-
3 measures for economic activity
- 1) GDP-total goods produced in country boundaries
- 2) GNI - produced by residents of country, gross national income
- 3) NNI - GNI less depreciation, most accurate
- GDP
- +Net property income from abroad
- =GNI
- -depreciation
- =NNI
-
cost of goods sold equ
begin inv + purchases - end inv = COGS
-
FIFO
LIFO
AVG Cost
Specific Indentification
-description, End inv, COGS
Specific indentifcation: actual cost of specific items included in end inv
- HIGHEST -----> Lowest
- End Inv: Fifo, Avg Cost, LIFO
- COGS: LIFO, AVG, FIFO
-
period system vs. perpetual system
inventory/cogs determined at end of period or continuously updated
-
-
Balance sheet Lifo to Fifo equs (3)
Inventory
Cash
Equity
Inventory FIFO=Inventory LIFO + LIFO Reserve
- CashFIFO=CashLIFO-(Reserve x tax rate)
- EquityFIFO=EquityLIFO+[reserve x (1-t)]
-
income statement, lifo to fifo
COGS
Taxes
NI
COGS FIFO = COGS LIFO - change in reserve
- TaxesFIFO = TaxesLIFO+Change in resrve x tax rate)
- NIFIFO = NILIFO + [change in reserve x (1-t)]
-
assuming rising costs, FIFO affect on
current ratio
Inventory turnover
long-term debt-to-equity
gross/net profit
CA/CL ->higher inventory is partially offset by lower cash from taes
Lower COGS/Avg inv, lower COGS and higher inv
lower, higher equity from LIFo reserve net of tax
higher profits - lower COGS, profits partially offset by higher taxes
-
explain
increase in raw materials and WIP
increase in finished goods alone
finished goods growing faster than sales
expected increase in demand
decrease in demnad
decrease in demand, may be the result of exeessive or obsolete inventory
-
capitalize vs. expensing
general rule and def
capitalize if there is a future economic benefit, immeditely expense if the future benefit is unlikely or uncertain
Capitalizing: involves depreciating asset's cost over its useful life
expensing: results in an immediate reduction of net income
-
-
Where to report:
Capatialized interest
Interest expense
-
6 analysis adjustments to adjust out effects of capitalization
- 1) add capitalized interest to interest expense
- 2) remove depreciation of CI from earnings
- 3) deduct CI net of related depreciation from fixed assets
- 4) add CI to CFI
- 5) deduct CI from CFO
- 6) recalc interest coverage and profitability ratios
-
research and devleopment costs
IFRS vs GAAP
IFRS: resarch costs are expense as incurred but development costs are capitalized
GAAP: R&D costs are expensed as incurred
-
software development costs
IFRS vs gaap
internal vs for sale
- For sale:
- IFRS/GAAP: expensed as incurred until feasibility is reached
- InternaL:
- IFRS: same as software developed for sale
- GAAP: capitalize all software development costs
-
straight-line depreciation
double-declining balance
Units of production
equs
SL= (Cost-salvage value) / useful life
DDB (Cost - Acc Depn) x (2/useful life)
UOP = (Cost - Salvage value) x (unis used/ total capacity)
-
-
impairment (IFRS)
asset is imparied when book value (historical cost - acc. deprec) > recoverable amount
recoverable amount is greater of "fair value less selling costs" and "value in use"
- if impaired:
- -write-down asset to recoverable amount and recognize loss in I.S.
- -loss reversal is allowed up to original loss
-
impairment (GAAP)
1)identify impariemnt-impaired when book value > asset's estimated future undiscounted cash flows
2) loss recognition - if impaired, write down to fair value and put loss on I.S.
-loss reversal is prohibited for assets "held-for-use"
-
impact of impariment on
BS
IS
CF
Disclosure
BS: reduces assets, liabilities (deferred taxes), and S.E.
