Technical questions help

I don't really understand the significance of the debt question -- can someone elaborate? Cost of debt can be calculated via interest expense / net debt, through finding all debt with interest and weighting it via company reports, or looking at the current market yield on its debt / comparable debt. I suppose the point of it being private is that, with no annual reports, you'll be unable to find all of their listed outstanding debt / interest payments? In that case, just do the other 2 options..?

If you buy back shares with cash interest income decreases so net income decreases. However, the EPS of the shares will be distributed to the old shares. Thus, the effect on net income depends on the EPS of the shares relative to the interest on the cash. P should not change, however it tends to increase when companies are buying back shares.

For the P/E question, P/E decreases but not for the reason mentioned above. P/E can be calculated as either Price per Share / Earnings per Share or Market Cap / Earnings - as you can see from both, increasing or decreasing the number of shares does not change the ratio. However, market cap decreases when you repurchase shares because there is less cash left in the Company. Said in another way, since Enterprise Value for a Company is fixed, then EV = Debt + Equity - Cash, or Equity = EV - Debt + Cash, and therefore if Cash decreases (while holding EV and Debt fixed), then equity must decrease as well. For example, if a Company is worth $100, has $50 in debt, $60 in equity, and $10 in cash, then $100 EV = $50 debt + $60 equity - $10 cash. If the Company uses that cash to buy equity, then $100 EV = $50 debt + $X equity, where X = $50. In all cases of stock repurchase with cash, the equity value will decrease as shown, while earnings remains uneffected. This causes P/E to decrease. Intuitively, if there were two identical companies that generated the same amount of earnings, but one had more cash than the other, would you pay more or less for the one with more cash?

For question on zero revenue, agree with SCLID - just project forward and do your typical valuation. Having no current revenue does not change how you value a company, since past / present financials are not accounted for anyway, although arguably your projections may be less accurate with no historical precedence.

For cost of debt question, again agree with SCLID - cost of debt is equal to the pricing of debt available to the Company. However, I will caveat that this is NOT interest expense / debt on the financial statements, since the CURRENT debt may not be the MARKET debt available. Arguably, this could be the market value adjusted weighted average yield of debt on the Company, assuming that the market is valuing the debt correctly. Alternatively, as God mentioned, you can use comps to figure out the cost of debt.

Agree with monkeynumber7 on the cost of debt. Guess I should have elaborated on debt available to the company, meaning what it could reasonably raise in the market.

@God, you mention using comparable multiples to value a company with no revenues. Multiples of what exactly? The company obviously has no current earnings, so LTM EV/EBIT or EV/Revenue won't work. The next step would be applying a multiple to future projected earnings and discounting it back, e.g. the terminal value of a DCF, no?

It's gonna be difficult to do interest expense / debt for a private company because, um, you probably won't have their financials. And if you do, it's likely you can probably get access to the rates they're paying on their debt, making cost of debt a simple weighted-function.

Fixing a model... hit CTRL+Z. And hope to God that the row/column/cell you X'ed gets put back in. If by chance he just means it DIVs out or something of the like, just reset interest expense to zero (many different ways to do it; I'd suggest just building in a switch) and re-run the function. 95% of the time, when one of my models blows up, that's all that needs to be done.

Monkey7 you are wrong.

Shares Outstanding X Price Per Share / Net Income

Shares are only in the numerator. This is in many books. You need to rethink your analysis

Make sure you tell all of your interviewers exactly what you just said and your analysis.

F'in retard.

P/E= Price/EPS. If I decrease shares outstanding, EPS goes up and PE goes down. Or your way shares go down and PE goes down.

This is hilarious. Monkey7 is right. It would be ridiculous to think a company's price changes just because the number of shares changes.

Simply thinking about market forces, the introduction of a large buyer of shares (i.e. the company) will push up prices. So even if there's less shares outstanding, the price per share will increase. Therefore the market capitalization will remain the same.

I think you guys misunderstood me.

P/E = Price / Earnings per share.

If shares decrease EPS increases. The only thing I was disagreeing with Monkey on was the following:

"However, market cap decreases when you repurchase shares because there is less cash left in the Company. "

Market cap does not change because there is less cash.

Do you all agree with that?

I don't agree with that and I think Monkey7's answer shows much more understanding of financial concepts than all other answers.

Total Enterprise Value = Market Cap + Debt - Cash.

If you buy back shares you have less cash. Your Total Enterprise Value stays the same and your debt stays the same, thus market cap must decrease to account for less cash.

Answering that P/E will decrease because EPS increases is being completely oblivious to the fact price (i.e price per share) will increase.

You make a fair point. I agree I think Monkey's answer is more complete.

Sorry for the mixup, however i think you must not confuse to cash concept (as they are easy to if you don't explain it properly)