Accounting
Current year ending date 12/31/2019
Balance Sheet
Date 12/31/2018 12/31/2019
ASSETS
Cash 100,000 140,000
Accounts receivable 20,000
Inventories 20,000 0
Property, plant and equipment 30,000 20,000
Total Assets 150,000 180,000
LIABILITIES
Accounts payable (AP)
Debt 50,000 50,000
Total Liabilities 50,000 50,000
EQUITY
Common equity 100,000 100,000
Retained earnings 0 30,000
Total Equity 100,000 130,000
Total Liabilities and Equity 150,000 180,000
Balance check 0 0
Income Statement
Period ending 12/31/2019
Revenues 100,000
Cost of goods sold (COGS) (20,000)
Gross profit 80,000
% Gross profit margin 80.0%
Selling, general & administrative (SG&A) (15,000)
EBITDA 65,000
Depreciation & amortization (D&A) (10,000)
Operating Income (aka EBIT) 55,000
Interest expense (5,000)
Pretax profit (EBT) 50,000
Taxes (20,000)
Net Income 30,000
Earnings per share (EPS) $3.00
Shares outstanding 10,000
Tax Rate 40.0%
Cash flow statement
Period ending 12/31/2019
Net income 30,000
Depreciation & amortization 10,000
Changes in net operating assets
Accounts receivable (A/R) (20,000)
Inventories 20,000
Cash from operations 40,000
Cash for investing
Cash from financing
Beginning cash 100,000
Plus: Net change in cash 40,000
Ending cash 140,000
Current year ending date 12/31/2019
Balance Sheet
Date: 12/31/2018 12/31/2019
ASSETS
Cash 100,000 168,060
Marketable securities 0 100,000
Accounts receivable (A/R) 0 20,000
Inventories 20,000 29,600
Prepaid expenses 0 2,500
Property, plant and equipment 30,000 60,000
Total Assets 150,000 380,160
LIABILITIES
Accounts payable (AP) 0 10,000
Accrued expenses 0 4,000
Deferred revenue 0 3,000
Debt 50,000 250,000
Total Liabilities 50,000 267,000
EQUITY
Common equity 100,000 100,000
Retained earnings 0 13,160
Total Equity 100,000 113,160
Total Liabilities and Equity 150,000 380,160
Balance check 0 0
Inventories - Beginning of period (BOP) 20,000
Plus: Purchases 30,000
Less: COGS -20,400
Inventories - End of period (EOP) 29,600
Income Statement Cash flow statement
Period ending: 12/31/2019 Period ending:
Revenues 102,000 Net income
Cost of goods sold (COGS) (20,400) Depreciation & amortization
Gross profit 81,600 Changes in net operating assets
% Gross profit margin 80.0% Accounts receivable (A/R)
Inventories
Selling, general & administrative (SG&A) (29,000) Prepaid expenses
EBITDA 52,600 Accounts payable (AP)
Accrued expenses
Depreciation & amortization (D&A) (10,000) Deferred revenue
Operating Income (aka EBIT) 42,600 Cash from operations
Interest expense (5,000) Capital expenditures
Interest income 1,000 Other investments
Pretax profit (EBT) 38,600 Cash for investing
Taxes (15,440) New debt borrowing
Net Income 23,160 Pay-down of debt
New equity issuance
Dividends 10,000 Dividends
Earnings per share $2.32 Cash from financing
Shares outstanding 10,000
Beginning cash – 12/31/2018
Tax Rate 40.0% Net change in cash
Ending cash – 12/31/2019
12/31/2019
23,160
10,000
(20,000)
(9,600)
(2,500)
10,000
4,000
3,000
18,060
(40,000)
(100,000)
(140,000)
200,000
0
0
(10,000)
190,000
100,000
68,060
168,060
Accounting Example
Balance Sheet 12/31/2020 12/31/2021
Cash $ 1,000 $ 1,440
Accounts Receivable 50 150
Inventories 820 600
Prepaid Expenses - -
PP&E 200 160
Intangibles 100 90
Goodwill - -
Other Non-Current Assets - -
Total Assets $ 2,170 $ 2,440
Accounts Payable - -
Accrued Expenses - -
Current Liabilities $ - $ -
Long Term Debt 100 105
Deferred Tax Liability - 16
Other Long-Term Liabilities - -
Total Liabilities $ 100 $ 121
Common Stock and APIC 500 500
Treasury Stock - -
Retained Earnings 1,570 1,819 <=====================
Total Liabilities and Equity $ 2,170 $ 2,440
Balance Check 0.000 0.000
Income Statement (aka Statement of Earnings) 12/31/2021 Revenue
Revenue (cash and $100 A/R to be received later) $ 1,100 1,100
Cost of Goods Sold (excl Depr.) (220)
Depreciation (40)
Gross Profit 840
Sales, General and Admin. (excl Amort.) (330)
Amortization (10)
R&D (55)
Operating Profit 445
Interest Income 5
Interest Expense, Cash (25)
Interest Expense, Paid in Kind (5)
Other Expense (Income) (5)
Pre-Tax Profit 415
Tax Expense (166)
Cash Taxes (actually paid to IRS) (150)
Deferred Tax Liability (To be paid in the future) (16)
============= Net Income $ 249 $ 1,100
Changes to Balance Sheet Example (NOT balances!) Revenue
Cash $ 1,000
Accounts Receivable 100
Inventories
Prepaid Expenses
PP&E
Intangibles
Goodwill
Other Non-Current Assets
Total Assets
Accounts Payable
Accrued Expenses
Current Liabilities
Long Term Debt
Deferred Tax Liability
Other Long-Term Liabilities
Total Liabilities
Common Stock and APIC
Treasury Stock
Retained Earnings $ 1,100
COGS Depr SG&A Amort R&D Int Income Int Exp - Cash
(220)
(40)
(330)
(10)
(55)
5
(25)
$ (220) $ (40) $ (330) $ (10) $ (55) $ 5 $ (25)
COGS Depr SG&A Amort R&D Int Income Int Exp - Cash
$ (330) $ (55) $ 5 $ (25)
(220)
(40)
(10)
$ (220) $ (40) $ (330) $ (10) $ (55) $ 5 $ (25)
Int Exp - PIK Other Exp Taxes - Cash Taxes - Deferred
Financial Reporting (SEC)
Revenue
COGS
Depreciation
(5) Gross Profit
(5) Operating Expenses
Interest and Other
Pre-Tax Income
Tax Expense
(150)
(16) Capex bought 12/31/2020
Useful Life
NI Check
$ (5) $ (5) $ (150) $ (16) $ 249 Book Depreciation (Straight)
Int Exp - PIK Other Exp Taxes - Cash Taxes - Deferred
$ (5) $ (150) $ 440
100
(220)
-
(40)
(10)
-
-
$ 270
-
-
$ -
5 5
16 16
-
$ 21
-
-
$ (5) $ (5) $ (150) $ (16) $ 249
Balance Change Check 0.000
12/31/2021 Tax Reporting (IRS) 12/31/2021
$ 1,100 Revenue $ 1,100
(220) COGS (220)
(40) Depreciation (80)
840 Gross Profit 800
(395) Operating Expenses (395)
(30) Interest and Other (30)
415 Tax Rate Pre-Tax Income 375
$ (166) 40.0% Taxes Paid $ (150)
$ 200
5.0 Yrs
$ 40 Tax Depreciation (DDB) $ 80
1 2 3 4 5
Financial Reporting 2021 2022 2023 2024 2025
Revenue $ 1,100 $ 1,100 $ 1,100 $ 1,100 $ 1,100
Depreciation 40 40 40 40 40
Pre-Tax Income 1,060 1,060 1,060 1,060 1,060
Taxes (I should pay!) $ 424 $ 424 $ 424 $ 424 $ 424
Tax Reporting 2021 2022 2023 2024 2025
Revenue $ 1,100 $ 1,100 $ 1,100 $ 1,100 $ 1,100
Depreciation 80 48 29 17 10
Pre-Tax Income 1,020 1,052 1,071 1,083 1,090
Taxes (I DO pay!) $ 408 $ 421 $ 428 $ 433 $ 436
Deferred Tax Liability $ 16 $ 3 $ (4) $ (9) $ (12)
DCF-Valuation
When cash flows are the same in each period
Cash flows 1,000.0
t (periods) 5
r (discount rate) 25%
Present value
When cash flows are not the same in each period
Period (t) 1 2 3 4 5
Cash flows 1,000.0 1,245.0 1,258.0 1,568.0 1,895.0
Discount rate (r) 25% 25% 25% 25% 25%
Present value 800.0 796.8 644.1 642.3 621.0
Sum of present values 3,504.1
Apple Unlevered Free Cash Flows
Period (t) 2017A 2018P 2019P 2020P
EBITDA 74,467 78,190 82,099 86,204
EBIT 67,343 70,710 74,245 77,957
Tax rate 26% 26% 26% 26%
EBIT (1-t) 49,834 52,325 54,941 57,689