IS: loss decreases current period net income; in future periods, reduced deprec. results in higher net income
CF: unaffected
Disclosure: MD&A, footnotes
-
impact of impairment on ratios
1) fixed asset and total asset turnover ratios
2)debt-to-equity ratio
3) current year ROA and ROE
4) future ROA and ROE
1) fixed asset and total asset turnover ratios: increase due to reduced assets
2)debt-to-equity ratio: increases due to reduced equity
3) current year ROA and ROE: decrease, % reduction in net income > % reduction in Assets/equity
4) future ROA and ROE: increase due to lower assets and equity, higher net income with lower depreciation
-
asset revaluation (gaap vs. ifrs)
- GAAP: depreciated historic cost
- IFRS: depcreciated historic cost or fair value
-
estimated useful life equ
historical cost/ annual depn
-
Estimated age
accum depn/annual depn
-
Estimated remaiing life
Net Book Value / Annual Depn
-
GAAP, treat as finance lease if any of the following is met (4)
1) title to the leased asset is transferred to the lessee at the end of the lease
2) a bargain purchase option exists
3) the lease term is >75% of the asset's economic life
4) the PV of the lease payments >90% of the leased asset's fair value
-
finance lease
Treat as if leased asset was purchased with debt
Lower of fair value or PV of future lease payments reported as balance sheet ASSET AND LIABILITY
depreciated over time
interest expense is recognied on liability
lease payments treated like amortizing debt - each payment is part interest (CFO) and part principal (CFF)
-
-
-
lessor financial reporting
Finance vs. operating
- finance:
- -lessor reports lease receivable on BS
- -treat as either sale-type lease or direct-financing lease
- operating:
- -lessor reports leased asset on bs
- depreciation expense on asset
- lease payments as rental income
-
sale type lease (def)
lessor is typically a dealer or the asset
PV of lease payments > carrying value of leased asset
-
direct financing lease
lessor is not the dealer
PV of lease payments = carrying value of leased asset
-
percentage ownership
4
financial assets <20%
- investments in associates 20-50%
- -equity method
- Busines combinations >50%
- -acquisition method
- shared control by 2+= joint venture
- -IFRS: proportionate consolidation
- -GAAP: equity method
-
joint venture (gaap vs. IFRS)
GAAP: Equity
IFRS: proportionate consolidation or equity
-
Held to maturity
def, initially reported?
- debt securities where the company has the intent and ability to hold to maturity
- Initially reported:
- GAAP: cost including transaction costs
- IFRS: Fair value including tranasction costs
- COST METHOD
-
held for trading
debt and equity securities acquired for the purpose of selling in the near future
MARKET METHOD
-
available for sale
debt and equity that are neither held-to-maturity nor trading securities
HYBRID
-
Designated at fair value
management has the option to report held-to-maturity or available-for-sale assets at fair value
treated like Held-for-trading
-
-
Available for sale (IFRS)
FX gains and losses on debt to income statement in IFRS not GAAP
-
investments in associates: equity method
BS, IS,
balance sheet: reported at cost + earnings - dividents
IS: earnings
-
evidence of significant influence (5)
- representation on board of directors
- participation in policy making
- material transactions between the parties
- interchange of key personnel
- technological dependency
Influence: finance, operating, amount and timing of dividends
-
equity method impairment
fair value < carrying value AND deemed to be permanent
asset written down to fair value and impariemnt loss on IS
no reversal in GAAP or IFRS
-
intercompany transfers
upstream profit on transaction in associates accounts (Dunder Mifflin sells paper to Sabre)
downstream profit on transaction in parent's accounts (sabre sells printers to Dunder mifflin)
both must eliminate proportionate share of profit from equity income
-
6 steps of acquisition method
1) elminate investment account of parent and equity accounts of subsidiary
2) create minority interest (share of equity not owned)
3) combine assets and liabilities of both firms (net of intercompany transactions)
