Valuations Flashcards
(39 cards)
What is the order of the reorganized balance sheet
Operating capital:
Operating fixed assets
NWC
Operating liabilities
Non operating assets
Non operating liabilities
INVESTED CAPITAL
Adjusted group Equity
Financial liabilities
What are the steps in DCF?
Enterprise value formula?
MV of equity + Net debt + Debt equivalents ((i.e., pension deficits & assoc. DTLs)
What is part of Operating fixed assets
PPE
Intangible assets
Operating leases right of use assets
(e.g., patents, trademarks,
goodwill)
Operating NWC
- Op. cash, trade receivables, inventory, prepaid expenses
(Accounts payable, accrued expenses)
Operating liabilities examples
- Long term financing from customers
- Income taxes payable (accrued)
- Deferred tax liabilities (net of deferred tax assets) assoc. with operating assets/NWC
- Operating provisions (e.g., warranties, product
-returns; bad debt)
Three types of expenses
- Operating expenses (current period)
- Capital expenses (Multiple periods)
- Financial expenses (nonequity capital raised by the firm)
What falls under the invested capital?
+ Operating capital
+ Non operating assets
- non operating liabilities
What falls under the Operating Capital?
+ Operating fixed assets
+ Operating net working capital
- operating liabilities
How do you calculate unlevered beta
Beta_Unlevered = Beta_Levered/(1+((D/E)*(1-tax rate)))
we want to take out of the total equity risk -> the business risk
NOPAT formula?
ebit * (1-tax rate)
Growth rate formula
Ronic * reinvestmentrate
RONIC formula
(new year nopat 24 - old year nopat 23) / new investments 23
Non operating assets
Excess cash
Investments in securities
Investments in associates & JVs
Deferred tax assets assoc. with
tax loss carryforwards
Overfunded pension assets
Assets held for sale
Loans to other companies
Customer financing subsidiaries
Discontinued operations
Excess real estate
Value of non-operating / financing
derivatives
Any other contingent assets not included
in op. assets/NWC
Non-operating liabilities
- Unfunded employee benefits
- Unfunded pension liabilities
- Deferred tax liabilities (net of deferred tax assets) assoc. with non-operating items.
-Non-operating provisions - Liabilities associated with assets held for sale
- Any other contingent liabilities not included in op. liabilities
How do we classify deferred tax assets & liabilities
Classification of DTAs and DTLs:
- Treat any DTLs (net of any DTAs associated with operating assets) such as PPE,
intangibles, operating provisions as operating liabilities.
- Treat all other DTAs such tax loss carryforwards (also known as “net operating losses NOLs”, DTAs associated with financing etc. as non-operating assets.
- Treat all other DTLs (e.g., DTLs associates with pension/employee benefits or financing etc.) as non-operating liabilities / debt-equivalents
How are R&D expenses treated under IFRS and US GAAP?
Under IFRS, research costs are expensed and development costs are capitalized, meaning no adjustments are needed. Under U.S. GAAP, all R&D costs are expensed, which means they should be capitalized for financial analysis purposes.
What is the impact of expensing R&D costs on ROIC calculation?
Expensing R&D costs will understate (or overstate) the ROIC for R&D-intensive firms in early (or later) years. This is because R&D expenses reduce current profitability on the income statement and are not reflected as an asset on the balance sheet.
What is the consequence of capitalizing R&D expenses on financial statements?
Capitalizing R&D expenses means the value of intangible assets created as a result of R&D spending is recorded on the balance sheet. This increases the invested capital figure and can provide a more accurate measure of ROIC over time. It also reduces the scope for earnings management.
Why might the capitalization of R&D expenses be important for technology-intensive companies?
For technology-intensive companies like Apple, which experience substantial year-on-year variation in R&D spending, capitalizing R&D expenses ensures that the investment in future technology is reflected in the financial statements.
-This practice affects the balance sheet by showing higher intangible assets
- impacts the income statement by spreading out the expense over the useful life of the research, rather than taking the full hit in the year the expense occurs.
“holds them accountable”
What are the implications of expensing versus capitalizing R&D costs for ROIC?
Answer: Expensing
R&D costs immediately decreases the operating income for the period, which can lower ROIC in the short term. However, if R&D costs are capitalized, they are amortized over time, leading to a more even distribution of costs and potentially a higher ROIC in the short term. Over time, as the capitalized R&D is amortized, the ROIC will reflect the true returns on these investments.
How does the treatment of R&D expenses influence the reported invested capital on the balance sheet?
If R&D expenses are expensed as incurred (as per U.S. GAAP), they are not recorded as assets on the balance sheet, thereby understating invested capital. If they are capitalized (as permitted under IFRS for development costs), they increase the asset base and consequently show a higher invested capital, which may affect the ROIC calculation.
What does capitalizing R&D expenses imply for earnings management?
Capitalizing R&D expenses reduces the ability of management to manipulate earnings since the R&D costs are spread over several periods rather than affecting profits in just one period. This leads to a smoother earnings pattern and can give a more accurate picture of a company’s long-term profitability and investment efficiency.
What is the goal of adjustments for non-recurring items and which ones do you do?
