things I forget

what three things lead to deferred taxes?

SBC, write-downs/impairments, D&A

is preferred stock tax deductible or no? where does it go on the income statement (like explain the mechanics to me)

preferred stock does NOT affect taxes. it pays out dividends and creates net income to common

how do DTAs/DTLs affect the statements?

1) add DTL and subtract DTA on CFS

• you determine the value by tax rate * NOL?

• or like the way I think it is like the number actually used IRL * the tax rate

2) on BS, asset (DTA) or liabilities (DTL) up (by same amount you add/subtracted on CFS)

what is a capital gain? how is it realized on the financial statements?

a capital gain is when you pay less for a company’s net assets-liabilities. it is realized as (1) a GAIN on the income statement that (2) then has to be subtracted on CFS

what is the difference between equities and liabilities?

both represent a future obligation but equity is tied to a company’s internal operations (ie. for equity investors to realize a gain the company has to operate more efficiently and do better such that their stock price goes up) while liabilities is related to external parties (ie. debt investors just care about getting their money back)

what is common shareholder’s equity?

CSE is equity attributable to all common shareholders. it encapsulates all the equity portions that are attributable to common but nothing more senior (like if they have preferred equity investors, they are more senior and CSE doesnt encapsulate preferred equity)

CSE = common stock + APIC + RE - treasury stock

what are NOLs?

NOLs are a component of a DTA. if you have $100 in NOLs and 25% tax rate, the DTA line item you subtract is $25

what are the differences between accrued expenses and accounts payable?

accrued expenses is recurring (ie. wages) and accounts payable is not (ie. paying suppliers).

accounts payable also has an invoice

how does PIK show up on the financial statements?

IS —> interest expense

CFS —> add back

BS —> debt

what is the difference between the level of working capital vs change in working capital?

level of working capital = current assets - current liabilities

change in working capital = old working capital - new working capital

what does a negative change in working capital mean? what does a positive one mean?

negative = working capital increased, cash outflow bc it USED cash to do grow, company tied up cash

• assets increased more than liabilities

• ie. retailer stocking up for holidays —> buying lots of inventory —> money tied up in that inventory —> so working capital increases —> cash outflow

positive = working capital decreased, cash inflow bc it GAINED cash to do that, company freed cash

• liabilities grew more than assets

• ie. retailer delays paying suppliers —> A/P increases —> more liabilities —> working capital decreases —> cash freed up —> cash inflow

name 7 ways the financial statements connect

NI, D&A, equity, debt, working capital, PIK, CapEx

• Net income → income statement, balance sheet (retained earnings), cash flow statement

• D&A → income statement, add back on CFS, accumulated depreciation on BS

• CapEx → in CFI on CFS, also reflected on BS 

• Debt → in CFF on CFS, on BS under liabilities 

• Equity → in CFF on CFS, on BS as equity

• PIK interest → interest expense on income statement, add back on CFS, debt up on BS

• Working capital → sometimes reflected on income statement, adjusted on CFS, up on BS

what happens when NOLs are used?

add back DTA on CFS, DTA down on BS

• because remember DTAs can be carried on into the future once a company does turn profitable

difference between operating leases and finance leases

operating leases have no ownership transfer and do not own the leases. finance leases do have ownership transfer option or option to purchase asset at bargain price

what is the main difference between accounting treatments for operating leases for US GAAP and IFRS

under US GAAP, the operating lease asset and operating lease liability decrease by the same amount each year because principal repayment = cash lease expense - interest expense AND lease depreciation = cash lease expense - interest expense. Under IFRS, leases are treated like debt so depreciation and interest lead to a divergence over time

differences between IFRS and US GAAP

1. Operating lease expense

• Operating lease expense is split into interest and depreciation under IFRS

• Simple rental expense under US GAAP (like one single straight-line rental expense)

2. Cash flow statements

• Started with something other than net income under IFRS (ie. operating income, pre-tax income, cash received or cash paid)

DTA is when

book taxes > cash taxes (paying more in taxes than you have to)

• lower deprecation recorded

• asset write down

• SBC

DTL is when

book taxes < cash taxes (paying less than required)

• accelerated D&A

• asset write ups

What are the key adjustments made to acquirer’s balance sheet in M&A deal? 