4) eliminate subsidiary earnings from parent
5) subtract minority share of earnings (share of earnings not owned)
6) combine revenues and expenses of both firms (net of intercompany transactions)
-
joint venture accounting and 3 issues
equity method for GAAP
- 1) net profit margin overstated
- 2) ROA overstated
- 3) debt ratios skewed
-
IFRS 3 types of JV
- 1) jointly controlled entities: sharing control of a separate entity
- 2) jointly controlled operations: each venture uses its own assets for a shared project
- 3) jointly controlled assets: a project carried out with assets that are jointly owned
-
parital vs. full goodwill
- GAAP requires full
- IFRS allwos bowth
full goodwill = total fair value of subsidiary minus FV of net identifiable assets
Partial: goodwill is purchase price, minus the % owned times fair value of net identifiable assets
-
3 step process for impairment of goodwill (IFRS and GAAP)
- 1)
- IFRS: allocated across cash generating units that will benefit from acquisition
- GAAP: Allocated across reporting units: operating segment or component
- 2)
- IFRS: One-step process
- -if recoverable amount < carrying value, recognize difference as impairment
- GAAP: 2-step process
- -if fair value of reporting unit < carrying value, goodwill is impaired
- -amount of impairment is unit's reported goodwill - current fair value of unit's goodwill
- 3)
- IFRS: if loss is greater than unit goodwill, remainder is allocated to impairment of other assets of the cash generating assets
GAAP: If loss is greater than the current fair value of a unit goodwill, unit goodwill is reduced to zero, no other allocation of impairment amount
-
-
EQUITY METHOD = best ratios
-
DC accounting
IS, BS
IS = employer contribution
BS = asset/liability = excess or shortfall in payments relative to specified contribution
no issues for analyst
-
Pay-related plans
pension benefits are based on future compensation
-
PBO
ABO
VBO
IAS 19
PBO: projected benefit obligation: PV of all future pension payments earned to date based on expected salary increases overtime. Going concern basis
ABO, accumulated benefit obligation: PV of all future pension payments earned to date based on current salary levels, liability on liquidation basis
Vested benefit obligation: only vested units
IAS 19: a measure of Defined benefit obligation similar to PBO
-
PBO Components
Service Cost
Interest Cost
Actuarial G/L
Prior Service costs
Benefits paid
SC: change in PBO attributed to employees efforts during the year. The actuarial PV of pension benefits earned in a year
IC: increase in the PBO resulting from passage of time: PBO at start of period x discount rate
Actuarial g/l: g/l resulting from changes in actuarial assumptions
Prior service costs: retroactive benefits awarded to employees
Benefits paid: payments made from the fund to retirees
-
PBO equ (6)
- Beninning PBO
- +Service Cost
- +Interest Cost
- +/- Actuarial g/l
- + prior service cost
- - benefits paid
- ________
- Ending PBO
-
Fair value of plan assets (equ 4)
- Fair value at start of year
- +/- actual return on plan assets
- + Employer contributions
- - benefits paid to retirees
- ______
- fair value of plan asset at year end
-
Pension expense on income statement (6)
- Net period benefit costs
- +service costs
- + interest costs
- -expected return on plan assets
- +/- amortization of g/l
- + amortization of prior service costs
- +/- amortization of transition (asset)/liability
- ___________
- Pension expense on IS
-
all plans make/disclose 3 assumptions
- 1) discount rate
- 2) expected return on plan assets
- 3) rate of compensation increase
-
these assumptions can affect:
- balance sheet (through effect on PBO)
- disclosures (ABO, VBO)
- income statement (pension cost)
-
-
IAS 19 allows for delayed recognition of certain events (2)
- 1) deferred g/l
- -from changes in actuarial assumptions affecting the PBO
- -from differences in the actual and expected return on plan assets
- 2) trasition assets and liabilities
- -artifact of implementation of new accounting rule in 1985
-
Balance Sheet (IAS)
- Funded status: +overfunded -underfunded
- Deferred (gain)/loss +/-
