease or buy it at fair market value. This can be good or bad. For example, if equipment doesn’t age much in your industry you at somewhat of a disadvantage, however, if you are in an industry (let’s say networking hardward), this is great because you don’t get stuck with equipment that is obsolete. However, there is nothing stopping you from negotiating with the leasing company for a price that would be acceptable to you!
For accounting purposes, this lease is a pure expense. It’s only place is on the income statement and it has no bearing on your debt-to-worth ratios or other balance sheet ratios that can effect business credit.
In the long run, you usually pay more than if you could have obtained the equipment with a capital lease or a loan, but in the short-run (when you are cashed pinched) it can be a life saver.
Capital Lease:
Here the equipment buyer is essentially making payments to own whatever equipment is being leased. At the end of the term, you will usually pay an established nominal amount (like $1) to obtain ownership of the equipment.
For accounting purposes, you must capitalize the lease on the balance sheet (ergo capital lease). It will effect your long-term liabilities and assets such as bank loan would.
Despite that it is capitalized like a typical term loan, capital leases are usually easier to obtain and consume less initial capital than a typical bank term loan.
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