Investment Banking
Technical Questions
Where Amazing Candidates Meet
Exciting Companies
@ 2015 CoachingAssembly.com, All rights reserved
@ 2016 CoachingAssembly.com, All rights reserved
2015/ 16
2016/ 17
Today’s topics
I. Introduction
II. Key operating model mechanics
III. Capital structure
IV. Enterprise value calculation
V. Key valuation methodologies
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Introduction
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key subjects
Be prepared. Don’t read a book the day before an interview as you will be expected to understand things
rather than learn them by heart
Basic Accounting
Restructuring and Capital
Structure
Discounted Cash Flows
Technical
Interview
Preparation
Trading Multiples
Leveraged Buyout
Transaction Multiples
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
First Round Motivation (HR) Interview
Component
Personal Pitch
Interview Questions
• Tell me about yourself
• Please walk me thru your CV
Knowledge of • Why this bank and division?
the Bank,
• Where else are you applying?
Division and
• Key deals?
Culture
Motivation
and Fit
Your
Questions
Preparation
• Prepare a 1-2 minute personal pitch that differentiates you from other
candidates
• Good to mention long-term hobbies, sports, clubs and volunteering,
international experience & languages, personal stock portfolio, etc
• Demonstrate passion for finance and banking
• Do not do a boring walk through of your CV
• Prepare by talking to employees, Investor Relations reports, Analyst
reports, student chat rooms
• This is the most prestigious bank in the world is not a good answer
• Why should we hire you? Tell me
about your biggest failure? 3
weaknesses?
• Describe when you had to make a
decision in a team, without all the
information being given.
• Link examples to professional experience or extra curricular activities if
possible. Need to come off as sincere
• Be 100% familiar with everything on your CV! If you had finance
experience before, the interview can be more technical
• Do you have any questions for me?
• Need to prepare 3-5 solid questions. Ask questions appropriate to the
profile of the interviewer
• Questions regarding compensation and work hours are off limits
Tip: Try to find out who the interviewer will be and look up their profile on LinkedIn.
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Assessment Center Overview (AC)
• Numerical Tests: Repeat the Numerical Test Using Paper and
Pencil. This version is harder than the online tests
• Fit/Behavioral interviews: 2-4 30 minute interviews. You will
likely meet bankers that are VP and above.
• Technical Interview: Could be a case study. Analysts and
Associates run technical interviews.
• Case Study Presentation: Need to prepare a 5-10 minute
presentation.
• Group Exercise: 5-8 Participants
Tips:
• Never say that you are tired.
• ACs are different depending on location. In continental EU the technical interviews are more
important.
• Need to be consistent in all interviews.
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Assessment Center (AC) Preparation
• Numerical Test: Practice your numerical test prior to AC. If you do not reach the minimum level you will not
be advanced
• Fit/Behavioral interviews: Often more important than technical interviews. Need to show passion and energy
• Technical Interview: Need to practice 4 types of questions (valuation, accounting, modelling and brain
teasers)
• Case Study Presentation: Can be a long case 50-100 pages (skimming / time management is key) or short
case 3-5 pages (attention to detail is important). Need to demonstrate presentation skills
• Group Exercise: Testing your ability to work on a team. Personality type, assertive vs. aggressive.
Egocentric people need to bring others into the discussion. Team goal is more important than individual goal
Analytical and critical
reasoning
Verbal communication
Industry knowledge
Empathy and people
skills
Innovation and creativity
Level of energy and
motivation
Team work and
leadership potential
Conflict management
Resilience and tenacity
Organisation
What they will
judge (1 to 10)
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Learn about specific deals
Preparing deals is extremely important as it will show that i) you have some sort of interest for the business
and ii) you understand the dynamics of a deal
Key things to prepare
Key sources of information
Context: players, geography, sector and different
stakeholder
MergerMarket
Sort of deal (IPO, spin-off, merger, acquisition,
restructuring etc…)
ThomsonOne
Financial aspects of the deal
Dealbook (NY times)
Rationale of the deal: why did this deal happen?
SEC.gov
Your opinion: why do you think it’s good/ bad –
cheap/ expensive etc…
Financial times
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Different deal situation
Type of situations
Type of deals
IPO
Buy-side
Acquisition
A deal or live
situation
Sell-side
Merger
Restructuring
Company
Sale
A pitch
Board
Others
@ 2016 CoachingAssembly.com, All rights reserved
Financing - Equity
Financing - Debt
2016/ 17
What you will do as a junior analyst
Company profiles
LBO model
What?
Why?
Business overview
Key financials
Key stakeholders
Share price performance
Calculation of returns
What sort of capital structure?
What sort of growth prospect?
DCF
Process
Why?
Intrinsic value of the business
What WACC for the business
Internal
Working Group List
Organize work streams
External
Teaser and Information
Memorandum
Merger Model
Multiples
Organize Due Diligence phase
with different advisors on the deal
Organize calls and meetings with
different stakeholders
When?
What?
When you want to sell a business
Why?
Transaction multiples
Client
When you want to buy a business
and propose the opportunity
Accretion/ dilution
Trading multiples
Financial and strategic analysis
What?
Full company overview
@ 2016 CoachingAssembly.com, All rights reserved
Financial impacts
ROI
Why?
Impacts on ownership
How does the business compare
to other similar businesses?
2016/ 17
Overview of a process timetable
ACTIVITY
STAGE 1
Contact Potential Buyers
CA's Signed
OM's sent to buyers
STAGE 2
Apr
May
15 Apr
22 Apr
29 Apr
Jun
1 May
Evaluation of Offers
15 Jun
Management Presentations
Site Visits
Aug
2 Jul
7 Jul
3 Jul
16 Jul
6 Jul
15 Jul
22 Jul
Evaluation of Second Round Offers
13 Aug
Close Transaction
@ 2016 CoachingAssembly.com, All rights reserved
Nov
12 Aug
13 Aug
Announcement
Oct
26 Jun
Second Round Binding Offers
Negotiate and Execute Contracts
Sep
15 Jun
15 Jun
Due Diligence
Jul
6 May
First Round Offers
Data Room Access
STAGE 3
MONTH
19 Aug
20 Aug
10 Sep
11 Sep
1 Oct
2016/ 17
Prepare and answer in a case study
While working on a case study, you need to make sure you think about the entire deal ecosystem/
environment
What sort of questions to you need to ask?
