Term
| Calculating Accounts Payable Turnover Ratio |
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Definition
= COGS/Average Accounts Payable
Also,
365/Accounts Payable Ratio =
# of Days to Pay Suppliers |
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Term
| Calculating Accretion/Dilution Analysis |
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Definition
1. Calculate Synergies (usually given)
2. Add EBIT (Op Income) of 2 cos + synergies
3. Apply (1-tax rate) to above total (= proforma Net Income of combined co)
4. Calc. new shares added to acquire co
5. Divide offered share price by acquirers' market share price = multiple
6. Multiply share multiple by # of target shares (= # of addl acquirer shares)
7. Add new acq shares to addl outstanding (= total shares after combination)
8. Divide Proforma NI (#3 above) by TTL proforma shares (#7 above)
9. Compare result of #8 to Acquirer's pre-acquisition EPS. If proforma is greater then pre-acq then accretive |
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Term
| Calculating Cash Flow From Operations ("Indirect Method") |
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Definition
Net Income
+ Depreciation & Ammortization
+ Deferred Taxes
+ Decrease in Accounts Receivable
- Increase in Inventory
+ Increase in Accounts Payable
- Increase in Interest Received
+ Increase in Interest Payable
- Gains in Asset Sales
= Net Cash Flow From Ops |
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Term
| Calculating Cost of Capital (a) |
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Definition
1. Yield to Maturity (YTM) of Debt x (1-marginal tax rate)
x
2. CAPM {risk free rate + (co.'s Beta x co.'s risk premium [rp = return of market - risk free rate])}
x
3. Ratio of Debt to Total Capital + Ratio of Equity to Total Capital |
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Term
| Calculating Cost of Capital (b) |
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Definition
1. Interest Expense x (1-Tax Rate) / Amount of Debt - Debt Acquisition Cost
x
2. Interest Expense / Preferred Debt Amount
x
3. Risk Free Rate + (Co.'s Beta x Risk Premium) |
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Term
| Calculating Cost of Debt (a) |
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Definition
For publicly traded companies = current yield on all outstanding issues
or
Current Yield = Annual Coupon (par) / Current Bond Price
BUT
On Callable Bond Yields quoted as YTW (Yield to Worst) |
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Term
| Calculating Risk Free Rate |
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Definition
Usually the 3 month T-Bill Rate
BUT
Ibbotson's uses the interpolated yield on a 20 Year Treasury (= 30 Yr Treasury 20 years from maturity since U.S. does not issue 20 Year Treasuries) for the "Risk Free Rate" |
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Term
| Calculating Cost of Debt (b) |
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Definition
Difficult to do for a private company
Some private companies DO have publicly-traded debt
Can approximate on the basis of credit ratings |
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Term
| Calculating Debt to EBITDA Ratio Change |
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Definition
Debt/EBITDA = Total Liabilities/EBITDA
Change in Ratios Year 1 to Year 2:
= (TTL Liab/EBITDA Yr1) /
(TTL Liab/EBITDA Yr 2)
- 1
= % Change in EBITDA Ratios between 2 years |
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Term
| Calculating Discounted Cash Flow (a) |
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Definition
DCF = FCF (Free Cash Flow) + Projected Cash Flow
or
PV of forecasted FCF
DCF is a check on the prevailing market value
* When no 'pure play' peers exist DCF is solution
* Typically 5 year projections of DCF - ends in "Terminal Value"
* Discount Rate in DCF Analysis = WACC (Weighted Average Cost of Capital)
* NOTE: DCF Analysis is easier w/publicly-traded companies
* An INCREASE in future Net Working Capital = LOWER valuation under DCF |
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Term
Calculating Discounted Cash Flow (b)
(Unlevered FCF) |
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Definition
DCF Drivers:
(a) Sales Growth
(b) Profitability
(c) Free Cash Flow Generation
*Unlevered FCF is the core of DCF
Unlevered FCF = cash generated by co. AFTER paying ALL operating expenses AND taxes as well as funding CAPEX AND Working Capital but BEFORE paying Interest Expense
FCF Calculation:
EBIT
- Taxes (@ Marginal Rate)
= EBIAT (EBI After Taxes)
+ Depreciation + Amortization
- CAPEX
- Increase in Net Working Capital
= FCF |
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Term
| Calculating Dividend Discount Model (DDM) |
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Definition
1. Need:
a) Dividend Growth Rate ("g")
b) Investor's Required Rate of Return ("r")
DDM = Dividends / r-g |
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Term
| Calculating Dividend Payout Ratio |
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Definition
Version (a)
DPR = Dividends Paid to Common Shareholders / (Net Income - Dividends Paid to Preferred Shareholders)
(b)
Annual Dividends / Annual EPS |
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Term
| Calculating Equity Turnover Ratio |
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Definition
*ETR is a calculation of the efficient use of equity
ETR = Sales / Avg Shareholders Equity |
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Term
| Calculating Enterprise Value (a) |
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Definition
EV = "Best estimate of a purchase price" Acquisition Cost (for an acquiring co.)
