Debt  interest bearing negotiated securities

EBITDA  Proxy for cash flow to the entire company before the effects of capital structure and
leverage

CFO  ability to generate cash flow to the equity stakeholders

CFO vs EBITA

- Working capital  in CFO not in EBITDA

- Interest and Tax  in CFO no in EBITDA

Current vs non-current assets  liquidity is the key differentiator not the intent

Treasury stock is negative  reduce the equity

Key Ratios

Credit ratios  ability to pay outside creditors

Relative asset base funding  capitalization = Equity + Debt, Debt =/= total liabilities

Most of the Debtors are interested in EBITDA  link to cash flow

CAPM model  additional risk a single security will bring into a well-diversified portfolio. And it is
systematic risk

Management will need to pay the equity holders above the ROE using CAPM

Security market line is the graphical representation of CAPM  any securities that is above the line is
under valued because the return is above the requires risk

Cost of Debt  3 options (option 1 and 2 is correct only if the company is not distressed and going
concern)

1. Coupon rate  cash payment (cash is king)

2. Yield to maturity  Investors required rate of return (can be a proxy for the incremental cost
of debt)
3. Cos of new issue  incremental cost of debt (cannot be correctly decided)

WACC  must look at the project specific WACC to decide on whether to proceed on the project.
Because the project has a different risk profile as the company  affecting the Beta

Valuation Methodologies

Basic Valuation Methodologies

- Trading Comps  Value of publicly traded companies and compare against the company
- Deal comps  Selected acquisitions
- DCF
- LBO  core ability for the company to generate cashflow and use the cashflow to payoff the
leverage
- Breakup analysis  useful for conglomerates
- Asset Valuations  sum of all the assets value
- Distressed, restructuring, turnaround, liquidation

Equity value  Market cap

Enterprise value  Equity Value(mkt cap)+net Debt+preferred stock +minority interest + capital lease
( because in EV/EBITDA, D and I has elements of capital lease depreciation and interest expense)
Enterprise Value  represent the company’s core business operations to all the investors

3 rule of thumb

- Long term funding source for the company  add back, (if its operational cash flow i.e.
payables, accrued expense  its operational cash flow and shouldn’t add it)
o This include restructuring and environmental liabilities, unfunded pension obligations
and capital leases
- Will it cost the acquirer of the company to pay back extra after acquisition?  it must be paid
out of the operational cash flow  this includes the short-term funding since most of the time
they get refinancing and also pensions because it is like delayed payment for the workers
- Are these operational assets?  remove from EV because its not core business operations
(KEEP if it is part of core business operations  if you remove PPE business can go
eat shit)
o E.g Cash, liquid investments, Net operating loses(tax exemptions), assets from
discontinued operations, asset for sales