How can you answer?
What is the deal about?
IPO, Merger, Partnership, Fund
Raising…?
What are the resources?
Equity, cash, debt others…?
What is the best solution?
Type of deals and how to go
forward
Who are the different
stakeholders?
Equity holders, external investors,
debt providers, employees…?
What are the different options?
Sale, acquisition, capital raise…?
Is it feasible?
Strategically, financially etc…
Who are the different
stakeholders?
Equity holders, external investors,
debt providers, employees…?
What is the issue?
Lack of cash, expansion,
diversification, size down…?
@ 2016 CoachingAssembly.com, All rights reserved
What is your rationale?
Why do you intend to pursue a
route more than another one?
What are the risks?
Execution risks, interlopers risks
etc…
2016/ 17
Key operating model mechanics
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Structure of the 3 financial statements
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Structure of the 3 financial statements
It is vital to understand these key relationships
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Phone Interview Preparation Sheet
First-round phone interviews are generally very predictable, and because they are conducted over the
telephone, the interviewer will not be able to tell that you’re referring to reference materials while
responding. Thus it makes sense to have this sheet available during the call:
FINANCIAL STATEMENTS
§ 3 Financial Statements:
a)
b)
c)
Income Statement
Cash Flow Statement
Balance Sheet Statement
INCOME STATEMENT
Revenue
- COGS
Gross Profit
- Other Operating Expenses (SG&A etc.)
Operating Income (EBIT)
- Non-operating Expenses (Interest Expense)
EBT (Earning Before Tax)
- Taxes
Net Income
BALANCE SHEET
ASSETS
Current Assets
Cash & Equivalents
Short Term Investments
Inventories
PP&E (Property Plant & Equipment)
TOTAL ASSET
LIABILITIES
Current Liabilities
Accounts Payable
Short Term Debt
Long Term Debt
TOTAL LIABILITIES
CASH FLOW STATEMENT
1.
2.
3.
Cash Flow From Operating Activities
Cash Flow From Investing Activities
Cash Flow From Financing Activities
@ 2016 CoachingAssembly.com, All rights reserved
TOTAL SHAREHOLDER EQUITY
ASSETS = LIABILITIES + EQUITY
2016/ 17
Phone Interview Preparation Sheet – Cont’d
First-round phone interviews are generally very predictable, and because they are conducted over the
telephone, the interviewer will not be able to tell that you’re referring to reference materials while
responding. Thus it makes sense to have this sheet available during the call:
VALUATION TECHNIQUES
§ Enterprise Value = Equity Value (Market Cap.) + Debt – Cash + Preferred Equity + Minority Interest
§ Equity Value = Share Price * Shares Outstanding
§ Valuation Techniques:
a)
b)
c)
DCF
Comparable Company Analysis
Precedent Transaction Analysis
DCF
§ Valuing a company based on
its future cash flows and using
a discount rate to value the
NPV (Net Present Value) of
those cash flows
COMPARABLE COMPANY
§ Valuing a company based on
the valuation of similar
companies within the same
field
PRECEDENT TRANSACTION
§ Valuing a company based on
past transaction of similar
companies within the same
field
§ Multiple: metric used for valuation
§ PE Multiple (Equity Multiple)
§ EBITDA Multiple (Enterprise Value Multiple)
§ Revenue Multiple (Enterprise Value Multiple)
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Capital structure
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Risk and return across the capital structure
Return for a specific stakeholder depend on his aversion to risk
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Security: senior vs. junior securities
Seniority matters when things go bad
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Enterprise value calculation
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key interview questions
1. How do you adjust for Minority Interests and Associates in the
calculation of Enterprise Value?
2. What is a debt-liked items?
3. How do you deal with options in the calculation of Enterprise
Value?
4. How do you calculate Net Debt and where do you find the
information?
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Enterprise Value
Calculation
Equity Value and Adjustments
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Equity value and adjustments
Detailed analysis of the equity value includes some adjustments
Adjustments
convertible bonds
Adjustments for
options in the
money
Total Equity Value
(including
adjustments)
Equity Value of
shares
Equity Value
Effect of exercised
options using treasury
method
@ 2016 CoachingAssembly.com, All rights reserved
Effect of converted
bonds
Total Equity Value,
including
adjustments
2016/ 17
Equity value
Basic equity value calculation
General calculation
§ For a listed company, the Equity Value is the market capitalization of the company:
― Equity Value = Stock class A * Share price class A + Stock class B * Share price class B +…
§ If the price of the stock is very volatile (for none apparent reason), it is possible to take an average of the share price over 1,
3month… period
Market Value of Class B shares
# of shares outstanding (NOSH) *
share price
Market value of the Equity
Market Value of Class A shares
# of shares outstanding (NOSH) *
share price
NOSH A =100
Share price A = 10
Value A =1,000
@ 2016 CoachingAssembly.com, All rights reserved
NOSH B =50
Share price B = 5
Value B =250
Total Equity Value = Value Class A
shares + Class B shares
Equity Value = 1,250
2016/ 17
Equity value adjustment – options
Companies usually have stock option plans
General overview and treasury method
§ Options: financial instruments usually used in employee incentive
plans
Treasury method and Equity value adjustment
§ If options are in the money (exercisable and in the money), they are
assumed to be exercised
― Awarded to an employee, it gives the right to an employee to
acquire a certain number of shares of the company at a normally
favourable price (strike price) at a certain moment of time (once
the options are “vested”)
§ Equity Value must be adjusted for Options in the money
§ We commonly use the treasury method to assess the impact of
options on the Equity Value:
§ The company issues the respective amount of shares
§ With the proceed of the new issue, the company buys back worth of
the same amount of shares @ current market price
§ From the example on the left side:
1.