D&A 7,124 7,480 7,854 8,247
Change in NWC (1,032) (929) (836) (753)
Capital expenditures (9,836) (10,278) (10,741) (11,224)
Unlevered free cash flows (UFCF) 46,089 48,598 51,219 53,959
Discount rate (r) 10% 10% 10%
PV of UFCFs 44,180 42,329 40,540
Stage 1: Sum of present values 203,010
Stage 1 % of EV (Perp Growth Method) 24.0% Stage 1 % of EV (Multiple Method)
Terminal value - growth in perpetuity approach Terminal value - EBITDA multiple approa
Long term growth rate 4% EBITDA multiple
2022 FCF x (1+g) 62,220 Terminal value in 2022
Terminal value in 2022 1,037,004 Stage 2: PV of TV
Stage 2: PV of TV 643,898
Stage 2 (TV) % of EV 76.0% Stage 2 (TV) % of EV
Enterprise value (stage 1 + 2) 846,908 Enterprise value (stage 1 + 2)
Net debt Shares outstanding
Data as of: 9/24/2016 Basic shares outstanding
Effect of dilutive securities
Commercial paper 8,105 Diluted shares outstanding
Current portion of long term debt 3,500
Long term debt 75,427 Equity value
Gross debt 87,032
Cash and equivalents 20,484
Short term marketable securities 46,671 Enterprise value
Long term marketable securities 170,430 Less: Net debt
Nonoperating assets 237,585 Equity value
Diluted shares outstanding
Net debt (150,553.0) Equity value per share
DCF
1 Money-In
2 Money-Out
3 Time
4 Risk
6,966.0
2021P 2022P
90,515 95,040 <<Assume 5% growth
81,855 85,948
26% 26% <<Assume constant tax rate
60,573 63,602
8,659 9,092 <<Set to grow at 5%/yr
(677) (610) <<Set to decline at 10%/yr
(11,729) (12,257) <<Set to grow at 4.5%/yr
56,826 59,827
10% 10%
38,813 37,148
(Multiple Method) 27.7%
- EBITDA multiple approach
9.0x
855,363
531,113
72.3%
e (stage 1 + 2) 734,123
5,332
50
outstanding 5,382
Perpetuity EBITDA
approach approach
846,908 734,123
(150,553) (150,553)
997,461 884,676
5,382 5,382
$185.32 $164.37
Home Depot WACC
Shares outstanding 1,500.0
Share price $50.00
Debt 7,600.0
Cost of debt 6.0%
Marginal tax rate 35.0%
Beta 0.8
Market risk premium 6.0%
Risk free rate 2.0%
Debt weight
Equity weight
WACC
Home Depot WACC
Shares outstanding 1,500.0
Share price $50.00
Debt 7,600.0
Cost of debt 6.0%
Marginal tax rate 35.0%
Beta 0.8
Market risk premium 6.0%
Risk free rate 2.0%
Debt weight 9.2%
Equity weight 90.8%
WACC 6.5%
Relative Valuation - Comps
Trading Comps
in millions except per share data
Company Colgate
Share price $30.00
Shares outstanding 30
Revenue 1,000
EBITDA 200
Net income 75
Net debt 200
Peer group EV/Sales EV/EBITDA P/E
Kimberly Clark 1.0 6.0 15.0
Unilever 2.0 8.0 19.0
Procter & Gamble 1.5 6.5 17.0
Avon Products 1.0 5.8 14.6
Mean 1.38 6.58 16.40
Implied Colgate share price
Is Colgate overvalued based on
comps?
Implied CL Enterprise Value $ 1,375 $ 1,315 $ 1,430
Less: Net Debt 200 200 200
Implied CL Equity Value $ 1,175 $ 1,115 $ 1,230
Shares Out. 30 30 30
Implied CL Equity Value per
$ 39.17 $ 37.17 $ 41.00
Share
Comparable Transaction
Analysis Exercise
$ in billions, except per share data
Company Eli Lilly
Share price $50.00
Shares outstanding 1.000
LTM Revenue $20.00
LTM EBITDA $6.50
LTM Net income $5.00
Net debt $1.00
EPS 5.00
Comparable transactions Premiu
Target Acquirer Offer m TV /
value ($b) Paid LTM Revenue
Roche Genentech $47.00 19.00% 2.0x
Wyeth Pfizer $68.00 18.00% 3.0x
Schering-Plough Merck $41.00 23.00% 1.5x
Genzyme Sanofi $20.00 23.00% 2.5x
Mean 20.75% 2.3x
Implied Eli share price
Is Eli overvalued based on
comps?
