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Mergers and Acquisitions – A beginner’s guide
geographic risks(same country). The most common techniques used are: Comparable Publicly traded companies (“Public Comps”) – this analysis indicates how the stock markets are valuing companies that are similar to the target Precedent Comparable Transaction analysis (“Transaction Comps”) – this analysis indicates the valuations at which prior M&A transactions have been done in the same industry as that of the target. Therefore. each “part” might have its own Public Comps. the financial advisor will value each business separately. Historical Exchange Ration analyses etc. processed meats and raw meats are different). To find a good peer group start broad (all companies in the SIC code) and then narrow the list to the most comparable peers. PUBLIC COMPS • Compare the current trading level of a Company to its peer group of companies The peer group is a set of 5 to 10 companies that are most similar to the target in terms of business mix and strategy.Cogent Analytics M&A Manual Valuation M&A involves using more than one valuation technique to arrive at a valuation that we think is fair. (i. The total value is the sum of the parts Other –depending on the unique characteristics of the transaction. Transaction comps and DCF (with different WACCs for each part). financial advisors will perform a number of other analyses to arrive at fair value like Leveraged Buyout (“LBO”) Analysis. DCF analysis – is one of the most important valuation techniques Sum-of-the-parts analysis – If a target has more than one lines of business.e. margins and size. Also refer to 2 • • .
Electric Utilities . What the PEG ratio is.) Understand why Equity valuation and Enterprise valuation are different • The goal of the analysis is to understand how the markets is valuing the peer group in terms of Price to Earnings. The importance difference with public comps is that in this case. 2. Make sure you capture these in your analysis.S. Also understand if merger premium is already built into price – industry group should know this. Specifically. Also.Cogent Analytics M&A Manual equity research reports. Price to Cashflow to Equity. Note that the Earnings need to be after Preferred Dividends so that they are earnings that are available to Common shareholders). Using these. Price to Book value. a control premium is built into the offer price and therefore the multiples. The control premium is generally around 30% for U. There are always some industry specific comps (Telecom – Enterprise Value to POPs and SUBs. Price to Book (Price / Book value of equity per share). Equity Multiples: P/E (Price / LTM EPS. determine the pricing of past deals as compared to the target’s financial performance and unaffected (pre-announcement) market value 3 • . some companies that are widely perceived to be acquisition targets may have some premium built into their stock price. industry reports. Enterprise Value Multiples: EV/Revenues. Enterprise Value to Revenues. EV/ EBITDA. the company’s 10K where its discusses competitors and Bloomberg (Quote 2) to identify the most comparable peers. prospectuses when they do a filing for new debt or equity – in freeedgar.). (look at filing 8K. transactions. Price / 1-Year forward EPS. EV/EBIT (Note that the Revenues. Most common multiples are: • • • 1. EBITDA.$/Mw etc. Net Assets etc. EBITDA and EBIT multiples could be computed for LTM and 1-Year forward projected numbers) TRANSACTION COMPS • The goal here is to understand the multiples at which transactions in the target’s industry sector have been announced or completed. we will try to value the target bearing in mind that public comps don’t reflect the “control premium” that an acquirer will pay for buying control of the target.
in the same country as the target etc. so one should look for recent deals. So. (On leveraged DCF analysis. where a company with highly similar business was acquired. 1-week and 4-week trading prices). additionally.Cogent Analytics M&A Manual • Transactions selected should be as comparable to our proposed transaction as possible. free cash flow is reduced by after-tax interest expense) • Sensitivities on discount rates. The new firm has $75MM of old and $100MM of new debt outstanding which is sustained by the $50MM of annual EBITDA and an equity cushion of $30MM. The most common ones are same as in the case of public comps but. the sponsor approaches management and structure a deal where the firm borrows an additional $100MM to buy back stock. Subtract market value of outstanding net debt and preferred capital from the present value of assets to get present value of equity. To finance a LBO. transaction comps also cover Premium paid (Offer price premium as % of 1-day. This year it reported EBITDA of $50MM. • DCF (Merger model has this already built into it) • Discount unleveraged projected free cash flows (or in some cases dividendable income) at Company’s cost of capital to obtain an economic present value of assets. The sponsor supplies the remaining $30MM required to buy the public float and ends up owning a 100% of the equity of the firm. terminal value assumptions and operating scenarios are frequently used to estimate the uncertainty in the values obtained LBO • Goal is to understand how much value a financial buyer (with no operating synergies) could buy the target for To understand the economics of an LBO lets do an example: Company A’s equity market capitalization is $100MM and it has Debt of $75MM. Free cash flow is after-tax operating earnings plus non-cash charges less increases in working capital less capital expenditures. A financial sponsor realizes that the even if it bought the stock at a 30% premium to market for $130MM. it could generate attractive returns. the restructured company has to have a Debt to Total Capitalization (Debt+Equity) not exceeding 80% and a Debt to 4 • • .
