Equity reconciliation

So I'm working through a 3 statement model that projects out over 5 years. I had to do a model in the interview today and he gave me another model to take home and complete to discuss tomorrow AM. I have completed forecasting out the AR and Inventory but I'm lost on how to balance out the equity portion as my "check" is like $3k off. Can someone please help me figure this out and then explain to me how they did this? I'm not sure what to even google to find out how to finish this thing.

Also, the interviewer told me that forecasting out the non-cash items (you'll see if you open the file) is not important. Would you let me know your thoughts on this too?

I would really appreciate the help, this is the furthest I've ever gotten in an IB interview!!

 
Most Helpful

Three things I've caught so far.

  1. CAPEX on your cash flow statement is positive when it should be negative.

  2. You calculated interest expense using the interest rate on cash. Use the interest rate on debt instead.

  3. You left out dividends in your equity value calculation.

EDIT: See my PM.

EDIT2: Unfortunately, I reached my limit for PMs. If you have any other questions let me know. Otherwise, best of luck with the interview!

 

Not sure if my PM went through so I’ll post here. If I interpreted the question correctly, the easiest way to approach the question would be to calculate a WACC and then some debt ratios and coverage ratios. If the company can handle raising additional debt and still be able to cover its interest expenses, then raising debt would be optimal because it’s generally cheaper. If the company can’t raise more debt without putting too much stress on the balance sheet, raise equity.

Alternatively, if the VP is looking for an answer in the context of M&A, look at the cash on hand available, amount of debt on the BS already, and cost of equity (inverse PE ratio). From there, you can take your answer as you see fit. Is there enough cash on hand to make a value add acquisition and sustain minimum cash requirements? What do the company’s debt ratios look like and can they raise additional debt and still cover interest expenses? What is the cost of equity compared to the cost of debt and cost of cash? Although it is exceedingly rare, sometimes it may be cheaper to issue shares instead of using cash on hand or raising additional debt. Perhaps the best answer is a combination of two considerations.

 

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