Technical question: NOLs, Beta, etc

1) precedent transactions - synergies 2) DCF - terminal value often higher than reality 3) comps. - no synergies

As for beta's, is there another way? I certainly don't know one, unless you want to regress returns of the firm versus the market, which is stupid because you want an industry beta.

1. NOL questions should be answered like typical 'flow' questions related to accounting... nothing really too difficult here

2. Same as previously mentioned (Transaction Comps first), although I don't think I'd say 'synergies', but transaction premiums that can be related to synergies and also pricing premium related to gaining elements of control (not really sure about the relationship between Comps / DCF)

3. You can actually compute beta through regression, but I don't think this is typically done (not sure - haven't worked in IB). Go out an grab betas for each company, un-lever them (strip out the effects of cap. structure), and average them, and then re-lever w/ the target cap. structure of the company you're valuing.

vana:

Thanks. For the calculation of the cost of equity, do we use the beta from bloomberg directly? Why do we bother un-levering and re-levering betas of comparable companies if we have already known the beta from bloomberg?

The listed beta reflects the company's current capital structure, and if you're using beta in the context of calculating a cost of equity for the WACC in a DCF then you'd want to use the target capital structure (not necessarily the one the company currently has) so this is one reason why you'd go through the process of pulling a beta then un-levering, and re-levering

FYI from your posts I get the impression that you're trying to get really granular w/ your technical prep, and it's definitely good. But, based on your questions you might need to go back and do a better job of understanding the components of each question.

BepBep12:

vana:

Thanks. For the calculation of the cost of equity, do we use the beta from bloomberg directly? Why do we bother un-levering and re-levering betas of comparable companies if we have already known the beta from bloomberg?

The listed beta reflects the company's current capital structure, and if you're using beta in the context of calculating a cost of equity for the WACC in a DCF then you'd want to use the target capital structure (not necessarily the one the company currently has) so this is one reason why you'd go through the process of pulling a beta then un-levering, and re-levering

FYI from your posts I get the impression that you're trying to get really granular w/ your technical prep, and it's definitely good. But, based on your questions you might need to go back and do a better job of understanding the components of each question.

Agree with BepBep12, I remember Brian explains this very clearly in the videos. You're probably moving on too fast, just watching the videos instead of really studying them. Just follow this formula:

=IF(would i be able to lecture the material in last lesson to a class? = 1, move on to next video, restudy last lesson).

I would agree with the sentiment that it would be useful to go over basics in more depth, but just to answer the NOL question explicitly:

Suppose the NOL used was $100...

Income Statement: no change, NOL changes cash taxes paid but has no impact on accrual of expenses for the period

Statement of Cash Flows: starting point (net income) is the same, recognize savings (increase) of $100 in cash flows from operations because you paid less taxes

Balance sheet: deferred tax assets down $100, cash up $100: changes in Assets offset. Liabilities and Stockholder's Equity unchanged, so we balance.

_

iwantaboat:

For #3 I think it is important to note that levered beta is used when the stock is not publicly traded or similar cases. Otherwise you can just take COV/VAR.

No dude, not at all man. You might want to re-visit this; otherwise, good luck in your interview.

I see now. I didn't read all the responses. I thought he was talking about using levered beta to estimate a firm beta instead of equity beta.

Sarbane's Moxie:

I would agree with the sentiment that it would be useful to go over basics in more depth, but just to answer the NOL question explicitly:

Suppose the NOL used was $100...

Income Statement: no change, NOL changes cash taxes paid but has no impact on accrual of expenses for the period

Statement of Cash Flows: starting point (net income) is the same, recognize savings (increase) of $100 in cash flows from operations because you paid less taxes

Balance sheet: deferred tax assets down $100, cash up $100: changes in Assets offset. Liabilities and Stockholder's Equity unchanged, so we balance.

NOL carry-forward will create a deferred tax asset, and thus create an income statement event in the form of a deferred tax expense. The dte will also touch the SoCFs in order to net out the effect on the I/S. Obviously a dta/l will change the BS.

So how does a $100 change in DTA affect the three statements? Does it impact the IS or not, there have been conflicting answers here...

Xanatos:

So how does a $100 change in DTA affect the three statements? Does it impact the IS or not, there have been conflicting answers here...

Let's say DTA increases by $100. DTA increase hits the BS, step one done.

Journal entry for a DTA increase:

DTA 100 (d) DTE 100 (c)

DTE will hit the income statement, and will also have to be added back/subtracted from net income using the indirect method of Statement of Cash Flows.

B/S? Yes. I/S? Yes. SoCFs? Yes.

Xanatos:

Thanks a lot! Sorry to keep pushing, but I just wanted to know:

Won't the $100 DTE be affected by tax on the IS (i.e. net income doesn't change by $100)?

I know all 3 statements would be affected, but it would be helpful to see the exact breakdown, as it is not available in any of the guides or Google-able.

No problem, happy to help.

As the journal entry stated, an increase in DTA will have to be balanced out by crediting DTE. Since DTE is an expense account, the normal balance should be a debit. Therefore, an increase in DTA, will actually increase net income, for it is reducing the amount of Total Taxes Paid.

Here's a helpful formula for the tax part: Total Tax Provision (what shows up on the IS) = Current Tax Expense +- Change in DTA/DTL

Current Tax Expense is Taxable Income x Statutory Tax Rate the delta DTA/DTL will come from the difference between the financial income and the taxable, and also any other DTAs created (such as when a NOL is carried-forward).

In our problem, the DTE is a credit balance, eating into CTE, and reducing Total Tax Expense. Naturally, the DTA hit the BS by debiting DTA by 10 (whether it is current or non-current depends on the expected time frame the NOL will vanish by profitable operations). The Income Statement will be hit via a reduction in Provision for Income Taxes, and the Statement of Cash Flows will also be hit in order to net out the effect the DTE had on the net income.

If you have any other questions, I'd be glad to help.

There is so much misinformation above that I'm not even going to bother. Just understand that book taxes (what's shown in filings) is different from cash taxes (how much you actually pay). NOLs only affect cash taxes, not book taxes.