- Transition (asset)/liab +/-
- ___________
Balance sheet (liability)/asset
-
toatl Income statement efect equ
Total IS effect = service + interest - actual return
-
economic pension expense (Equ)
6
- Ending PBO
- -Beginning PBO
- =Change in PBO
- +benefits paid
- -actual return on assets
- =Economic pension expense
-
Contribution > economic expense
- > : principal payment
- CFO up, CFF down
< : borrowing
-
6 inputs to option pricing models
- 1) exercise price
- 2) stock price at the grant date
- 3) expected term
- 4) expected volatility
- 5) expected dividends
- 6) risk-free rate
-
Translation/Current Rate Method
Remeaseurement/Temporal Method
Current Rate/Temporal method
Local Currency to Functional Currency to Presentation currency (Picture)
-
5 factors to consider in deciding functional currency
1) currency that influences sales prices for goods and services
2) currency of the country that determines prices
3) currency that influences labor, material and costs
4) currency form in which funds are generated
5) currency which reciepts from operating activities are usually retained
-
EXCHANGE RATE DEFS
current rate
average rate
historical rate
current: exchange rate on the balance sheet date
avg: average over period
historical rate: actual rate during transaction
-
-
-
hyperinflationary enviroment
where cumulative inflation exceeds 100% over a 3-year period
-
fair value hedge
purpose and recognition
purpose: offset exposure to changes in fiar value of an asset/liab
recog: gains and losses are recognized in the IS
-
cash flow hedge
purpose and recognition
offset exposure to variable cashflows from anticipated transactions
G/L report in equity. The gains and losses are eventually recognized in the IS
-
net investment hedge of a foreign subsidiary
purpose and recognition
offest exposure from an existing investment in a foreign sub
g/L are recognized in equity along with translation g/l
-
6 mechanisms to deter strategic manipulation
- 1) indepedent audit
- 2) board of diretors
- 3) certification by senior management
- 4) class action litigation
-
formula for balance sheet based aggregate accruals
accrualsBS = NOAEND - NOABEG
-
accruals ratioBS equ
accruals ratioBS=[(NOAend-NOAbeg)]/[(NOAend+NOAbeg)/2]
-
accruals cash flow equ
accrualsCF = NI - CFO - CFI
-
accruals ratio cash flow
accrualsCF =
[NI - CFO - CFI] / [(NOAEND+NOABEG)/2]
-
core operating margin equ
(sales - COGS - SG&A) / sales
-
categories of capital budge projects (6)
- 1) replacement projects to maintain the business
- 2) replacement projects for cost reduction
- 3) expansion projects
- 4) new product or market development
- 5) mandatory
- 6) other
-
5 principals of capital budgeting
- 1) decisions are based on cash flows, not accounting income
- 2) cash flows are based on opportunity costs
- 3)timing of cash flows is important
- 4) cash flows are analyzed on an after-tax basis
- 5) financing costs are reflected in the project's required rate of return
-
MACRS
Modified accelerated cost recovery system
DEF
for capital budgeting purposes, we should use the same depreciation method used for tax reporting since captial budgeting analysis is based on after-tax cash flows and not accounting income
-
initial investment outlay equ
outlay = FCInv + NWCInv
NWCInv = change in non-cash current assets - change in non-debt current liab = change in NWC
-
after tax operating cash flows
CF = (S-C)(1-T)+(TD)
- S = sales
- C = cash operating costs
- D = depreciation expense
- T = Marginal tax rate
-
terminal year after-tax non-opearting cash flows (TNOCF)
- TNOCF = SalT + NWCInv - T (SalT-BT)
- SalT=pre-tax cash proceeds from sale of fixed capital
- BT = book value of the fixed capital sold
-
inital outlay if replacement project equ
outlay = FCInv + NWCInv - Sal0+T(Sal0-B0)
-
hard capital rationing
soft capital rationing
hard: occurs when the funds allocated to managers under the capital budge can't be increasesd
soft: managers are allowed to incrase their allocated budget if they can justify
-
simulation analysis (monte carlo)
results in a probability distribution of project NPV outcomes, rather than just a limited number of outcomes as with sensitivity or scenario analysis.
