What is net working capital?
Net working capital represents the money tied up in the daily operations of the business. This includes both current assets and current liabilities. On the current assets side, we typically include accounts receivable, inventory, and prepaid expenses as part of net working capital. All these items will tie up cash, but are generally necessary for […]
What are the most important items to due diligence in an LBO?
Some of the most important due diligence is done on the industry, and this can include competitor analysis, pricing trends, volume analysis, and speaking with industry experts. Due diligence will also be done on the company’s growth and cost strategy, customers, customer contracts, products, distribution chain, risks, etc. There are many other common due diligence […]
Walk me through the 3 financial statements.
The income statement shows how profitable or unprofitable your business is. It typically contains revenue, COGS, SG&A, which gets you down to EBITDA, and then contains depreciation and amortization, interest, and tax, which gets you down to net income. The cash flow statement shows the cash coming in and out, how much cash gained or […]
What are the most important items to due diligence in an M&A deal?
The due diligence process for an M&A deal typically involves questioning and confirming all key aspects of the business, especially the growth trajectory of the business and industry. PE firms will often hire 3rd parties to help out with different aspects of due diligence. Some of the most important due diligence is done on the […]
How would you rank M&A financing methods from cheapest to most expensive?
Cash on balance sheet: No need to access capital markets for financing,the only cost is the opportunity cost of the cash. Debt: Interest expense is after-tax, so there is a tax shield here. Also,debt holders have higher priority on assets in case of a bankruptcy, sothey have less risk. Stock: Issuing new shares will dilute […]
What are the top 5 questions you would ask management if you were building a DCF?
How does your revenue model work, what are your growth drivers for revenue and how does revenue growth look going forward? What are your gross margins and do you expect improvement? How is SG&A driven (eg % change vs. % of sales) and how does that look going forward Who are your competitors and how […]
Walk Me Through an Accretion / Dilution Analysis for an M&A Transaction.
Make transaction assumptions: consideration (cash, debt, or equity),transaction fees, synergies, etc. 1. Combine income statements of the acquirer and target2. Adjust income statement and shares outstanding accordingly tofinancing terms • Add synergies • Adjust for additional expenses (transaction fees) • Add additional shares • Subtract forgone interest on cash • Subtract additional interest expense on […]
How do you find the cost of debt when building a financial model?
If it’s a public company, you can look up the cost of debt on Bloombergor in their company filings. Different types of debt are often listed in thenotes to the financial statements in a quarterly or annual report and theinterest rate is sometimes provided. If it’s a private company, you can create “debt comps” by […]
How would issuing debt affect the P/E ratio?
Issuing debt would usually increase the risk to equity investors, so theywill sell off the stock. This will cause price to go down, which is thenumerator in P/E, so P/E will go down as well. Mathematically, an increase in debt raises levered beta, which is a keycomponent of the cost of equity. With a higher […]
What are beta comps and how do you unlever and relever beta?
Beta comps can be used to find beta for a private company or a newcompany with not enough public trading history. The four steps to do this are:
