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Financial Modeling and Valuation A Practical Guide To Investment Banking and Private Equity 1st Edition Paul Pignataro
Financial Modeling and Valuation A Practical Guide To Investment Banking and Private Equity 1st Edition Paul Pignataro
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Financial
Modeling and
Valuation
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Financial
Modeling and
Valuation
A Practical Guide to Investment
Banking and Private Equity
Paul Pignataro
Cover Design: Wiley
Cover Image: © Getty Images/Chad Baker
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Pignataro, Paul.
â•…Investment banking in practice : financial modeling and valuation / Paul Pignataro.
â•…â•… pages cm. — (Wiley finance series)
â•…Includes bibliographical references and index.
â•…ISBN 978-1-118-55876-8 (cloth) — ISBN 978-1-118-55874-4 (ePDF) —
â•…ISBN 978-1-118-55872-0 (Mobi) — ISBN 978-1-118-55869-0 (ePub)
╅ 1.╇Investment banking.╅I.╇ Title.
â•… HG4534.P54 2013
â•… 332.66 — dc23
2012050850
10 9 8 7 6 5 4 3 2 1
This book is dedicated to every investor in the pursuit of enhancing his or
her wealth. Those that have gained; those that have lost; this continuous
struggle has confounded the minds of many. This book should be one
small tool to help further said endeavor; and if successful, the seed planted
to spawn a future of more informed investors and smarter markets.
Contents
Preface xv
The Walmart Case Study xvi
How This Book Is Structured xvii
Part ONE
Financial Statements and Projections 1
Chapter 1
The Income Statement 3
Revenue 4
Cost of Goods Sold 4
Gross Profit 4
Operating Expenses 5
Other Income 6
EBITDA 6
Depreciation and Amortization 8
EBIT 8
Interest 9
EBT 9
Taxes 9
Net Income 10
Non-Recurring and Extraordinary Items 10
Distributions 11
Net Income (as Reported) 11
Shares 11
Earnings per Share (EPS) 12
Walmart’s Income Statement 12
Revenue 15
Getting to EBITDA 19
Digging up Depreciation 19
Cost of Goods Sold 21
Gross Profit 22
vii
viii Contents
Chapter 2
The Cash Flow Statement 51
Cash from Operating Activities 51
Revenue 53
Cost of Goods Sold 53
Operating Expenses 53
Depreciation 53
Interest 53
Taxes 54
Cash from Investing Activities 55
Cash from Financing Activities 55
Financial Statement Flows Example 56
Walmart’s Cash Flow Statement 62
Contents ix
Chapter 3
Depreciation Schedule 91
Straight Line Depreciation 92
Accelerated Depreciation 93
Declining Balance 93
Sum of the Year’s Digits 94
Modified Accelerated Cost Recovery System (MACRS) 94
Deferred Taxes 97
Deferred Tax Asset 97
NOL Carryback Example 98
Deferred Tax Liability 99
Projecting Depreciation 101
Straight Line Depreciation 101
Anchoring Formula References 105
Accelerated Depreciation 116
Chapter 4
Working Capital 139
Operating Working Capital 140
Walmart’s Operating Working Capital 142
Receivables 145
Inventory 147
Prepaid Expenses 148
Accounts Payable 149
Accrued Liabilities 151
x Contents
Chapter 5
The Balance Sheet 175
Assets 175
Current Assets 175
Cash and Cash Equivalents 175
Accounts Receivable 175
Inventory 176
Prepaid Expense 177
Non-Current Assets 178
Property, Plant, and Equipment (PP&E) 178
Intangible Assets 178
Liabilities 178
Current Liabilities 178
Accounts Payable 178
Accrued Liabilities 179
Short-Term Debts 179
Non-Current Liabilities 179
Long-Term Debts 179
Deferred Taxes 179
Walmart’s Balance Sheet 180
Current Assets 180
Non-Current Assets 180
Goodwill 182
Other Assets and Deferred Charges 182
Current Liabilities 182
Non-Current Liabilities 183
Deferred Taxes 183
Contents xi
Chapter 6
The Debt Schedule, Circular References, and Finalizing the Model 215
Debt Schedule Structure 216
Modeling the Debt Schedule 216
Short-Term Debt 217
Mandatory Issuances/(Retirements) and Non-Mandatory
Issuances/(Retirements) 217
Long-Term Debt Due within One Year 220
Obligations Under Capital Leases Due Within One Year 223
Long-Term Debt 225
Long-Term Obligations under Capital Leases 227
Total Issuances/(Retirements) 231
Total Interest Expense 231
Cash Available to Pay Down Debt 231
Circular References 242
Circular Reference #Value! Errors 250
Automatic Debt Paydowns 254
Basic Switches 255
Finalizing the Model 256
Part TWO
Valuation 277
Chapter 7
What Is Value? 279
Book Value 279
Market Value 279
Enterprise Value 280
Multiples 284
xii Contents
Chapter 8
Discounted Cash Flow Analysis 291
Mid-Year vs. End-of-Year Convention 291
Unlevered Free Cash Flow 292
Weighted Average Cost of Capital (WACC) 301
Cost of Debt 302
Cost of Equity 302
Market Risk Premium 305
Beta 307
Levering and Unlevering Beta 308
Terminal Value 309
Multiple Method 309
Perpetuity Method 310
Walmart DCF Analysis 311
WACC 313
Cost of Equity 313
EBITDA Method 319
Perpetuity Method 323
Chapter 9
Comparable Company Analysis 327
Last Twelve Months (LTM) 328
Calendarization 330
Costco as a Comparable Company 331
Costco Adjusted 2012 Year End 331
Costco Adjusted LTM Data 332
Costco Annual Income Statement 334
Revenue 334
COGS and Operating Expenses 334
Depreciation 336
Interest 338
Taxes 338
Non-Controlling Interests 341
Non-Recurring Events 341
Earnings per Share (EPS) 341
Costco Quarterly Income Statement 342
Contents xiii
Chapter 10
Precedent Transactions Analysis 373
Identifying Precedent Transactions 373
Walmart Precedent Transaction Analysis 374
Chapter 11
Conclusion 383
52-Week High/Low 383
Comparable Company Analysis 384
Precedent Transactions 385
Discounted Cash Flow 386
Appendix 1
Model Quick Steps 391
Appendix 2
Financial Statement Flows 393
Appendix 3
Excel Hotkeys 395
Index 401
8 Financial Statements and Projections
Operating Expenses
SG&A 77,500.0
Advertising 7,500.0
R&D 5,000.0
Total Operating Expenses 90,000.0
Other Income 1,000.0
EBITDA 286,000.0
EBITDA Margin 57%
Depreciation is the accounting for the aging and depletion of fixed assets
over a period of time. Amortization is the accounting for the cost basis
reduction of intangible assets (intellectual property such as patents, copy-
rights, and trademarks, for example) over their useful life. It is important
to note that not all intangible assets are subject to amortization. We will
discuss depreciation and amortization (D&A) in Chapter 3.
EBIT
Similar to EBITDA, earnings before interest and taxes (EBIT) is also utilized
in valuation. EBIT is EBITDA – Depreciation and Amortization. So let’s
assume the example car company has $8,000 in D&A each quarter. So:
Interest
EBT
Earnings before taxes (EBT) can be defined as EBIT – Net Interest.
Taxes
Taxes are the financial charges imposed by the government on the
company’s operations. Taxes are imposed on earnings before taxes as
defined previously. In the car example, we can assume the tax rate is 35
percent.
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Language: Finnish
(Religio medici)
Kirj.
Esipuhe.
*****
*****
V. H.-A.
ENSIMMÄINEN OSA.