-
scenario analysis
risk analysis technique that considers both the sensitivity of some of key output variable to changes in a key input variable
-
real options def and 5 examples
allow managers to make future decisions that change the value of capital budgeting decisions
- timing
- abandonment
- expansion
- flexibility (price-setting,production)
- fundamental option (copper mine, open if profitable)
-
economic income (3 equ)
economic income = cash flow + ending market value - beginning market value
economic income = cash flow - economic depreciation
economic income = beginning market value - ending market value
-
accounting income def and difference from econonmic (2)
reported net income on financial statements
- 1) accounting deprec is based on the orgininal cost
- 2) financing costs are considered as a separate line item and subtracted out to arrive at net income. in capital budgeting, financing costs are reflected in WACC
-
economic profit equ
EP = NOPAT - $WACC
- NOPAT = net operating profit after tax
- $WACC = dollar cost of capital = WACC x capital
- capital = dollar amount of investment
-
Market value added equ
NPV = MVA = Sum of [EPt / (1+WACC)t]
-
residual income
RI t = NI t - r eB t-1
- RI = residual income in period t
- NI = net income in period t
- r = required return on equity
- B=beginning of period book value of equity
-
claims valuation approach
divides operating cash flows based on the claims of deby and equity holders that provide capital to the company
calculates the value of the company, not the project. this is different from the economic profit and residual income approahes, which calc both project and company value
-
progession of capital structure theories
MM 1958: no taxes, no costs of financial distress
to
MM 1963: taxes, no costs of financial distress
to
Static trade-off theory with taxes and costs of financial distress
-
MM assumptions 5
- -capital markets are perfectly competitive
- -investors have homogeneous expectations
- -riskless borrowing and lending
- -no agency costs
- -investment decisions are unaffected by financing decisions
-
MM proposition 1 no taxes
no taxes
value of levered firm = value of unlevered firm
capital structure doesn't matter
-
MM proposition 2 no taxes
- no taxes
- cost of equity increases linearly as a company increases its proportion of debt financing
-
MM proposition 1 with taxes
tax shield provided by debt
VL=VU+(t x d)
optimal structure is 100% debt
-
MM proposition 2 with taxes
-
Tax shield causes WACC to decline as leverage increases. the value of the firm is maximized at the point where the WACC in minimized, which is 100% debt
-
costs of financial distress
def and 2 components
increased costs a company faces when earnings decline and the firm has trouble paying its financing costs
- 1)direct/indirect: direct fees, legal
- -indirect: lost opportunities
2)probability of financial distress: use of leverage
-
agency costs of equity (def and 3 components)
costs associated with the conflicts of interest between managers and owners
- 1) monitoring costs
- 2) bonding costs (non-competes, etc)
- 3) residual losses
-
pecking porder theory
def and 3
signals management sends to investors through financing
- most favored to least favored
- -internally generated equity
- -debt
- -external equity
-
static trade-off theory def and equ
seeks to balance the costs of financial distress with the tax shield benfits from using debt
VL=VU +(t x d)-PV(costs of financial distress)
-
3 things analyst hould look at regarding capital structure
- 1) changes in structure over time
- 2) relative to competitors with similar business risk
- 3) company-specific factors
-
3 international differences in financial leverage
- 1) total debt
- 2) debt maturity
- 3) emerging market difference
-
-
change in price from losing dividend (equ)
change in P = [D(1-TD)] / (1-TCG)
-
6 factors that affect firm dividend payout policy
- 1) investment opportunities
- 2) expected volatility of future earnings
- 3) financial flexibility
- 4) tax considerations
- 5) flotation csots
- 6) contractual /legal restrictions
-
effective tax rate equ
effective tax rate = corporate tax rate + (1-corporate tax rate)(individual tax rate)
double taxation
-
split-rate tax system
earnings distributed as dividends are taxed at a lower rate
-
imputation tax system
