If Company A is 30% equity, 70% debt currently, but will have a capital structure of 50% equity, 50% debt in year 5, which capital structure do you use for your DCF?
The 50/50% capital structure would be used. When calculating WACC, we assume the optimal target capital structure, which is the capital structure the company will have in the long term and the optimal capital structure for a company in that industry.
What are some key debt metrics, and why are they important?
The leverage multiple, debt / EBITDA, is a common metric comparing debt and EBITDA. EBITDA is a proxy for cash flow that can be used to pay back the debt. It’s also a measure of the core profitability of the business that remains neutral in terms of capital structure, tax jurisdiction, and accounting policies. The […]
What type of multiples would you use for a company in real estate?
P / FFO Per ShareP / AFFO Per ShareP / NAV Per Share FFO = Funds from Operations, which adds D&A and subtracts capital gainsAFFO = FFO + capital expenditures + rent increasesInterest is core to business, so debt is consideredNAV = Net Asset Value (Assets – Liabilities) -> Note that this is a different […]
Do private equity companies add more value to portfolio companies through financial engineering or operational improvements?
Operational improvements adds more value as the impact is far more permanent than temporarily playing around with the capital structure. Strategic shifts or operational improvements may last a lifetime, while capital structure changes and financial engineering will only affect the company until the PE firm sells the company. This kind of question is usually asked […]
Would a company with a capital lease have a higher or lower EV / EBITDA multiple compared to an operating lease?
This depends if the ratio between the capital lease and the lease payment is higher or lower than the EV / EBITDA of the company. A capital lease is like buying the asset with debt. You pay interest and principal repayments. These payments are below EBITDA, meaning they are not treated as operating expenses (OPEX), […]
How can a PE firm incentivize management to stay and perform?
A PE firm can incentivize management to stay by getting management to put up some equity for the acquisition, also known as management rollover. Usually, management will anywhere from 5-20% of the company to ensure they have “skin in the game.” Another common method to incentivize management is with options. Options give management a percentage […]
What is debt sizing in project finance? (1 min)
Debt sizing is used in project finance (infrastructure) to figure out how much debt can be raised to support an infrastructure project each month / year. As dictated by the debt term sheet, there is usually a maximum leverage ratio (eg maximum of 70% debt and 30% equity) and a minimum debt service coverage ratio […]
What are the advantages and disadvantages of leading a deal by yourself vs. doing the deal with other PE firms as partners?
The advantage of being the only PE firm involved in the LBO is that you have complete control. You can dictate the type of debt financing to be raised and take full control when negotiating the financing terms with banks / institutions. You can choose whether or not to hire an investment bank as an […]
How does a capital call affect IRR?
A capital call is when a portfolio company needs to go back to its investor(s) to ask for more equity investment. This could be to finance an add-on acquisition or a new growth strategy. A capital call may also occur if the company is simply low on cash and needs more capital to stay afloat […]
Why would a PE firm choose to do a sale-leaseback after acquiring a company?
A sale-leaseback involves selling property ownership to a third party and then renting that property back from that third party at a rate that was previously agreed upon. This is also a common way to generate cash to fund other projects. Companies may also wish to do this to reduce their real estate risk and […]
