The Impact of Competitive Position on Prices and Costs
Modeling Non-operating Costs and Other Items
Financing Expenses Financing costs comprise interest expense and interest income, which are typically netted. Interest income is less significant to non-financial companies but a key revenue component for financial institutions such as banks and insurance companies. Interest income depends on…
Behavioral Finance and Analyst Forecasts
Financial statement models are not immune to behavioral biases. Analysts must be aware of the impact of behavioral biases and solutions to improve investment decisions and forecasts. The five key behavioral biases are overconfidence, conservatism, confirmation bias, the illusion of…
Income Statement Modeling: Revenue
Analysts use three approaches to project future revenue. Top-down approach. Bottom-up approach. Hybrid approach. Top-down Approach The top-down approach begins at the level of the overall economy. Forecasts are then narrowed to such levels as sector, industry, and market for…
Investment Action Evaluation
We will use an example to illustrate investment action evaluation for joint ventures, acquisitions, and equity investments. De Monte De Monte is a company that makes and sells vintage brandy and cognac. For the past five years, the company has…
Modeling and Valuation
A pro forma financial statement is an estimated financial statement with restructuring effects. The pro forma financial statement includes the EPS, revenue, and free cash flow measures. The situational specifics and the type of restructuring will determine the process of…
Evaluating Divestment Actions
A company will sell its business to another company or spin them off as an independent company to improve its performance. While it is difficult for analysts to evaluate a corporate restructuring until details are fully announced, some companies will…
Evaluating Restructuring Actions
Restructuring actions are often difficult because, in most cases, external forces impose them on a company. We will use an illustration to evaluate cost and balance sheet restructuring. GrimCo GrimCo, an industrial chemical manufacturer, received an unwanted acquisition offer from…
Valuation Methods Used in Corporate Restructuring
Where restructuring is material and involves a transaction, an analyst conducts a preliminary valuation of the target. The analyst can use comparable company analysis, comparable transaction analysis, and premium paid analysis in the target valuation. Comparable Company Analysis In comparable…
Initial Evaluation
Four questions need to be answered at the initial evaluation of corporate restructuring: What is happening? Why is it happening? Is it material? When is it happening? The first two questions can be answered by reading the issuer’s conference call…