EV = Sum of all ownership interests in a co.
EV =
Equity Value
+ Total Debt
+ Preferred Stock
+ Minority Interest
- Cash & Cash Equivalents
*NOTE: If a company raises additional debt but that debt remains as cash on its Balance Sheet, EV is unchanged since the new debt is offset by the cash.
"Implied" Enterprise Value = EV - Net Debt |
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Term
| Calculating Enterprise Value (b) |
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Definition
Calculating EV for a Transaction
IF Offer Price = Cash/Share + (Exchange Ratio x Acquisition Share Price)
AND
Equity Value = Offer Price x Target's Fully Diluted Shares Outstanding
THEN
EV = Equity Value + Total Debt + Preferred Stock + Non Control [="Minority"] Interest - Cash & Cash Equivalents
Calculating Premium Paid = (Offer Price / Unaffected Share Price) - 1 |
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Term
| Calculating Net Working Capital (a) |
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Definition
Net Working Capital =
Increase in Accounts Payable
- Increase in Accounts Receivable
- Increase in Inventory |
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Term
|
Definition
P/FCF =
(Market Price x # Outstanding Shares) /
[EBIT x (1-Tax Rate)] + Dep+Amort - CAPEX - Change in Net Working Capital |
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Term
| Calculating Equity Value (EqV) |
|
Definition
EqV = Value of Fully Diluted Shares =
Basic Shares Outstanding
+ Exercised 'in-the-money'
+ 'in-the-money' Convertible Securities
* NOTE: An option is considered 'in-the-money' when the option exercise price is BELOW the underlying co.'s current share price
**NOTE: Many calculations include ALL outstanding 'in-the-money' warrants/options/convertibles (even if not exercisable) since they represent a future claim |
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Term
| Calculating In-The-Money Options (Treasury Stock Method) |
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Definition
IF Assumptions Known:
- Current Share Price
- Basic Shares Outstanding
- # of Options
- Weighted Average Exercise Price
THEN:
Step 1:
Option Proceeds (#Options x Exercise Price) / Current Share Price = Shares Repurchased From Option Proceeds (smaller # than Shares Exercised Because "in-the-money" means 'less than' current market)
Step 2:
Shares Exercised By 'in-the-money' Options
- Shares Repurchased w/Proceeds From Option Proceeds
= NET NEW SHARES from Exercise of Options
[Add NET NEW to Basic Shares Outstanding to get FULLY DILUTED Shares Outstanding] |
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Term
|
Definition
*NOTE: If Forward P/E is lower than Current P/E, then market expects EPS to grow
1. Calculate Market Cap (Current Share Price x # Outstanding Shares)
2. Calculate Future Net Income (Current Net Income x Growth rate)
3. Current market Cap / Future Net Income = Forward P/E |
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Term
| Calculating FCFF (Free Cash Flow to Firm) |
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Definition
FCFF =
(EBIT x 1 - Tax rate)
+ Depreciation & Amortization
- Increase in Weighted Average Capital
- Increase in CAPEX
* NOTE: If future taxes go UP then FCFF will go DOWN |
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Term
| Calculating Impact of Working Capital Changes on Valuation Metrics |
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Definition
ASSUME 2 Cos: ABC & XYZ
If ABC's Working Capital is LOWER THEN XYZ's
THEN:
- XYZ's Enterprise Value will be HIGHER than ABC's
- XYZ's Discounted Cash Flow will be LOWER than ABC's
- There will be NO CHANGE in the relative value of ABC vs XYZ in the Dividend Discount Model |
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Term
| Calculating Interest Coverage Ratio |
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Definition
*NOTE - Any Ratio BELOW 1 = 'risky'
Interest Coverage Ratio = EBIT / Interest Expense |
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Term
| Calculating Inventory Turnover Ratio |
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Definition
Inventory Turnover Ratio (ITR) Measures how often a business 'turns' its inventory. The higher the ratio the more efficient the business.