margins improvements. there is usually a small percentage owned by publicly. Capex. • • Assume current market scenarios for pricing the new debt The exit mechanism is an important element since it defines what the sponsor will do in. is the sponsor planning an IPO or sale to strategic players? The sponsor’s returns will be driven by EBITDA growth rate. and exit multiples In a LBO. Note that these could vary based on the nature of the industry. 5 years to exit the investment. while in a Leveraged Recapitalization. the entire equity is privately held.Cogent Analytics M&A Manual EBITDA ratio that does not exceed 5. say. In other words. • 5 .0x.
Fully diluted: Basic + All options and warrants (as if all converted into equity) Average: This calculates the average shares that were outstanding during the year or quarter Firm value (or Enterprise Value): Equity market value + LT debt + ST debt + preferred stock + Minority Interest (-) cash. Diluted: This is the Basic shares plus the dilutive impact of any “in-themoney” options or warrants that are outstanding as calculated by the Treasury stock adjustment method. stock are not considered LT debt.) • • (2) • • • • (3) Use net income to common for common share price Up to EBIT – still enterprise #’s. Shares outstanding from front page of latest 10K.) 6 .Cogent Analytics M&A Manual Selected Public Comps statistics explained (1) Closing price: most recent closing stock price (from Bloomberg. Look for average strike price and if lower than closing price then assume would convert. Note date of shares outstanding on the exhibit. (Enterprise value may value from firm to firm or industry to industry – sum of total value of firm. LT debt: from latest 10K/Q under N/C liabilities – LT debt plus redeemable pfd. Equity value: last closing stock price multiplied by number of shares outstanding. 10Q. ILX or Populator). Comes from cash flows of business. The following is a list of definitions of shares outstanding: Basic: The actual outstanding shares which can be found on the cover of the latest 10Q or 10K. As soon as you pay interest – the net income belongs to equity holders. Look at public comps template. Prices for all companies should be as of the same date. (Other types of pfd. or other public document adjusted for options or other instruments in existence (if applicable). Option info is in 10K.
” “loans. These estimates are reported on fully diluted basis and updated every Thursday.) Divide projected net income into current equity value. FV/EBIT. (Available on Bloomberg.” “FY1MEDIA” or “FY2MEDIA.” 0).” “ibesshrs. (4) Equity value multiples: While the Firm value multiples reflect how the business is valued. Use market values. (Market value can frequently be obtained from Bloomberg. otherwise book values. FV/Customers etc.” plus “ “accrued interest” and “current maturities of LT debt” (if any) Preferred stock: from latest 10K/Q under stockholders’ equity. Calendarize earnings estimates as needed Projected net income multiple: Multiply forward I/B/E/S by I/B/E/S projected weighted average shares outstanding (=IDD (“ticker. Insight.” 7 . Always use median I/B/E/S (not mean) to avoid skewed data values. or Populator by typing = IDD (“ticker. It is thus important to check to see that I/B/E/S projected shares outstanding are consistent with credible brokerage reports. or Populator by inputting = IDD (“ticker. if possible. Infocenter. (Do not use LTM average shares!) – Divide stock price by LTM EPS Projected P/E: Get median I/B/E/S estimates for the next two years. We do NOT calculate FV/Net Income or FV/Book Value since the denominators in these “belong” to equity holders and so they are Equity multiples not Firm value multiples.” “MEDLTG. (5) Long-term EPS growth rate: Get median I/B/E/S estimate from Infocenter.” 0) to obtain projected net income.” “bank notes. Insight.Cogent Analytics M&A Manual ST debt: from latest 10K/Q under current liabilities – “ST borrowings. – Divide the LTM NI by the weighted average number of shares outstanding from the most recent 10Q to calculate LTM EPS. if not. equity multiples reflect how equities are valued relative to the net income or EPS (LTM and projected) and Book value (latest available).) Cash: from latest 10K/Q – “cash and cash equivalents” plus “marketable securities” (if any) Common Firm Value multiples are: FV/Revenues. FV/EBITDA. (Note that I/B/E/S shares are not fully diluted and are source from Exlel not “street” analysts. use most recent 10-Q shares outstanding to derive fully diluted shares. FV/Cashflow.