The company granted options to its employees in T0
2.
In T1, the options are in the money, so the employees buy 100
new shares @ $8, which results in a $800 proceeds for the
company, which issues 100 new shares
3.
With the proceeds ($800) the company decides to buy-back
shares on the financial market, listed @ $10: the company buys
back 80
Period: T0
Company
100 stock
options
Strike price:
$8
Employee
Share price: $6
Exercisable in T1
Ø The result of this process is 20 new shares are trading on the
markets at a current share price of $10
Period: T1
Company
Company
100 * $8 =
$800
100 new
shares
$800 worth of
shares @$10
Employee
Market
Adjustment for
options
20 * $10 = $200
Share price: $10
Options are
exercised
Share price: $10
Market value of
the Equity
$1,250
Equity Value
$1,450
$800
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Enterprise Value
Calculation
Net Debt and Debt-liked Items
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Net debt and debt-like items
Further adjustments are usually needed
Pensions
Leases
Net Debt
Enterprise
Value
(excluding
adjustments)
Total Equity
Value
(including
adjustments)
Total Equity
Value, including
adjustments
Total financial
debt - cash
@ 2016 CoachingAssembly.com, All rights reserved
Debt-liked item:
operating leases
Debt-liked item:
unfunded
pensions plans
Enterprise Value
2016/ 17
Net debt
Net debt has to be added to equity value
Net Debt
If the company has very little debt vs. cash it can have a “net cash” position
Long term debt
Net
debt
Cash
Equity
EV pre
adj.
Cash
equivalent
Current
portion of long
term debt
Net debt
Short term debt
Maturity date:
within 1 year
Payment of long
term debt
happening within
1 year
@ 2016 CoachingAssembly.com, All rights reserved
Maturity date:
beyond 1 year
Cash in the bank
Very liquid
financial
instruments
considered as
cash
2016/ 17
Enterprise Value
Calculation
Enterprise Value Adjustments
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Enterprise value adjustments
Value of minority
interests
Value of
investment in
associates and JV
Enterprise Value
(excluding
adjustments)
Enterprise Value
Total Enterprise
Value (including
adjustments)
Minority interests
@ 2016 CoachingAssembly.com, All rights reserved
Investment in
associates and JV
Total Enterprise
Value, including
adjustments
2016/ 17
Other adjustments - minorities
Minorities interest – stake not own by the company
Minority interests
How to adjust for minority interests?
§ Minority interests appears when a company does not own
100% of a company but consolidate 100% of the profits of the
subsidiary
― In the case below, 10% of the consolidated profits do no go
to company A and its shareholders
§ Minority interests are added to get to Enterprise Value
§ The value which has to be deducted correspond to the market
value of the minority interests
― In the P&L, a line “minorities” appears below “Total Net
Income” and correspond to the profit attributed to
minority shareholders
Other
shareholder
― We can apply a relevant PE multiple to this number and
find the market value of the minority interests
Other
shareholder
§ For a quick and dirty analysis, the analyst can take the
number in the liability side of the balance sheet corresponding
to “Minority Interests”
Other
shareholder
Owns
10%
Total Net Income
$100
Net Income to shareholders
Company A
Owns 90%
but
consolidated
100% of the
profits
Net Income to minority shareholders $10
90% owned by
company 1
Minorities
@ 2016 CoachingAssembly.com, All rights reserved
$90
PE of 10.0x
Value of
minority
interests = $100
to be added
2016/ 17
Other adjustments – investment in associates
Investment in Associates and JV
§ Investment in Associates (or JV) appears when a company has
a participation in another company and holds a minority
stake
― In the case below, Company A has 10% stake of another
company. It accounts for the revenue in the P&L
Other
shareholder
How to adjust for Associates?
§ Investment in Associates are deducted to get to EV
§ The value which has to be deducted correspond to the market
value of the investment in associates
― In the P&L, a line “revenue from associates” appears below
“EBIT” and correspond to the profit from associates
― We can apply a relevant PE multiple to this number and
find the market value of the minority interests
§ For a quick and dirty analysis, the analyst can take the
Other
shareholder
number in the asset side of the balance sheet corresponding to
“investment in associates and JV”
Other
shareholder
Owns
90%
EBIT
$80
Revenue from associates
Company A
Owns 10%
and accounts
for the
revenue of
the
associates in
the P&L
90% owned by
other
shareholders
Own by Co A
@ 2016 CoachingAssembly.com, All rights reserved
$10
PE of 10.0x
Value of
minority
interests = $100
to be added
2016/ 17
Key valuation methodologies
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Overview of valuation methodologies
RELATIVE VALUATION
COMPARABLE COMPANY
ANALYSIS
PRECEDENT
TRANSACTIONS ANALYSIS
ESTIMATED VALUE RANGE
DCF ANALYSIS
LBO ANALYSIS
ABSOLUTE VALUATION
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Comparing valuation methodologies (1/2)
METHOD
PROS
CONS
COMPARABLE
LISTED COMPANIES
ü Market efficiency should ensure
that trading values reflect industry
trends, business risk and market
growth
ü Well understood methodology and
primary driver of most public
company analyst valuations
× Truly comparable companies are rare
and differences are difficult to account
for
PRECEDENT
TRANSACTIONS
ü Reflects value that purchasers
have been prepared to pay for
control of ‘similar’ assets
ü Indicates a range of premia offered
(for publicly listed companies)
× Past transaction are rarely directly
comparable either due to company
specific factors or the fact that
acquisitions happened at a different
point in the cycle
× Public data on past transactions can be
incomplete, non-existent or misleading
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Comparing valuation methodologies (2/2)
METHOD
PROS
CONS
DCF
ü Reflects fundamental value of a
company’s cash flows
ü Less influenced by public market
conditions
ü Synergy values can be built in by
modelling their cash flows
× Valuation highly sensitive to underlying
cash flows assumptions, terminal value
and discount rate
× Terminal value often represents a
significant proportion of total value
× Often viewed as subject to
‘manipulation’ of assumptions and
therefore less reliable
LBO
ü Provides a valuation that is
independent of stock and M&A
markets
ü Determines value that a private
equity firm is theoretically able to
pay
× Standalone LBO will underestimate
strategic sale value by ignoring
synergies with acquirer
× Value obtained is sensitive to
projections and views on acquisition
price and exit multiple
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Example of a summary valuation page