• Foregone interest rate of cash

• New deal debt 

• Shares issued which increases common stock/apic and diluted share count, eliminate target equity

• PP&E adn intabibles write ups

• Goodwill plug

• Deferred taxes

  • You write down a seller’s existing DTAs and DTLs in most M&A deals, new DTL/DTAs may be created 

• NCI

• Fees

What is the difference between a DTL and Income Tax Payable?

DTL is when book taxes < cash taxes. its about timing differences whereas income taxes payable is a line item on BS that represents taxes owed to the government for current period that havent been paid yet. they come from operations during the period. whereas DTLs could be from prevoius years

Interest Expense of 20m, a 5% interest rate. what is debt

20m/5% = 400

If leverage is 10x EBITDA and the cost of debt is 10%, what is the interest coverage ratio?

just multiply so 1

what is interest coverage vs leverage ratio

coverage = ebit or ebitda / interest expense

leverage = debt / ebitda

what are the drivers in an LBO

LIFO in inflationary environmetn what happens.

what abt FIFO in inflationary

• COGS up

• GP lower

FOR LIFO^^^

• cogs down

• GP higher

FOR FIFO^^^

If you change from LIFO to FIFO and costs are rising, how would this impact your DCF?

nothing happnes

margins are better and higher EBIT/FCF bc cogs are lower. BUT, the inventory left on your balance sheet is still more expensive so that will indicate cashoutflow.

MoM equation

equity out / equity in

or

exit price - leftover debt / purchase cash

100 bps

1%

what is exchange ratio

• Exchange ratio = (offer price / buyer price) * % stock

  • How many shares of the buyers shares do they have to give out in order to make up the price of the new stock 

reasons a strategic can pay more for a target than a financial sponsor. How?

what is peg ratio

p/e / eps growth

Is this stock expensive or cheap relative to how fast its earnings are expected to grow?”

How are deferred financing fees treated in an LBO analysis?

Deferred financing fees are treated as a use of cash at close and amortized through income statement over the life of debt.

It is a contraliability against debt

What would the impact be on M&A activity if the tax rate were to decrease to 20%?

a. Increased cash repatriation therefore more dry powder available for acquisitions

b. Increased cost of debt therefore increased WACC therefore decreased company valuations

NCI vs equity investments

NCI stands for non-controlling interest and it is the part of the company you do not own. You do add it back in EV. You do control the company (>50% ownership) so you consolidate financials and you need to add it back in EV.

Equity investments is ownership in a company usually 20-50%. Since it is a small stake, it is not operational and you do not add back in EV. You do NOT control the company in equity investmetnts so you do not report their financials and don’t have to add it back in EV.

full EV equation

TEV = Equity Value + Debt + Preferred Stock + Capital Lease Obligations + Unfunded Pension Obligations – NOLs – Cash + Non controlling interest  

If you were buying a vending machine business, would you pay a higher EBITDA multiple for a business that owned the

machines and where they depreciated normally, or one in which the machines were leased? The Depreciation expense and the lease expense are the same dollar amounts and everything else is held constant.

The one that leases the machine you would pay a higher multiple for because EBITDA .

For the one that owns teh company, D&A is below EBITDA. So you have a higher EBITDA.

For the one leasing, lease expenses are above EBITDA so lower EBITDA

Considering EV is same and EV = EBITDA x mulitple. If we have lower EBITDA, then higher multiple.

How does you calculate the preferred stock % value of the WACC equation

go into the footnotes of a 10k and it will usually give you how much preferred stock outstanding and the dividend on it. You multiply the dividend number by the current share pirce to get the market value of preferred stock and divide it by the total capital structure (debt + equity + preferred).

What is cost of preferred / how to calculate it?

Cost of preferred is also dividend yield. It asks - if i buy this preferred stock today at its current price, what annual return do I earn from dividends?

To do this you divide the dividend value / market price (in public companies, it is just current share price and for private companies, it is the par value)