you are spreading comps in September 2001 for a company that has a Jan-Dec financial year. You would calculate the LTM EBITDA as follows: FYE 12/31/00 EBITDA (from 10K) + 6-Month EBITDA for 2001 (from the 10Q dated 6/30/01) (-) 6-Month EBITDA for 2000 (from the 10Q dated 6/30/01). this result then divided into most recent stock price. EBIT etc.Cogent Analytics M&A Manual 0). (Bloomberg) (6) Other equity multiples:( look at PEG ratios) Price/book value per share: Book value equal to sum of common equity accounts on most recent financial stated divided by most recent number of shares outstanding. we could also make our own (private) projections and use them for calculation multiples. its customary to look at the multiples of 1 and 2 year forward Revenues.marginal tax rate) EBIT = EBT + net interest expense EBITDA = EBIT + Depreciation + Amortization (8) 8 . Price/cash flow per share: Cash flow refers to operating cash flow. These estimates are updated every Thursday. EBITDA. Projected firm value statistics: In addition to LTM multiples. We usually cite recent equity analyst reports as sources for publicly available projections. Cashflow and Net Income or EPS (before any extraordinary items). Say. It is advisable to crosscheck this with analyst reports. However. divided by average number of shares outstanding. this result is then divided into most recent stock price. To adjust projected net income: EBT = (NI + (Pref. EBITDA. EBIT. or NI plus D&A plus deferred taxes plus other non-cash charges. (7) Last 12-Month (“LTM”) statistics: In order to see how a firm trades it is customary to calculate LTM Revenues. Dividends + Minority Interest)) ÷ (1 .
year) EBITDA EBIT (x) (x) Price per share/EPS LTM FY1 FY2 LT growth rate (%) Optional multiples P/BVPS (x) P/CFPS (x) Company financials Implied firm value Net debt Implied equity value Implied equity value per share Implied premium/ (discount) ¹ Based on closing stock price as of (date) ² Based on (#) shares outstanding from the latest 10K/Q dated (K/Q date) ³ Equity value plus total debt less cash 9 .Cogent Analytics M&A Manual Publicly Traded Comparable Company Analysis (Sample) Closing Company Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Mean Median Price¹ ($) Equity Value² ($MM) Firm Value³ ($MM) Firm value/LTM Revenue (x) EBITDA (x) EBIT (x) Firm value/FY1 (first proj.
² (%) Five-year EPS³ (%) (%) LTM EBITDA Margin (%) LTM leverage Adjusted Adjusted book market (%) (%) LTM EBIT/interest (x) 10 .Cogent Analytics M&A Manual Trading comparables Exhibit: Selected operating statistics Projected LT growth rates Company Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Mean Median Company ¹ Estimated CAGR over the next five years based on the Value Line report as of (date) ² Cash flow as defined by Value Line ³ Median estimated CAGR of EPS over the next five years based on the I/B/E/S report as of (date) Business description LTM EBIT margin Sales¹ (%) CF ¹.
4 (%) Credit Interest coverage5 L3YA (x) LTM (x) S&P/Mdy Rating Earnings L3YA (%) L3YA (%) 11 .Cogent Analytics M&A Manual Trading comparables Exhibit: Selected credit and operating statistics Growth² Sales Company¹ Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Mean Median Company All financial information is before extraordinary items. Three-year averages for the fiscal years (date)–(date) 2 Next 5-years average annual EPS growth rate represents mean estimates from I/B/E/S report of (date) 3 Total debt divided by total debt and book value as of (latest 10K/Q) 4 Total debt divided by total debt and current market value 5 EBIT divided by gross interest expense 1 Margins EBIT N5YA (%) L3YA (%) LTM (%) Earnings L3YA (%) LTM (%) Returns ROE LFY (%) ROC LFY (%) Leverage Book³ (%) Mkt. All LTM figures are for the period ending (latest 10K/Q date).
” “MEDLTG. preferred stock (preferably market value) and total debt (4) LTM EBIT/interest: Divide EBIT (including interest income) by gross interest expense (not net of interest income) Growth – calculating the CAGR (compound annual growth rate): Definition: value that simplifies observed data into one number that is descriptive.” The method of estimation (i.e. (5) 12 . they should be clearly identified as “n-year compound annual growth rates. since it is normally not necessary to tell the reader how to interpret the statistic. accurate and meaningful to others NB: When growth rates are used in exhibits. Divide LTM EBIT by LTM total revenues. “log linear least squares method”) may be specified in a footnote.g.. restructuring charges).Cogent Analytics M&A Manual Selected operating statistics explained Objective Assist explanation of equity trading multiples by analyzing key operating figures and ratios.. Explanation (1) Projected LT growth rates: Get Value Line (in the Library) estimates for sales and cash flow.” 0)] (2) LTM EBIT margin: Exclude any extraordinary items and one-time occurrences (e. I/B/E/S estimates from Populator for EPS = IDD (“ticker. Use most recent financial statements for these figures LTM leverage: • Book leverage: divide total debt by sum of equity accounts from latest 10K/Q and total debt • (3) Market leverage: divide total debt by sum of equity market value.
Sum beginning and ending period equity accounts (not including preferred stock) and divide by two to get average stockholders equity • ROC: Numerator is EBIT (excluding extraordinary items). library has reference books with recent ratings 13 . this result divided by average stockholders’ equity (including minority interest). Sum beginning and ending period equity accounts (including preferred stock) and divide by two to get average book capitalization (7) S&P/Moody’s ratings: Call S&P at 212-208-1527 and Moody’s at 212-553-0377. this number divided by average book capitalization. Alternatively. ask for the current senior secured rating.Cogent Analytics M&A Manual (6) Returns on equity and capital: • ROE: numerator is sum of NI (excluding extraordinary items) and minority interest.
” if any (10K/Q) Common Shareholders’ Equity (10K/Q) Interest expense from income statement (10K/Q) Interest expense from income statement less interest income and less capitalized interest which is usually found in the PP&E footnote (10K/Q) Depreciation. Remember that some discrepancy is normal. depletion. try to find any. Other types of pfd. Available on Bloomberg or latest 10K/Q Used for equity and firm valuations. D &A plus changes in deferred taxes plus other noncash charges. D &A EBIT EBITDA Operating cash flow EPS Projected cash flow Projected sales Projected EPS 14 . which are discretionary) Fully diluted. “short-term borrowings” or “bank notes. stock plus minority interests (if any). & amortization are on the cash flow statement (some 10Qs may not disclose) Earnings before gross interest expense and taxes but after minority interest and equity interest in subsidiaries EBIT plus D. (From cash flow statement. but before working capital changes.” plus “current maturities of LT debt. if net income/shares outstanding differs from EPS by more than 10 percent. On the front page of the latest 10K/Q near the bottom Used for EPS calculations. before extraordinary items. Watch for stock splits. (10K/Q) LT debt plus redeemable pfd. stock are not considered LT debt. (10K/Q) Under current liabilities. as total shares outstanding does not usually equal fully diluted weighted average shares outstanding Value Line or brokerage reports Value Line or brokerage reports I/B/E/S or First Call D.Cogent Analytics M&A Manual Summary of inputs and outputs Item Latest indicated annual dividend Common shares outstanding Average shares outstanding LT debt ST debt Book value Gross interest expense Net interest expense Explanation and source Last quarterly dividend paid times 4. D &A Net income plus D.
if added back to EBIT and EBITDA) Stock price/EPS or equity value/net income (see EPS) Stock price/operating cash flow per share Annual dividend/stock price Stock price/book value per share Annual dividend/EPS EBIT/gross interest expense Firm value/EBITDA1 Firm value/sales1 1 The idea is that since EBIT.Cogent Analytics M&A Manual Exhibit: Outputs to the comparables Item Equity value Equity capitalization Firm value Price/earnings Price/cash flow Dividend yield Price/book Percent payout Interest coverage Firm value/EBIT 1 Recipe. earnings. comments Stock price x common shares outstanding Equity value + LT debt Equity value + LT debt + ST debt – cash (+ minority interest. EBITDA. EPS. and sales are not affected by the Company’s choice of capital structure (as cash flow. and book value are) the appropriate multiples use total capital and not just equity capital 15 .
