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…
Fundamental Determinants of Residual Income
The fundamental drivers of residual income can be recognized by assuming a constant growth in dividends and earnings. Assuming constant growth, a stock’s intrinsic value under the residual income model, can be expressed as: $$\text{V}_{0}=\text{B}_{0}+\frac{\text{ROE}-\text{r}}{\text{r}-\text{g}}\text{B}_{0}$$ If the return on…
Valuation with Comparables
Valuation based on Comparables The P/E valuation method is used to estimate a company’s stock value by applying a benchmark multiple to the company’s actual or forecasted earnings. An equivalent approach is to compare a stock’s actual price multiple…
Types of Corporate Restructuring
Every company follows a lifecycle composed of four stages: start-up, growth, maturity, and decline. The table below summarizes each lifecycle stage’s corresponding profitability, revenue growth, and risk profile. $$ \begin{array}{c|c|c|c|c} \textbf{Stage in} & \textbf{Start-up} & \textbf{Growth} & \textbf{Maturity} & \textbf{Decline}…
Capital Structure and Cost of Capital Relative to Peers
Jackie Zhao is an analyst at Momentum Capital. She has been tasked with evaluating Marigold’s WACC, a company the management is looking to acquire. Marigold operates in the agriculture sector, manufacturing farm equipment such as tractors and combined harvesters. She…
The Cost of Debt and Equity for Public and Private Companies
We will use an example to illustrate how private and public companies estimate the required return on equity and cost of debt. DMC John Marcus, an analyst at Glendale Investments, has been tasked with estimating the cost of equity and…