A preliminary valuation implies a value for ABC of c.$160 - $230
$160
EV/EBITDA 2013E
$230
100
200
Trading comparables
EV/EBITDA range implied by
average of peers +/- 0.5x
EV/EBITDA 2014E
Precedent transactions
EV/EBITDA range implied by
precedent transactions
EV/LTM EBITDA
LBO
Range implied by 20%-25%
IRR with exit in year 5 at
entry multiple = exit
EV/ LTM EBITDA
DCF
Value range implied by
8%-10% WACC and 2%-3%
perpetuity growth rate
EV/EBITDA 2013E
80
180
160
260
140
240
220
320
Share Price
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key Valuation
Methodologies
Discounted Cash Flow Analysis
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key interview questions
1. Walk me through a DCF analysis
2. How do you calculate a WACC?
3. What is the WACC?
4. How do you calculate Terminal Value?
5. What is normalized cash flow?
6. What forecast horizon do you consider?
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Overview
The DCF is one of the main valuation methods available to the analyst. It is the only stand-alone way
to estimate the intrinsic value of a business
§ The DCF analysis aims to estimate the intrinsic value of a business by calculating the net present value of the
generated cash flow
§ The more certain the cash flows forecast is, the more accurate the value of the business will be
§ While the DCF is used to value most companies, it is particularly suited for valuing businesses such as mines, oil
well, infrastructure assets etc. which have a finite operations life and/or very predictable cash flow generation
§ The analyst will have to be very carefully in how he/she calculate the key driver of the DCF valuation:
― Free cash flow
― The normalized cash flow
― The weighted average cost of capital
― Terminal Value
§ To obtain a relevant valuation range, it is important to build sensitivities around key drivers (WACC, perpetuity
growth rate) and to cross check Terminal Value calculation (Gordon Shapiro vs. multiple method)
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Intrinsic value – Discounted Cash Flow (“DCF”)
A method estimating the intrinsic value of a business
How to run a DCF
Introduction
Free cash flows
§ The DCF analysis estimates the net present value of the
future cash flows of a company to the providers of capital
of this company
§ It is an approach which aims at capturing the intrinsic
value of a business
Key comments
§ Cash flows used are the “Free Cash Flows to the
Firm” (FCF) or Unlevered Free ash Flows: the cash flow
generated by the company independently of its capital
structure
§ The DCF valuation is as good as the forecast cash flows
― If the analyst has only 3-year projections, the output
will only be some sort of a cross check
― If the analyst is valuing a mine, with a finite life and
very predictable cash flows, the DCF valuation will be
fairly accurate
§ A DCF valuation will tend to be higher than the other
methods as it is supposed to capture 100% of the
intrinsic value of a business
@ 2016 CoachingAssembly.com, All rights reserved
FCF
FCF
FCF
FCF
Norm
TV
Normalized free cash flow
Terminal value calculated
using multiple method or
Gordon-Shapiro method
1. Build the operating model and projections for the
business
2. Calculate Normalized Free Cash Flow based on
§ Normalized revenue growth
§ Normalized margins
§ Normalized D&A
§ Normalized Working Capital
§ Normalized Capital expenditure
3. Calculate Terminal Value based on Normalized Free
Cash Flow
4. Discount FCF and TV using an appropriate
“WACC” (weighted average cost of capital)
2016/ 17
From the operating model to the free cash flow
A FCF is the cash flow generated by a business independently of its capital structure
Comments
§ The first step in a DCF analysis is to build
an operating model of the business the
analyst wants to estimate the value for
― The operating model is either built by
the bank or provided by the client
§ Once the operating model is set up, the
analyst has to calculate the unlevered free
cash flow
― The DCF aims at estimating the value
of an asset regardless of its own
capital structure
― All items linked to capital structure
have to be stripped off: interests,
dividend, debt repayment and issue,
equity issue, share buy-backs etc…
§ Taxes are calculated on EBIT
§ Capital structure will be later reflected in
the WACC
§ Depending on the business, the
projections horizon can vary, but it is
common to request/ build a 10-year
horizon operating model
Simplified financial statements – levered cash flows
Levered financials
(in $m except specified)
2013E
2014E
2015E
2013E
2014E
2015E
Revenue
Growth%
150
165
10.0%
183
11.0%
150
165
10.0%
183
11.0%
EBITDA
Margin %
30
20.0%
35
21.0%
40
22.0%
30
20.0%
35
21.0%
40
22.0%
D&A
As % of revenue
EBIT
Margin %
Net interest expenses
(5)
3.5%
25
16.5%
(3)
(6)
3.5%
29
17.5%
(3)
(6)
3.5%
34
18.5%
(5)
3.5%
(6)
3.5%
(6)
3.5%
25
16.5%
29
17.5%
34
18.5%
(3)
Profit before tax
Margin %
22
14.5%
26
15.7%
31
16.9%
25
16.5%
29
17.5%
34
18.5%
Taxes
Effective tax rate %
(4)
20.0%
(5)
20.0%
(6)
20.0%
(5)
20.0%
(6)
20.0%
(7)
20.0%
Net Income
Margin %
17
11.6%
21
12.6%
25
13.5%
Simplified Cash flow statement
EBITDA
Dividend
Taxes
Variation in WC
Capital expenditures
Net debt service (principal and interests)
Cash flow
@ 2016 CoachingAssembly.com, All rights reserved
Unlevered financials
30
(8)
(4)
3
(5)
(13)
35
(8)
(5)
3
(5)
(13)
40
(8)
(6)
4
(6)
(13)
30
35
40
(5)
3
(5)
(6)
3
(5)
(7)
4
(6)
3
7
11
23
27
31
2016/ 17
How to get to normalized cash flow
For businesses which do not have a finite life, the analyst needs to determinate what the normalized cash
flow is
Example of a normalized cash flow
Forecasts
(in $m except specified)
Revenue
Growth%
EBITDA
Margin %
D&A
As % of capex
Extrapolation
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Norm.
