DTLs LBO Modelling Test

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Has anyone seen DTLs on an actual modelling test for a pe interview. I've seen them on a few practice models but it just seems like its not really something you see too much on the job and was wondering if its something that actually shows up on these tests. I think the creation of the DTL is pretty straightforward when it comes to write ups, but more so tracking the amortization and cash/book taxes

 

Comments (12)

 
  • Prospect in IB-M&A
Aug 26, 2020 - 3:06pm

Yep have seen it on modeling tests under purchase price accounting. assume some % of net identifiables/tangible assets as write-ups, then document the associated DTL.

Use book-to-cash reconciliation schedule to amortize DTL over the period.

not too bad. it's just a 3-line book-to cash schedule + another line entry in CFO and BS. takes 3 minutes to implement.

Array
 
  • Prospect in IB-M&A
Aug 26, 2020 - 10:46pm

1) pull EBT line from income statement

2) add-back D&A that was not tax deductible (basically the annual amount from write-ups in stock purchase)

3) sum the above two lines and then apply the effective tax rate to get the cash tax

4) find difference between cash tax and income statement (book) tax. usually cash tax > book tax since you have the DTL. this will be a negative amount.

5) go to CFO and make a line for use of cash. Write amount as "Less: Unwind of DTL" and then sum through to yield a negative effect to your CFO.

6) go to balance sheet, under liabilities -> DTL: write next year's DTL = this year's DTL + Unwind of DTL, which will make DTL decrease year over year.

Balance sheet will balance because on liabilities side the DTL has gone down and on assets side the cash number has gone down.

 

LMK if this is unclear

Array
 
  • Analyst 2 in IB - Gen
Sep 14, 2020 - 12:17pm

How does this affect your EV to Equity bridge in an LBO? I would assume you don't include in entry bridge (or as a source/use) and then include in exit bridge if any DTA/DTL remains at end of investment period?

 

And what is your balancing item on the BS? Cash or RE?

Array
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