Implied Eli Enterprise Value $ 45.0
Less: Net Debt 1.0
Implied Eli Equity Value $ 44.0
Shares Out. 1.0
Implied Eli Equity Value per
$ 44.00
Share
TV / Offer price
LTM EBITDA / LTM EPS
8.0x 16.0x
12.0x 20.0x
11.0x 16.0x
13.0x 18.0x
11.0x 17.5x
$ 71.5 $ 87.5
1.0 1.0
$ 70.5 $ 86.5
1.0 1.0
$ 70.50 $ 86.50
M&A
Accretion / dilution analysis
Acquirer Target Pro Forma
GOOG ATHN (Year 1)
Acquirer
Current share price $1,300.00
Diluted shares outstanding (mm) 700.0
2018 Earnings per share (EPS) forecast $42.00
Acquirer shares issued in transaction
2018 P/E 31.0
Target
Pre-deal share price $150.00
Offer price per share $180.00
% Offer Premium
Shares outstanding (mm) 40.0
Offer value
2018 Earnings per share (EPS) forecast $4.00
2018 P/E 45.0
Accretion / dilution analysis
Implied standalone net income
Implied standalone pretax income
Pro forma pretax income - unadjusted
Less: Interest expense from new deal debt
Less: Incremental D&A expense
Less: Deal fees
Less: Financing fees amortization
Plus: Synergies
Pro forma pretax income - adjusted
Pro Forma Net Income
Pro Forma Shares Outstanding
Pro Forma EPS
Acquirer standalone EPS
Accretion / Dilution per share
Accretion / Dilution %
Sensitivity analysis
Accretion / dilution sensitivity at various % consideration and $ offer price per share assumptions
% stock:
$0.00 0% 50%
Offer price: $160.00
$180.00
$200.00
Deal
Assumptions
Deal date: 1/1/2018
Form of consideration <--Assume cash portion financed entirely by new acq
% Stock 50.0%
% Cash
Tax rate: 25.00% <--Assume same tax rate for both acquirer and target
Uses of funds
Purchasing target (offer value)
Financing fees 50.0
Transaction fees 100.0 <-- Legal, accounting, and advisory fees in M&A
Total
Sources of funds
Value of acquirer stock issued
New debt raised by acquirer
Total
Deal debt terms
Term of loan 5 years
Interest rate on new debt 5.0%
Annual financing fee amortization
Synergies: $20
Asset write-ups:
Book value of target assets 200.0
Fair market value of target assets 400.0
Asset write-up
Useful life 10 years
Incremental D&A expense
100%
ced entirely by new acquirer debt for simplicity of this exercise.
both acquirer and target
visory fees in M&A
LBO
Uses of funds
Buyout of equity
Offer price/share $13.88
Diluted shares outstanding 1.69
Oldco debt refinanced 1.40
Total uses of funds
Sources of funds
Debt 11.50
Existing cash on B/S 7.70
Equity (Michael Dell & Silver Lake)
Total sources of funds
Current valuation
EBITDA 3.50
EV
EV/EBITDA
Exit assumptions (5 years later)
EV/EBITDA
EBITDA 3.50
Enterprise value
Debt 0.00
Cash 0.00
Equity value
Equity IRR
Cash on cash return
$0.5b 1.4% senior notes due 9/13, $0.5b 5.625% senior notes 4/14, $0.4b 2.1% senior notes 4/14
All LBO debt fully paid down using Dell cash flows
or notes 4/14
Uses of funds
Buyout of equity 23.46
Offer price/share $13.88
Diluted shares outstanding 1.69
Oldco debt refinanced 1.4
Total uses of funds 24.86
Dell LBO sources of funds
Loans
Revolver 0.75
Term Loan C 1.50
Term Loan B 4.00
High yield bonds
First-lien note 2.00
Second-lien note 1.25
Microsoft loan 2.00
Equity Equity %
Rollover Michael Dell 60.1% 3.40
New equity Michael Dell 14.1% 0.80
New equity Silver Lake 25.8% 1.46
Existing cash on B/S 7.70
Total sources of funds 24.86
Current valuation
EBITDA 3.50
EV 17.16
EV/EBITDA 4.9x
Exit assumptions (5 years later)
EV/EBITDA 4.9x
EBITDA 3.50
Enterprise value 17.16
Debt 0.0
Cash 0.0
Equity value Equity % 17.16
Michael Dell 74% 12.7
Other sponsors 26% 4.4
Equity IRR
Michael Dell 24.8%
Other sponsors 24.8%
Equity MOIC
Michael Dell 3.0x
Other sponsors 3.0x
$0.5b 1.4% senior notes due 9/13, $0.5b 5.625% senior notes 4/14, $0.4b 2.1% senior notes 4/14
Notes
$2.0b asset-backed revolver ($750 drawn initially), 5yr
$1.5b TLc @ L + 300 w/1% LIBOR floor, cov-lite, 5yr amortizing at 10%, 17.5%, 22.5%, 25%, 25%
$4.0b TLb @ L+375 w/1% LIBOR floor, cov-lite, 6.5yr
$2b 1st lien bonds, 7yr
$1.25b 2nd lien bonds, 8yr
$2b subordinated note at 7.25% (~50% PIK), 10yr
$3.4b from Michael Dell
$1.4b from Silver Lake, $0.8b from Michael Dell
All LBO debt fully paid down using Dell cash flows
or notes 4/14
%, 25%, 25%