From 8K or proxy1 Aggregate purchase price: Equity value paid + Target debt assumed2 – Target cash Premium over market: Premium paid to get control of a target company. From SDC output Consideration/transaction terms: Indicate consideration paid (cash. 6. – See Trading Comparables if unclear on calculating LTM numbers 16 . 8. In instances where a transaction has been rumored for some time. 2. competitive or negotiated bidding. Additionally. Date of announcement: Public announcement date (not rumor date). 7. 4. notes. Acquirer issue price x Exchange ratio x Target shares (stock transaction).B.). debt assumption. stock) and terms offered (percent acquired. one can usually find applicable transactions by looking at the acquisitions announced by companies in the peer group (of public comps by using the Bloomberg function CACS) and by reading the fairness opinions for these transactions from the merger proxies. etc. Transaction multiples (a) Calculate LTM Revenue. Equal to ((offer price per target share (cash transaction) or issue price per acquirer share times exchange ratio (stock transaction)) ÷ (the “unaffected” share price) – 1) x 100 N. From SDC output Equity purchase price: Equity value paid = Offer price x Target shares (cash transaction). it may be appropriate to use a longer time frame to calculate the “unaffected” share price 3. we begin with a SDC search for transactions in particular industry or SIC code. exchange ratio. and net income using the latest financial statements prior to the announcement of the Transaction. closed or terminated (footnote reason for termination of transaction).Cogent Analytics M&A Manual Comparable transactions analysis Typically. EBIT.: “Unaffected” share price is target share price one week prior to announcement. 1. 5. offer price per share. From SDC output and public documents Status: Indicate if transaction is pending. EBITDA. From SDC output (check against news articles) Target/target: Indicate acquiring company and target company or subsidiary of target company with parent of subsidiary in parenthesis.
Estimated LTG rate: Calculate estimated long-term growth rate by taking the latest median I/B/E/S LTG rate prior to announcement of transaction. (Available on Intracenter.Cogent Analytics M&A Manual (b) Calculate Book Value by taking Common Equity accounts from the annual report or 10K/Q immediately prior to the date of the transaction. divide LTM Revenues. S&P Tear Sheets. Transaction P/E value are often compared to the P/E values of a comparable industry or composite group on the transaction date. from Bloomberg. (c) Divide Book value and LTM net income into the equity purchase price. 9. (b) Price/Operating Cash Flow: Divide offer price per target share (cash transaction) or issue price per acquirer share times exchange ratio (stock transaction) by LTM OCF available prior to transaction date 17 . The results are the comparable transactions multiples. or Value Line 11. Other transaction multiples (Check with senior team member to ascertain whether inclusion is appropriate) (a) P/E . Description of Target’s business: Summary of target’s business activities. Insight or Populator) 10. EBITDA and EBIT into Aggregate purchase price.price earnings ratio can be calculated by dividing the offer price per target share (cash transaction) or the issue price per acquirer share times the exchange ratio (stock transaction) by LTM EPS available prior to transaction date NB: This is not the same multiple as dividing the Equity purchase price by LTM net income.
into 1. seed and oleochemical biotech.0 No 242.5MM shares.0 for 4.3 444.0 3.25 in Jan.2MM primary shares (49.0 – Target Business Description Status Control? Sales (x) 1. Pending 45.3) NM NM 4. Bayer and Zeneca No No Biopesticides.9 – EBITDA (x) NM NM – EBIT (x) NM NM – Ag-biotechnology – Mycogen transactions Pioneer/Mycogen 9/18/95 Cash.0 Plant Genetic Systems Novartis. 6.4 original offer of $7.7 2. 3MM primary shares @ $10.00 Ag-biotechnology – other transactions Bionova (ELM)/DNA Plant 1/29/96 Stock swap reverse merger – DNAP is Closed 70. surviving entity s.6 587. MTC gains Board control with 54.4 4.8MM primary shares @ 17. price ($MM) 30.9%) in ex.25MM primary shares @ 48.8 536.0) (6.7 3.7 privately negotiated.0 Yes 550.0MM cash. to thwart Monsanto overtures.3 64. Mycogen/Lubrizol 1/15/96 Buyback of 19.7 NA NA NA NA >100 NA NA NA Plant biotechnology Ag-biotechnology – all transactions Mean: 10. LTG Rate (%) (3) 17.0 Biopesticides. 