150
165
10.0%
183
11.0%
201
10.0%
220
9.0%
237
8.0%
254
7.0%
269
6.0%
282
5.0%
294
4.0%
303
3.0%
30
20.0%
35
21.0%
40
22.0%
45
22.1%
49
22.3%
53
22.4%
57
22.5%
61
22.6%
64
22.8%
67
22.9%
70
23.0%
Long term sustainable
margin
(11)
100.0%
D&A as % of capex @
100% meaning that
the company invest in
capex as much as it
consumes in its
operations
(5)
(6)
(6)
(8)
(9)
(9)
(10)
(10)
(10)
(11)
111.1% 111.1% 111.1% 109.7% 108.3% 106.9% 105.6% 104.2% 102.8% 101.4%
EBIT
Margin %
25
16.5%
29
17.5%
34
18.5%
36
18.0%
40
18.2%
44
18.4%
47
18.6%
51
18.9%
54
19.1%
57
19.3%
59
19.5%
Taxes
Effective tax rate %
(5)
20.0%
(6)
20.0%
(7)
20.0%
(7)
20.0%
(8)
20.0%
(9)
20.0%
(9)
20.0%
(10)
20.0%
(11)
20.0%
(11)
20.0%
(12)
20.0%
30
(5)
3
(5)
3.1%
35
(6)
3
(5)
3.4%
40
(7)
4
(6)
3.8%
45
(7)
3
(8)
3.8%
49
(8)
3
(8)
3.7%
53
(9)
2
(9)
3.7%
57
(9)
2
(9)
3.7%
61
(10)
1
(10)
3.6%
64
(11)
1
(10)
3.6%
67
(11)
0
(10)
3.5%
70
(12)
(11)
3.5%
EBITDA
Taxes
Variation in WC
Capital expenditures
As % of revenue
FCF
Growth %
Long term growth rate
(aligned to inflation)
2013E
23
27
31
33
35
38
40
42
44
46
47
15.7%
16.4%
4.7%
7.5%
6.9%
6.2%
5.4%
4.6%
3.7%
2.8%
Foreseeable future
@ 2016 CoachingAssembly.com, All rights reserved
Impact of variation of
working capital trends
to 0 (cash neutral) –
growth more linked to
inflation than increase
in volumes
The company invests
enough to continue
operations
Trends to normalized year
2016/ 17
Calculate the weighted cost of capital (“WACC”)
The analyst has to give a particular attention to the calculation of the WACC as it is the corner stone of the
DCF valuation
Comments
Cost of equity
§ Market risk premium: global risk premium
(Bloomberg gives this data)
§ Beta: indication of volatility of the company
stock vs. market (data can be found on
Bloomberg or on the Barra database)
Market risk
premium:
6.50%
Cost of equity
Cost of debt
§ Credit spread = cost of debt – risk free rate
§ If the company is listed and mature, credit
spread is an average of its current spread on its
debt
§ Credit spread can also be benchmarked to
recent peers debt issuances
WACC calculation (example)
@ 2016 CoachingAssembly.com, All rights reserved
Levered
company Beta:
1.209
+
Equity risk
premium:
9.86%
Target D/E = 40%
Risk free rate:
2.00%
+
Target leverage/ long term financing structure
§ Reflects long term leverage in the industry (e.g.
what the leverage should be in 10 years, at a
sustainable level in the industry)
Credit spread:
+4.50%
Cost of debt
Small cap premium
§ Small cap companies have to incurred a
particular premium as judged riskier (the data
can be found in the Ibbotson reports, which run
linear regression of returns for different classes
of companies)
§ The premium is added to the final calculation of
the WACC
x
Equity risk
premium:
7.86%
Target D/E = 40%
+
Risk free rate:
2.00%
WACC:
7.10%
Pre-tax cost of
debt:
6.50%
Post-tax cost
of debt:
5.20%
Marginal tax
rate:
20%
2016/ 17
How to calculate the Terminal Value
The analyst has different methods when it comes to estimate the Terminal Value (“TV” or “TEV”) for a
business which does not have a finite life
The TEV is the value of the business at the end of the horizon, it will have to be discounted to the present
Gordon Shapiro approach
§ Formula:
Multiple approach
§ Formula:
TEV =
Norm Cash flow * (1+g)
(WACC – g)
Most commonly
used
TEV =
TEV =
Normalized aggregate * multiple
Normalized EBITDA * EV/EBITDA
§ Where g is the perpetual growth rate of the business – supposed to
be aligned to inflation @ c.2.50% - 3.50%
§ The Terminal Value is a value of the business when the company
§ EV/EBITDA multiple must be carefully chosen based on current
trading comparable and taken into account a multiple compression
reached a steady state of cash flow
Example based on previous financials:
Example based on previous financials:
§ g = 2.50%
§ WACC = 7.10% (assuming no small cap premium)
§ Normalized cash flow = $47m
TEV =
TEV =
47 * (1+2.5%)
§ Normalized EBITDA: $70m
§ Current EV/ EBITDA multiple: 18.0x
§ Multiple including compression: 15.0x
TEV =
70 * 14.0
TEV =
$1,044m
(7.10% – 2.50%)
$1,052m
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Calculate the EV and build sensitivities
In order to calculate the Enterprise Value of a business, the analyst has to discount the FCF and terminal
value using the calculated WACC
Calculation of Enterprise Value
Forecasts
(in $m except specified)
EBITDA
Taxes
Variation in WC
Capital expenditures
FCF
Extrapolation
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Norm.
