Bricking 3

What are the steps in projecting the 3 financial statements?

1) Project revenue in a reasonable level of detail

2) Project expenses — COGS, OpEx (projections typically done more simply than revenue)

3) Project operational balance sheet items and link them to the CFS

4) Project other cash flow statement line items, like CapEx and PIK interest adjustments, and create Debt schedule with interest payments

5) Link Interest on the IS (do this last because company earns interest on cash and must pay interest on debt, so you need other info before you can record that) and Everything to the BS

6) Create summary statistics

What are the 3 main ways to project revenue?

1) Simple percentage growth rate

2) Units sold x average price per unit

3) Market size x market share

Other than changing COGS to change net income, how can using LIFO vs FIFO affect cash flow?

Depending on the direction of inventory costs over time, using LIFO or FIFO can result in changes in inventory that affect CF from Ops. This is because ending inventory = beginning inventory + purchases - COGS

What are key differences between the 3 intercompany investment methods?

1) Fair value: for <20% investment; recorded on balance sheet and marked to market; dividends are recorded as investment income and cash
2) Equity method: for 20-50% investment; recorded on balance sheet and investment increases based on proportional share of net income; such net income is adjusted for as non-cash in cash flow statement; dividends decrease the value of investment
3) Consolidation method: financial statements consolidated; income statement has “Net Income Attributable to Non-Controlling Interests” and Balance Sheet has “Non-Controlling Interests” line

How does an underfunded pension affect company valuation?

When going from equity value to enterprise value, we have to add the underfunded amount. If the company’s pension contributions are tax-deducitble, we multiply unfunded pension by (1 - tax rate).

What are the 3 main components of pension expense?

Service cost: the actual OpEx, which is the future pension obligation (non-cash, just estimate of how much increased cash is owed when employee retires)

Interest expense on pension liability: value of money decreasing over time

Expected return on Plan Assets: Reduces pension expense, this is what the money set aside and invested to eventually pay off pension is expected to earn

How do defined contribution and defined benefit plans differ?

Defined contribution: employees invest independently and the company matches a certain %, which shows up as OpEx (e.g., 401k)

Defined benefit: company promises employees certain payments; pension plan assets show up on A side, projected benefit obligation on L&E side (gap is plugged by unfunded pension asset/liability); benefit payments decrease assets and liability; expenses increase as employees’ average salary increases and average time spent at company (results in higher service costs); service cost and interest cost both increase expense, whereas expected return on assets decreases it on the income statement

Most pension expenses on income statement are non-cash, 99% of cash outflow is pension contribution which doesn’t show up on IS