taxes paid at corporate level but are attributed to the shareholder, so all taxes are effectively paid at the shareholder rate
-
expected dividend equ
previous dividend + expected increase in EPS x target ratio ratio x adjustment factor
adjustment = 1/number of years which the adjustment in dividends will take place
-
residual dividend model
dividends are based on earnings less funds the firm retains to finance the equity portion of its capital budget
-
5 common rationales for share repurchases
- 1) potential tax advantages
- 2) share price support/signaling
- 3) added flexibility
- 4) offsetting dilution from employee stock options
- 5) increasing financial leverage
-
3 generalization made to global trends in dividend policies
1) lower proportion of US companies pay dividends as compared to europeans
2) proportion of firms paying cash dividends has trended downward
3) % of companies making stock repurchases has been trending upwards
-
FCFE coverage ratio equ
FCFE coverage ratio - FCFE / (Dividends + share repurchases)
-
corporate governance def
the system of principles, policies, procedures, and cleraly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest inherent in the corporate form
-
2 major objectives of corp gov
- 1) eliminate or reduce conflicts of interets
- 2) use the company's assets in a manner consistent with the best interests of investors and other stakeholders
-
sole proprietorships def and conflict
businesses owned by a single individual
conflicts between creditors and suppliers
-
partners, def and conflict
2 or more owners/managers
creditors and supplires, potential conflicts between partners, can be addresssed by delineating rolse and responsibilities
-
corporations, def and conflicts
- distrinct legal entities that have rihgts similar to those of an individual
- -easier to raise capital
- -ownership is transferable
- -limited liability
conflicts: agency. conflict between shareholders and management
-
issues between managers and shareholders (4)
using funds to expand the size of the firm
granting excessive comp and perquisites
investing in risky ventures
not taking enough risk
-
issues between directors and shareholders (5)
lack of independence
board members have personal relationships with management
board members have consulting agreements with firm
interlinked boards
directors are overcompensated
-
7 things that analyst should assess about corp gov
- 1) code of ethics
- 2) directors' oversight/review responsibliities
- 3) management's responsibility to the board
- 4) reports of directors' oversign
- 5) board self assessments
- 6) management performance assessments
- 7) director training
-
weak corp governance does 5 things
1) lowers value of company by increasing risks
2) financial disclosure risk
3) asset risk
4) liability risk
5) strategic policy risk
-
statutory merger
acquiring company acquires all the target's assets and liabilities
-
subsidiary merger
company becomes a subsidiary of the purchaser
-
consolidation
both companies cease to exist in their prior form
-
horizontal merger
two businesses operate in the same industries/competitors
-
vertical merger
acquiring company seeks to move up or down the product value chain. ice cream manufactuere acquires restaurant chain
-
conglomerate merger
2 companies operate in completely separate industries
-
bootstrapping
way of packaging the combined earnings from two companies after a merger so that the merger generates an increase in the earnings per share
-
-
stock purchase vs. asset purchase
-payment
-approval
-corp taxes
-shareholder taxes
-liabilities
- stock
- -made directly to target company shareholders in exchange for their shares
- -majority shareholder approval required
- -none
- -shareholdres pay capital gains tax
- -acquirer assumes liabilities of target
- asset purchase
- -made directly to target company
- -no approval needed
- -target company pays capital gains taxes
- -none
- -acquirer usually avoids assumption of target's liabilities
-
3 factors in choosing method of payment
1) distribution between risk and reward for the acquirer and target shareholders
2) relative valuations of companies involved
3) changes in capital structure
-
Pre-offer defence mechanism: poison pill
gives current shareholders right to purchase additional shares at low prices
-
Pre-offer defence mechanism:poison put
