Hi,
Per FAS 141r, transaction costs are to be expensed directly (rather than being included in the purchase price calculation). This means that when adjusting the transaction balance sheet in an LBO, the costs should be deducted from retained earnings. My question is: should this amount be reduced with (1-tax rate)? I notice that Macabus in their model do not reduce the amount with taxes (follow link below nd go to cell M120, and you will see that the 15.8 is pre-tax). The WSO PE Prep pack however reduces the amount my multiplying with (1-tax rate) in their Full LBO model exercises, which I suspect is incorrect. In the WSO prep pack models, they calculate goodwill as a plug and the value differs slightly compared to when calculating goodwill using the purchase price allocation method, and this shouldn't be the case given that there are no DTL/DTAs, write-ups/offs etc. If using the pre-tax transaction fee amount in the WSO model (Full lbo exercise 1), the adjustments balance with the goodwill that you get when using the purchase price allocation method. It is not really best practice to use goodwill as a plug - it should be calculated with the PPA.
http://macabacus. com/lbo-model/pro-forma-balance-sheet
Any input on this?
bump
r u a banker or an accountant? leave accounting shit to accountants
Please see my reply below
A banker. The question is important as this is part of most LBO tests in PE interviews. Also, I suspect that the WSO PE prep package is incorrect given the way they calculate goodwill.
Does anyone have the PE Prep package? Pls check the full exercise 1 model and try to calculate goodwill using the PPA method (which is the method that you hsould use if you are building an LBO model at a PE firm)
thx for the lbo lesson. carry on
You clearly do not seem to understand LBO modelling. Adjusting the balance sheet in a correct way matters dude. I think you should read my question again - I'm basically asking for a second opinion regarding the way goodwill is calculated in the WSO PE model exercise vs how it should be done
Bump. I noticed the same thing. Why do they do it that way?
Agree that should always use PPA. Using after-tax amount for transaction doesn't make sense as in the S&U, they used pre-tax amount. The inconsistency caused the goodwill amount to be incorrect. Should be 805 as opposed to 815.
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