30
(5)
3
(5)
35
(6)
3
(5)
40
(7)
4
(6)
45
(7)
3
(8)
49
(8)
3
(8)
53
(9)
2
(9)
57
(9)
2
(9)
61
(10)
1
(10)
64
(11)
1
(10)
67
(11)
0
(10)
70
(12)
(11)
23
27
31
33
35
38
40
42
44
46
Discount period
WACC
Discount factor
0.5
7.10%
97%
1.5
7.10%
90%
2.5
7.10%
84%
3.5
7.10%
79%
4.5
7.10%
73%
5.5
7.10%
69%
6.5
7.10%
64%
7.5
7.10%
60%
8.5
7.10%
56%
9.5
7.10%
52%
Discounted FCF
23
24
26
26
26
26
26
25
25
24
Sum of discounted cash flows and TEV
1,052
9.5
7.10%
52%
Discounted TEV
548
799
Comments
§ The sum of the discounted CF and of the TEV is the Enterprise
Sensitivities
Enterprise value in $m
Value of the business
§ Discount period: we use mid-year period convention
― Cash flow is generating all over the year, to reflect this we
discount the cash flow from the middle of each year
§ Discount factor is calculated as follow
1
Discount factor =
(1 + WACC) ^ (1 / discount period)
@ 2016 CoachingAssembly.com, All rights reserved
TEV
Perpetuity growth range
799
WACC range
2.00%
2.25%
2.50%
2.75%
3.00%
6.10%
932
977
1,029
1,088
1,157
6.60%
827
862
900
943
993
7.10%
743
770
799
832
869
7.60%
674
695
718
744
772
8.10%
616
633
652
672
694
2016/ 17
From the Enterprise Value to Equity Value
It is important to have an idea of both the Enterprise Value and Equity Value
General
§ Once the analyst has estimated the enterprise value through
a DCF analysis, the final step is to deduct the Equity Value of
the business
To get to a value per share
Enterprise Value
- Net debt
― When a buyer make an acquisition, if the debt does not
have to be refinance, it will buy the equity
- Minority interest
§ The value of the equity obtained, will be the intrinsic value of
the equity
― It will be the theoretical value of the shares if these ones
+ Investment in associates
were fully prices
= Equity Value
/ NOSH
Value per share
§ Calculation of the Equity Value from the Enterprise Value may
include more adjustments (debt-liked items such as leases,
pensions etc.)
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key Valuation
Methodologies
Leverage Buyout Analysis
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key interview questions
1. What are the key leverages of a LBO transaction?
2. What drives return?
3. What are the measure for return?
4. How much debt can you put in a LBO transaction?
5. Why do you use Mezzanine in a LBO transaction?
6. Why do you use High Yield?
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Overview of a LBO analysis
A method which estimates the value of a business for a financial buyer
How to run a LBO valuation
Introduction
§ A leveraged buyout valuation estimates the value of a
business, to a financial investors who wants to achieve a
target return based on:
1. Build the operating model and projections for the business
2. Set the maximum amount of debt which can be raised to
finance the transaction, based on:
― Internal rate of return (“IRR”)
― Type of asset
― Cash on cash multiple/ money multiple (“CoC”)
― Current debt market dynamics and macro-economic
§ It is a very “individual” valuation, which depends on the
amount of debt which can be raised for a LBO transaction, the
price of the debt etc…
Key comments
§ Returns expected depends on the nature of the assets
(infrastructure, startup etc…) and on the nature of the
investors (private equity firm, venture capital firm,
infrastructure fund, pension fund etc…)
environment
― Capacity of the business to repay the debts
3. Assume value at exit
4. Calculate returns and run returns sensitivities on
― Exit year
― Leverage
― Acquisition and exit multiple
§ In a LBO transaction, the main factors which determinate a
return are:
― Time
― Capital structure at acquisition
― Business performance of the asset during the holding
period
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key drivers
We can count 3 main leverages in a LBO transaction. Returns are influenced by time
Financial leverage
$100m valuation
Equity
Enterprise
Value
Debt
Company repays
debt
Equity
Debt
Operating leverage
Enterprise
Value
Equity
Debt
Equity
Debt
Company is acquired at 10.0x
EBITDA of $10m
Company performs well and reach
EBITDA of $15m and is sold 10.0x
EBITDA
Multiple expansion
Enterprise
Value
Equity
Debt
@ 2016 CoachingAssembly.com, All rights reserved
Equity
Debt
Company is acquired at 10.0x
EBITDA of $10m
The sector becomes more attractive
and the company is sold 15.0x
EBITDA of $10m
2016/ 17
Key Valuation
Methodologies
Comparable Multiples
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key interview questions
1. What is the main difference between Trading and Transaction
comparables?
2. What multiples will give you a higher valuation? Why?
3. How do you calculate enterprise value?
4. How would you go to select the comparables?
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Key Valuation
Methodologies
Trading Multiples
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Multiples – trading comparables
A benchmarking method to value a company
Introduction
§ Value a company comparing its trading and operating
performance to the one of its peers
§ This methodology assumes efficient financial markets
― The value of a listed company is fully reflected in its
share price
How to run a trading comparables analysis
1. Create a pool of listed peers
§ Carefully select peers
§ Key criteria: sector, size, geographies, growth profile
etc.
2. Select the relevant multiples to be used
§ Key multiples include:
§ Possible retreatment of EBITDA to EBITDAR (i.e.