1997.5) NA Equal to amount paid per share times the pro forma number of shares outstanding (including options) Equal to implied market capitalization plus total pro forma net debt Unaffected price defined as closing price one week prior to transaction announcement 4 Median estimated CAGR of EPS over the five years post announcement date.7 12.5MM shares.398 (25% premium over average closing price during prior 60 days) Mycogen/United Agriseeds 1/15/96 Concurrent sale by (DowElanco to MYCO Closed 100.3 556.0 Tech.1 6.6 63.5 80.5MM primary shares.4 20.6 573.5 4..1 4.5 NM NM 50. crop protection Biopesticides. Closed 13.8%) and $26. private.6 secondary 9.3 3. for Closed 49. separately.4 – – – – – – – Hybrid seed – corn soybean No Yes 72 16.4 5.4 98.5 NM NM 20.0 785. DE stake over 50% Ag-biotechnology – Calgene transactions Monsanto/Calgene 6/28/95 30.5 NM NM NM NM 18. ELM as 70% owner and Bionova mgmt. (%) Agg. $39MM deal based on last DNAP close of $7 per share AgEvo (Hoechst/Schering) 8/23/96 Competitive bidding serious interest from Closed 70.00 Closed 4.Cogent Analytics M&A Manual Exhibit: Premiums and multiples paid on comparable transactions Aggregate purchase price as a multiple of LTM: Acquirer/ Target Ann. DuPont.8 268. Lubrizol converts preferred shares. Food.4 also.2 299.0 126.3 NA NA NA NA 23.0 (30.0 573.7 – Implied firm value ($MM) (1) 196. oils & produce techn. $21MM for R&D funding DowElanco/Mycogen 1/15/96 Privately negotiated purchase of Closed 36.. Monsanto/Calgene 7/31/96 Cash.4 67.4MM cash (DowElanco’s MYCO stake raised to 46.6% voting block Monsanto/Calgene 1/27/97 Two-step cash offer for last 45% stake.0 NM NM 20. Food. (14. privately negotiated reorg.9 (25.2 4. cap ($MM) 257.0 NM NM 2. Date Consideration/ transaction terms % Vote acquire.0 20.9 623. seed and oleochemical biotech Plant cellular genetics Yes 50.1 NA Median: (3.9 358.0 Yes 38.1 620. from Closed 3. from Lubrizol.5) NM 6.9 $30. based on the latest I/B/E/S report as of transaction announcement 1 2 3 4. purch.3 Co.4 615.9) – LTM NI (x) NM NM – Book value (x) 1. to DowElanco) DowElanco/Mycogen 12/4/96 Negotiated purchase of 1MM shares.3 – Implied firm value as a multiple of LTM Est.3 NM 6. (%) (2) (13.1 – Prem.1 NM 7.1%) Implied MYCO valuation @ $16 per share (last close pre issuance of 4.4 98.0 18 . Gargiolyo (tomato germ plasm). crop protection NM Yes 98.5 18.8 2.0 – Implied mkt.8 NM NM NA Food.46% stake in Mycogen Seeds from Lubrizol for 1.5MM shares. seed and oleochemical biotech. w/purchase acct.3 0. crop protection No 144. over mkt. privately negotiated final offer @ $8.
19 . WACC is project specific – they may use acquirer’s WACC instead. the cash flow after interest and scheduled debt repayments.Cogent Analytics M&A Manual Discounted Cash Flow (“DCF”) Unlevered and Levered DCFs: Levered DCF involves discounting cash flows available to equity holders i. The discount rate is the equity cost of capital. Unlevered DCF discounts the firm’s free cash flows by the WACC. Unlevered means not looking at capital structure but rather CF to business. Free Cash Flow (“FCF”) Definition: • Cash flow generated by all assets employed in business (tangible and intangible) • • Unlevered (“free from financing considerations”) Accrual to all providers of capital Calculation: Net income (excluding extraordinary items and before preferred dividends.average tax rate)) + Depreciation & amortization & deferred taxes & other non-cash charges – Capital expenditures – Difference between beginning and ending Net Working Investment (“NWI”) = Free cash flow (unlevered) NB: contrasted with cash flow from operations (net income available to common shareholders + depreciation & amortization + deferred taxes + non-cash charges) Whether you use levered/unlevered – equity value should come out to same amount.e. equity income and minority interest) + After-tax interest expense (net interest expense (1.
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