Questions and answers

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ALL THEMES
  • COST OF CAPITAL
  • FINANCIAL ANALYSIS
  • FINANCIAL ENGINEERING
  • FINANCIAL MANAGEMENT
  • FINANCIAL POLICY
  • VALUATION

Question 1

Why should supplier credit not be considered as a source of financing like bank and other long-term debts or like equity, when calculating WACC?

Question 2

Can a reduction in net financial debt (prompted by a decrease in working capital) reduce WACC?

Question 3

We agree that the WACC is computed as a weighted average of the after-tax cost of debt and the cost of equity. What would you use as the cost of capital if the company has a net cash position ?

Question 4

Question 3: When calculating the cost of holding assets, what method should be used to calculate the return on equity?

Question 5

When calculating a company’s weighted average cost of capital (used for discounting free cash flows when valuing the company), should we take the cost of net debt before or after tax?

Question 1

What is the correct definition of Free Cash Flow and is it useful to compare a company’s performance from one year to the next, on the basis of Free Cash Flow and the way it changes?

Question 2

On Deutsche Telecom’s balance sheet there is one line item for deferred tax assets and one for deferred tax liabilities. What’s the difference?

Question 3

Could you give me a definition of return on capital employed?

Question 4

I want to calculate the leverage of the parent company Endesa (on the basis of its annual accounts), but these include a tax loss carryforward, and your formula assumes after tax figures!

Question 5

What is the exact definition of Free Cash Flow? Should dividends be deducted or not?

Question 6

I’d like to know how the leverage effect can be used in a mass market retail company.

Question 7

Could you give me more information on the notion of EBITDA and the advantages it presents?

Question 8

Could you explain the notion of normative?

Question 9

How does the accountant’s definition of “depreciation” differ from that of financial analysts and economists.

Question 10

Is working capital counted in number of days sales excluding tax or including tax? Which figure is more relevant? Why?

Question 11

Should factoring receivables be restated as a discounted outstanding bill?

Question 12

Should working capital for the year or change in working capital be taken into consideration in the cash flow cascade?

Question 13

Do we put capital gains on marketable securities on the income statement?

Question 1

Could you explain the procedures involved in a merger?

Question 2

How are mandatory convertible bonds treated during merger operations?

Question 3

What are the advantages and drawbacks of securitisation and defeasance, in terms of risk and valuation?

Question 4

What are the different types of financing that can be used during a merger or an acquisition? How is arbitrage between these different types of financing possible? What is the most frequently used today?

Question 5

What is the difference between a capital increase and the par value of new shares issued?

Question 6

How then do you calculate the capital increase and the share premium for the company benefiting from the transfer? What happens if the value of the shares of the company benefiting from the transfer is worth less than their par value (e.g. par value = 100 and market value = 20)?

Question 7

What are the precise reasons why a share buyback results in an increase in EPS when inverse P/E is higher than the cost of debt after tax?

Question 8

What is the average control premium paid in takeovers, and what are the factors that determine this premium?

Question 9

What is the basis used for calculating the exchange ratio of two shares during a public exchange offer? When the target company is bigger than the acquiring company, are there any problems (theoretical or practical) that arise? What sort of calculations need to be made to determine dilutive or accretive mechanisms?

Question 10

What are the financial, tax and legal constraints involved in a merger between the target company and the acquirer’s holding company in LBOs?

Question 11

What advantages are there for a group in spinning off its divisions into subsidiaries? Can this be considered to be a defence against a takeover?

Question 12

What are the respective advantages of a public purchase offer and a public exchange offer? Which would be better for the target company and which for the initiator of the takeover?

Question 13

What are the advantages of UCITS over direct investments, and how do they work?

Question 1

How can spinning off a division increase the overall debt capacity of the group?

Question 2

I often hear the term Revolving Credit, but I don’t know what it means. Could you shed some light on this matter, as it causes me problems when I’m trying to solve financial problems.

Question 3

What advantages are there for a group in spinning off its divisions into subsidiaries? Can this be considered to be a defence against a takeover?

Question 4

I’d like to know what advantages there are in reducing the nominal capital of a company.

Question 1

Is the financial policy of a high tech company different from that of other companies?

Question 2

For company’s classified as "cyclical stocks", how do you work out the payout and dividend yield that would be best suited to maximising the share price, especially at the bottom of the cycle?

Question 3

Why should a highly geared company issue convertible bonds rather mandatory convertible bonds?

Question 4

What are the possible reasons behind a share buyback? What are the different methods that could be used?

Question 5

What problems arise when measuring financial equilibrium?

Question 6

When a company is listed on a stock exchange such as Frankfurt and it also wants to be listed on the London stock exchange, for example, does a new company have to be set up in the new country?

Question 7

What are the Pros and Cons of off-market share buy-back?

Question 1

What multiples should be used for valuing a brokerage firm (financial intermediation only – broking with no on-line business): enterprise value on the number of clients, DCF or NAV?

Question 2

What impact does financial communication have on the valuation of a company, and more specifically on its risk premium?

Question 3

Is there a formula that can be used to determine the change in normalised free cash flows or do these normalised free cash flows fade in an arbitrary manner until the company’s ROCE is equal to its WACC?

Question 4

When valuing a company, how much importance should be given to the company’s book value?

Question 5

How do you calculate the market value of a debt?

Question 6

What are the different methods used for calculating the holding company discount? What are the methods used to reduce this discount?

Question 7

What is the difference between valuation methods based on discounted cash flows and those based on discounted dividends?

Question 8

I want to value a telecoms start-up company that has never made a profit or paid a dividend. I was wondering what methods I should use, since many of the methods described in the Vernimmen are based on the payment of a dividend.

Question 9

How do you go about valuing a company for a merger-acquisition? What are the most frequently used ratios? Are there any standard formulas? How do you calculate goodwill?

Question 10

Could you explain how to calculate the logarithmic returns of a share portfolio and provide an example?

Question 11

What are the different ways and formulas for calculating EVA and MVA, and what are they useful for?

Question 12

What assumptions are relied on for stating that a security is under or over valued? What is the basis for assumptions that the market is anticipating a rise in share prices in a given sector, or even a rise in the stock exchange index?

Question 13

How should one value a Very Small Enterprise (VSE) with sales of around €1m that operates on the very specific construction services sector?

Question 14

Is the government bond rate really the floor rate? In your view, what is the most appropriate method for calculating the risk premium on equity markets? Can you find the calculation of the discount rate on the internet?

Question 15

What valuation methods are used for valuing a brand/business in the consumer goods segment?

Question 16

How do companies fix the price range for IPOs? Do they use special, pre-established links or not?

Question 17

When valuing a company’s shares, should minority shareholders be factored in? What sort of discount should be applied? Do you have any examples of actual valuations?

Question 18

It seems that I’m confused with the terms “value of equity”, “shareholder’s equity”, and “market capitalization”. Could you explain the differences and what to use for valuation?