EBITDA before rent), EBITDA vs. earnings multiples
― EV/ Revenue
3. Calculate last 12 months and forward looking multiples
set
― EV/ EBITDA
― P/E
Key comments
§ When using this valuation method, it is vital to keep
consistency in the calculation of the multiples
― Numerator and denominator of the multiple have to be
consistent: if we adjust the EV for Investment in
associates, the analyst needs to be sure that EBITDA
reflects it
§ Value drivers are: growth and margin evolution
§ The multiples do not take into account any control
§ Calculate Enterprise Value for all peers
§ Be consistent in the different adjustments
4. Calculate averages and median
§ Calculate relevant multiples average
§ Deduct a valuation range
5. Apply the multiple range to the valued company’s
relevant aggregates
§ Apply valuation range to relevant financial aggregates
(Revenue, EBITDA, EBITDAR…)
premium
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Multiples
Enterprise value vs. equity value multiples
ENTERPRISE VALUE
SALES
RETURNS TO
EQUITY AND DEBT
ENTERPRISE VALUE
EV / SALES
EV / EBITDAR
EV / EBITDA
EV/ EBIT
RETURNS TO
EQUITY
EQUITY VALUE
P/E
EBITDAR
EBITDA
EBIT
NET INCOME
EQUITY VALUE
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Selecting the peer universe
BROAD
UNIVERSE
REFINED SET
INDUSTRY
§
§
§
LOOK AT BROKER
AND RESEARCH
REPORTS
CAPITAL IQ / FACTSET
SCREENING
PRODUCTS
SCALE
GEOGRAPHY
ASK YOUR TEAM
GROWTH PROFILE
FINANCIAL STRUCTURE
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Example of a trading multiples page
A benchmarking method to value a company
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Example of a trading multiples page – cont’d
A benchmarking method to value a company
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key Valuation
Methodologies
Precedent Transactions
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Multiples – precedent transactions
A benchmarking method to value a company and the premium for its control
How to run a precedent transactions analysis
Introduction
§ Compares the multiples implied by selecting M&A
transactions involving companies with similar characteristics
§ Multiples are “real” in the sense previous buyers agreed to
pay the price
1. Create a pool of listed peers
§ Carefully select peers
§ Key criteria: sector, size, geographies, growth profile etc.
2. Select the relevant multiples to be used
§ Possible retreatment of EBITDA to EBITDAR (i.e. EBITDA
before rent), EBITDA vs. earnings multiples
Key comments
3. Calculate multiples set
§ While in theory the analyst should calculate forward looking
- Reliability +
multiples, the date is usually not available – historical
multiples are generally retained
Sources of information:
Transaction announcement
Investors presentation
Latest financial report
Dedicated database
Broker notes issued at the time of the deal
Press, mergermarket
Company
sources
Third party
sources
§ Drawback is that transactions happened in the past, in
another environment (economic, social etc…)
§ The multiples take into account a control premium –
transaction multiples are generally higher than trading
multiples
@ 2016 CoachingAssembly.com, All rights reserved
§ Calculate Enterprise Value for all peers
§ Be consistent in the different adjustments
§ Ideally it would be great to have the forward looking
multiples but, at the moment of the transaction, the buyer
must have had private information about the target to draw
its own forecasts
4. Calculate averages and median
§ Calculate relevant multiples average
§ Deduct a valuation range
5. Apply the multiple range to the valued company’s relevant
aggregates
§ Apply valuation range to relevant financial aggregates
(Revenue, EBITDA, EBITDAR…)
2016/ 17
Example of a transaction multiples page
A benchmarking method to value a company and the premium for its control
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key Valuation
Methodologies
Merger Analysis
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key interview questions
1. What is a quick way to estimate if a transaction will be accretive or
dilutive? If it is a 100% stock offer? If it is a 100% cash offer?
2. Walk me through a basic merger model
3. What’s the difference between a merger and an acquisition?
4. Why would a company want to acquire another company?
5. What are the adjustments made for an acquisition?
6. Why would a strategic acquirer typically be willing to pay more for a
company than a private equity firm would?
7. What are synergies, and can you provide a few examples?
8. Are revenue or cost synergies more important?
9. Explain what a contribution analysis is?
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
What is a merger?
CONCEPTS
§
§
A merger is a generic word for all types of combinations of trade companies
1.
Various investors
2.
Various structures
3.
Various targets
A merger model is a simple sum of the bidder’s and target’s financial aggregates coupled with transaction
financial impacts
KEYS TO A SUCCESSFUL MERGER
§1 Find the right target…
§
Industrial rationale
§
Financial rationale
§2 …that creates value for shareholders…
§
Synergies
§
Re-rating
§
EPS accretion
§3 …while remaining financially balanced
§
Rating considerations
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
What is a merger? cont’d
KEY LEVERS
§1 Price paid
―
A premium over reference share price…
―
… justified by a significant amount of synergies…
―
… and aligning bidders’ and sellers’ shareholders’ interests
§2 Transaction structure: Cash & shares mix
―
Driven by shareholders requirements and …
―
… rating considerations
§3 P&L impacts
―
Level of synergies
―
Cost of acquisition debt
―
Proforma assumptions (i.e. tax rate, payout ratio…)
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Impacts
P&L
CASH FLOW
BALANCE SHEET
•
Synergies
•
Same as P&L
•
Goodwill
•
Financing costs
•
New dividend policy
•
Net debt
•
Transactions costs
•
Other synergies (capex,
working capital,…)
•
Equity
PRUDENTIAL RATIOS
SHAREHOLDING
RETURN OF TRANSACTION
•
Impacts on prudential ratios
•
NOSH
•
ROCE of transaction
•
Net debt/EBITDA
•
Shareholding structure
•
EPS relution
•
EBITDA interest coverage
•
Sharing of the synergies
•
Gearing
•
Capital gain /IRR for sellers
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Merger model guided tour
COMPANY INPUT
MERGER MODEL
OUTPUTS
Pro forma financials
Buyer
Combination
Accretion/ dilution
Buyer
+
Target
Leverage
Target
Shareholding
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Contribution analysis: how does it look like?
CONTRIBUTION (%)
ACQUIRER
TARGET
COMBINED
ACQUIRER
TARGET
ENTERPRISE VALUE METRICS
Revenues
2014E
800
300
2015E
850
330
2014E
85
30
2015E
90
32
Current Market
20
80
@ 25% Premium
25
85
EBITDA
Enterprise Value
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key Valuation
Methodologies
Overview of Restructuring
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key interview questions
1. What a restructuring situation?
2. What are the main things you look for in a restructuring
situation?