focus on bondholders, puts give bondholders ths option to demand immediate repayment of their bonds if there is a hostile takeover
-
Pre-offer defence mechanism: staggered board
board split into 3 equal sized groups with staggered election
-
Pre-offer defence mechanism: restricted voting rights
equity ownership above x% triggers loss of voting rights unless approved by board
-
Pre-offer defence mechanism: supermajority voting provisions for mergers
increases majority to 66% or greater
-
Pre-offer defence mechanism: fair price amendment
restricts merger offer unless fair, as determined by some formula
-
Pre-offer defence mechanism: golden parachutes
gives managers lucrative cash payouts if they leave the target company after a merger
-
post-offer defence mechanisms: greemail
payoff to potential acquirer to terminate the hostile takeover attempt
-
post-offer defence mechanisms: leverage recapitalization
target assumes a large amount of debt that is used to finance share repurchases
-
post-offer defence mechanisms:
-crown jewel defense
-pac-man defense
-white knight
-white squire
- -target sell a major asset to 3rd party
- -try to acquire the acquirer
- -3rd party comes to counter bid
- -3rd party buys minority stake
-
summarize U.S. antitrust litigation (4)
1890: The sherman antitrust act: made monopoly illegal, not enforceable
1914: The Clayton Antitrust Act: created FTC to enforce
1950: the Celler-Kefauver Act: addressed weaknesses in 1914 act
1976: the Hart-Scott-Rodino Antitrust: required all potentail mergers to be reviewed and approved by FTC
-
HHI
HHI = sum of (MSi x 100)2
MSi=market share of firm i
-
-
find FCF using DCF 6 steps
- 1) determine which cash flow model to use
- -2, 3 stage, etc
- 2) develop pro-forma financial estimates
- 3) calculate free cash flows using the pro forma data
- 4) discount CFs back to present
- 5) determine terminal value and discount back
- 6) add the FCF for the first stage and terminal value to determine final value
-
net income to FCF equ
- Net Income
- +Net Interest after tax
- =Unlevered net income
- +_ change in deferred taxes
- =NOPLAT
- +net noncash charges
- +_change in NWC
- - capital expenditures
- =FCF
NWC = current assets - current liabN
et interest after tax = (interest expense - interest income) * (1-t)
-
Terminal value EQU
terminal valueT = [FCFT*(1+g)] / (WACCadjusted - g)
-
5 steps to comparable company analysis
- 1) find comp firms
- 2) calc multiples
- 3) calc descriptive stats and apply to firm
- 4) estimate takeover premium
- 5) calc the estimated takeover price for the target as the sume of estimated stock value based on comps and takeover premium
-
takeover premium equ
TP = (DP - SP) / SP
- TP = takeover premium
- DP = deal price per share
- SP = target co's stock price
-
3 steps comparable transaction analysis
1: identify a set of recent takeover transactions
2: calc various relative value measures based on completed deal prices for the companies in the sample
3: calc descriptive stats for the relative value metrics and apply those measures to the target firm
-
post-value of an acquirer (equ)
V AT=V A+V T+S-C
- A: acquirer
- T: Target
- S=synergies
- C=cash paid to target shareholders
-
gain accrued to the target (equ)
- GainT=TP=PT-VT
TP: takeover premium - P= price paid for target
- V=pre-merger value of target
-
gains accrued to the acquirer (equ)
- GainA=S-TP=S-(PT-VT)
- synergies - takeover price
-
who assumes risk?
cash offer
stock offer
cash offer: acquirer assumes the risk and potential reward.
stock offer: some risks shift to target firm
-
divestitures
comapny selling a division or subsidiary
-
equity carve-outs
create a new independent company by giving equity interest in a subsidiary to outside shareholders
-
spin-offs
like carve-outs in that they create a new independent company that is distinct from the parent company
-
split ofs
allow shareholders to receive new shares of a division of the parent comapny in exchange for a portion of their shares in the parent company
-
liquidations
break up the firm and sell its asset piece by piece, most associated with bankruptcy
-
CFA 54 major reasons for divestiture
- 1) division no longer fits into management's long-term strategy
- 2) lack of profitability
- 3) individual parts are worth more than the whole
- 4) infusion of cash
|
|