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Career Resources
Walk me through how purchasing a building for $100 affects the 3FS.
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
Always this order
walk me from revenue to FCF
working capital went from 10 to 20 yoy. What does this mean, and is it a positive or negative result?
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?
Decrease in A/R is a decrease in NWC.
What are some of the ways to calculate beta?
Walk me through an LBO
What are ways to increase IRR in an LBO
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
Good.
2: I was asking from a more mechanical perspective. (Think determine purchase price...determine cap structure...proj financials) if you wanna give that one another go.
3: Yeah also div recap
Don’t forget that you can increase IRR by paying down more of the debt (pay down principal) to increase your equity position in the cap structure
What's the discount rate we use in an LBO?
What's the upper bound and lower bound of the growth rate in the Gordon Growth method?
How does the midyear convention / stub year effect your FCF in a DCF?
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.
What is the equity value of this company? Do you see an issue with it and if so where do you think the issue stems from?
Enterprise Value = $100
Equity Value = $X
Debt = $200
Cash = $50
Equity Value is zero. Company is distressed. Debt only worth 50.
You have the right idea, the likely error was that I provided you with the market value of debt, not the book value.
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
Yes, the company is distressed. Just a question to have people think through. If the interviewee says the equity value is -$50 or whatever then they don't understand the concept and are just doing algebra.
1. What's a sale-leaseback? Why would a company perform one?
2. What is PIK interest?
3. Why is a spin-off difficult to value? Does insider buying/selling in a spin-off have more significance than it would in a typical "company"? Why?
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.
You should actually try to respond to these as if you were in an interview setting (where you can't come back to it). In an interview, you'll have to give a response or at least a guess so it's better to just give a guess here and then you can get feedback on your guess / response.
PIK is a non-cash payment that accrues to the principal. That's it.
So instead of making a coupon payment of $50 on a $2,000 loan, you instead add $50 to the principal so that your loan is $2,050. PIK has nothing to do with settling in cash/equity. It's a way for an investor to "bridge the gap" when the debtor is an investable company that's more cash-strapped or growth-focused in the near-term.
For 3a, a spin-off would be tougher to value because you have to pull apart shared expenses between the two companies. For example, SG&A can support both companies, so in a spin-off where you now have two companies, how much SG&A (and other shared expenses/revenues) do you allocate between the two? Requires quite a bit of diligence and pre-negotiated arrangements between the two. Aside from shared expenses/revenues, transfer pricing (where the spin-off gets a favorable price vs. the outside market) can also make it difficult to value the company - e.g., paying a lower price on commidity A vs. the market makes your value go up, so if you assume they now have to pay market for commodity A, their value goes down. That dynamic makes it tougher to value.
For 3b, not sure I understand what you're comparing the spin-off company to so the question is unclear, but insider buying/selling in the spin-off definitely has far more significance...after all, the people getting shares in the new company are existing shareholders. Insiders are the entirety of your shareholder base! In fact, going back to question 3a, they might be motivated to put a high value on the spin-off company despite concerns on transfer pricing so they can dump their shares. That makes it harder to value the spin-off.
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Walk me through a $100 debt raise in y0,1,2
50% is cash 50% is pik tax rate is 20%. Probably the most fuck you question I got as a sophomore
What is the interest rate?
bro this question is wrong asf
From a BB: Lets say your friend has a start up. Its current fiscal year reported a negative net income (covid). Is it a good LBO candidate for financial sponsors? Why?
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.
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