3. What can you tell me about seniority?
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Introduction
What is a Restructuring?
§ A financial restructuring is typically required when a company can
no longer repay its debts
§ Typically occurs when a company’s enterprise value (that is, the
total value of its operating assets and non-operating assets) is less
than the value of its total debt and obligations
§ Obligations can include bank debt, bonds, and other financial
liabilities
§ In some situations a company may be able to meet all of its interest
payments, but unable to satisfy debt maturities
§ If a company is unable to repay or refinance its outstanding
obligations it will typically have to restructure its balance sheet
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Capital structures - where does the value break?
Capital Structure Overview
Equity
Out of the
Money
PIK Notes
Value breaks
Second Lien
Secured Debt
In the Money
First Lien
Secured Bank
Debt
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Financial restructuring scenarios
Healthy Company
HEALTHY COMPANY
VALUATION
Value
Liquidity
Obligations
Unlevered
Cash Flows
Cash Interest
Cash Flow
For Debt
Repayment
EQUITY VALUE
ENTERPRISE
VALUE
OBLIGATIONS
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Financial restructuring scenarios
Distressed company, pre-restructuring
DISTRESSED COMPANY - PRE-RESTRUCTURING
VALUATION
Liquidity
Value
Obligations
Out of the
Money
EQUITY VALUE
ENTERPRISE
VALUE
OBLIGATIONS
@ 2015 CoachingAssembly.com, All rights reserved
Unlevered
Cash Flows
Cash Interest
Cash Flow
For Debt
Repayment
2015/ 16
Financial restructuring scenarios
Distressed company, pre-restructuring
DISTRESSED COMPANY - POST-RESTRUCTURING
VALUATION
Value
Liquidity
Obligations
Unlevered
Cash Flows
Cash Interest
Cash Flow
For Debt
Repayment
NEW EQUITY
VALUE
ENTERPRISE
VALUE
NEW OBLIGATIONS
@ 2015 CoachingAssembly.com, All rights reserved
2015/ 16
Conclusion
Q&A
@ 2015
2016 CoachingAssembly.com, All rights reserved
2016/ 17
2015/
16
Key operating model
mechanics
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Top-line drivers
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Top-line drivers
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Key cash flow items - drivers
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Depreciation & PP&E - drivers
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Capital structure
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Capital structure - key considerations
To understand the capital structure, the analyst has to identify
stakeholders by risk and reward allocation
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Enterprise value
calculation
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Equity value adjustment – convertible bonds
Convertible are a debt item but can be converted into equity
General overview
§ A convertible bond is a usual bond assorted of a right to be
Equity value adjustment
§ A company has 10 bonds with a market value of $8 each
converted into equity
§ Share price is at $10
― The company pays interest to the bond holders and repays
§ The bonds are assorted with a conversion right to stock as
principal
follow: 1 bond = 1 right and 1 right = 1 share
§ The clauses of conversion of a bond can differ from one case
to another. The conversion right can be exercised:
§ Before conversion:
Bonds
$80
― At a change of control (if the company is acquired)
― If the share price of the company reaches a certain
threshold
― Etc…
Total
$1,530
Equity Value
$1,450
§ What happen in the case where bond holders decide to
convert their bonds?
§ After conversion:
― The company will issue new shares corresponding to the
conversion agreement
Bonds
$80
― The exercised bonds are extinguished
§ If we assumed that the bonds are converted into shares, they
can’t be considered as debt anymore!
@ 2016 CoachingAssembly.com, All rights reserved
Equity
Value
$1,450
New
equity
$100
$100 new shares
issued trading at
$10
Total
$1,550
2016/ 17
Debt-like item adjustment - leases
Operating leases can be considered as debt items
Adjustments for leases
General overview
General overview
Before adj.
Adjusted
§ Operating lease vs. financial lease
Lease expense
(20)
0
§ Operating lease: impact is an expense on the income
Implied EBITDA
200
220
Lease on balance sheet (debt
like item)
0
200
Impact on Enterprise Value
0
+200
10,000
10,200
statement (rent)
― Operating lease will be considered as a “rent”, as an
operating cost and will be taken into account in the
EBITDA
§ Financial or capital lease: is accounted as if the company
Enterprise Value
purchased the asset through debt financing
― The asset appears on the Balance Sheet and is
depreciated (P&L)
― Interest on the loan appears in the P&L
Converting an operating lease to financial lease
§ As a rule of thumb, you can multiply the operating lease
expense by 10 to obtain the liability amount of an potential
capital lease (assumes a 10% interest rate)
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
Debt-like item adjustment - pensions
Pensions can be considered as “debt” to employees
Adjustments for pension plans
General overview
§ Most large companies have pension plans for their
employees, to prepare them when they retire
§ For this, the company will put some money on the side,
invested in pension plans
§ If a company has a funded pension plan then some
Unfunded plan
Present value of
pension obligation
$1,000
adjustments have to be made
Fair value of planed
assets
$600
― The adjustment is made only if the company has an
unfunded status on its pension plans
― If the company has an overfunded position, nothing is
taken into account
§ In this case, the unfunded pensions plan is $400,
meaning that, theoretically, if the company had to pay the
pensions of all its employees it will be $400 short, will
have a “debt” of $400
§ This unfunded amount has to be taken tax free as
considered as debt: $400 * (1 – tax rate)
§ This information can be found in the note at the end of
financial reports (10K, annual reports, 10Q, quarterly
report)
@ 2016 CoachingAssembly.com, All rights reserved
2016/ 17
For more information
Contact details
Thomas Viguier
thomas.viguier@coachingassembly.com
+44 74 5362 3817
Guillaume Tardy-Joubert
guillaume.tardy-joubert@coachingassembly.com
+44 74 5688 6080
@ 2015
2016 CoachingAssembly.com, All rights reserved
2016/ 17
2015/
16