* Generally speaking, lower value inventory (e.g. bananas) will have higher 'turns' than higher margin products (e.g., Boeing jets).
3 Possible Methods:
a) Sales / Average Inventory
b) 365 / # of Days' Inventory
c) COGS / Average Inventory
*NOTE: This version is the preferred version |
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Term
| Calculating Net Debt to EBITDA |
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Definition
*This is a measure of leverage
Net Debt to EBITDA =
(Interest bearing Debt - Cash & Cash Equivalents) / EBITDA |
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Term
| Calculate Parity for Convertible Security |
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Definition
Assumption: Convertible par value = $1000
Step 1:
EITHER # of shares convertible at par OR Exercise price for conversion
(THUS: if $25 then 40 shares)
Step 2: Divide the factor (25 or 40) into the current convert price to determine the complementary number.
Must |
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Term
| Calculating ROE (Return on Equity) |
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Definition
ROE = Net Income / Average Shareholders Equity
*Calculating Average Shareholder's Equity (e.g., for 2012):
Step 1
2011 Shareholders Equity
+ 2012 Net Income
- 2012 Dividends Paid
- 2012 Shares Purchased Thru Buybacks
= 2012 Shareholder's Equity
Step 2
2012 Shareholder's Equity / 2011 Shareholder's Equity - Average [2012] Shareholder's Equity |
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Term
| Calculating Return on Common Equity |
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Definition
| RCE = (Net Income - Preferred Dividends) / Average Common Stockholder's Equity |
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Term
| Calculating Gordon Growth (Dividend Discount) Model - Stable Model |
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Definition
| Value of Stock = Dividends (Quarterly Dividends x 4) / [Discount Rate - Expected Dividend Growth Rate] |
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Term
| Calculating WACC (Weighted Average Cost of Capital) |
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Definition
WACC =
EBIAT (EBIT x [1-Tax Rate])
+ Depreciation (often projected as a % of sales)
+ Amortization (D&A on Cash Flow State.)
- CAPEX (= Yr 1 PP&E/Yr 2 PP&E)
- Increase in Net Working Capital |
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Term
| Calculating Working Capital |
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Definition
| WC = Current Assets - Current Liabilities |
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Term
| Calculating Net Working Capital |
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Definition
Two Methods:
a) Noncash Current Assets - Non interest-bearing Current Liabilities
b) [Accounts Receivable + Inventory + Pre-paid Expenses + Other Current Assets] - [Accounts Payable + Accrued Liabilities + Other Current Liabilities] |
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Term
| Calculating Comparable Company Analysis |
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Definition
Steps in Comparable Co. Analysis
1. Select Universe of Companies
2. Locate Financial Info
3. 'Spread' Key Stats/Ratios
4. Benchmark Comparable Cos.
5. Determine Valuation |
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Term
| Sources of Financial Info |
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Definition
1. Income Statement Data - ON 10K/10Q/8K/Press Release
2. Research Estimates -
First Call/IBES/Research reports
3. Balance Sheet Data - ON MOST RECENT 10K/10Q/8K/Press Release
4. Cash Flow Statement - ON 10K/10Q/8K/Press Release
5. Basic Shares - FOUND ON - 10K/10Q/Proxy Statement
6. Options & Warrants Outstanding - 10K/10Q
7. Credit Rating of Debt - Rating Agencies/Bloomberg |
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Term
| Calculating ROI (Returns on Investment) |
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Definition
ROI = Measure of Profitability / Measure of Capital
Measures of Profitability = EBIT OR NOPAT (= tax-effected EBIT i.e. EBIAT)
Measures of Capital = Capital/Equity/Assets
THUS
1. ROIC [Return on Invested Capital] =
EBIT / (Average Net Debt + Equity)
2. ROE [Return on Equity] = Net Income / Average Shareholders Equity (=Book Value)
3. ROA [Return on Assets] = Net Income / Average Total Assets |
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Term
| Calculating Value of Treasury Stock |
|
Definition
Value of Treasury Stock =
(Total Assets - Total Liabilities)
- Par Value of Issued Shares
- Paid-in Capital Greater Than Par Value
- Retained Earnings |
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