General

Question 1

Equity Value Formula

Answer 1

EV - Net Debt = Equity Value

Question 2

Net Working Capital

Answer 2

Accounts Receivable
Inventories
Vendor non trade receivables
Other current assets

Less

Working capital liabilities
Other current liabilities
deferred revenue

Question 3

Flows vs Balance

Answer 3

Make sure that changes are negative (i.e. if NWC goes from (30,143) to (27,216) that is a (2,927) NWC Change. Don’t confuse flows vs balance.

Question 4

Perpetuity formula – terminal value

Answer 4

(FCF in year N+1)/WACC-G

Question 5

Net Working Capital Formula

Answer 5

(Working Capital Assets - Working Capital Liabilities). Subtracted from NOPAT bc an increase is a SOURCE of cash i.e. outflow of potential FCF.

Question 6

NOPAT/EBIAT (Net Operating Profit After Taxes aka unlevered net income)

Answer 6

After-tax operating profit for all investors, including shareholders and debt holders. Frequently used in economic value added (EVA) calculations and is a more accurate look at operating efficiency for leveraged companies. Theoretical income from operations if it had no debt.

Question 7

Unlevered Free Cash Flow Formula

Answer 7

NOPAT/EBIAT + D&A +/- changes in NWC - Capex

Question 8

EBIAT formula

Answer 8

EBIT * (1 - tax rate)

Question 9

Diluted Shares Outstanding Calculation

Answer 9

Diluted shares should be added to denominator of equity value calculation.

Question 10

Vested RSUs vs Unvested

Answer 10

Vested RSUs: Like options, restricted stock vests over several years, but when they vest they automatically get included in the actual share count, so there is no dilutive impact

Unvested RSUs: the most common approach is to include in the diluted share count, logic being that since it is highly likely that unvested restricted stock will vest over the next several years (vesting periods average 1-3 years), it is more conservative to include all unvested restricted shares in the dilutive share count than to exclude.

Question 11

Levered Free Cash Flow Formula

Answer 11

LFCF = CFO - CAPEX - DEBT PAYMENTS

Question 12

Enterprise Value

Answer 12

Represents core OPERATIONS of the company.

Operating assets - liabilities

** Cash is netted against debt (Net Debt) rather than operating assets.

Question 13

LFCF vs UFCF

Answer 13

1. Directly Value EQUITY (Levered)
2. Directly Value Enterprise (Unlevered)

Question 14

Perpetuity Formula

Answer 14

Value = Cash Flow +1 / (discount rate - growth rate)

Question 15

Enterprise Value vs Equity Value

Answer 15

Enterprise Value - Net Debt = Equity Value