Great video congrats Would appreciate if you could help in similar issue but in context to FCFE. How net borrowing would be normalized in terminal year considering capex of amount X in terminal year and entity’s capital structure would remain same till perpetuity i.e 50:50 debt equity. ? Also what would be the impact on interest net of tax in normalized terminal year. ?
Hard to say with just that description because it depends on the current capital structure vs. the long-term target of 50:50. If the current debt/equity ratio is higher, you might have to adjust down the net interest expense in the Terminal Year, and vice versa if it's lower.
Appreciate your response I need your assistance how to normalize the debt issues, debt repayment and interest costs on terminal year. For example dep is $ 10 m on last year of projection. I assumed capex of $10 + stable growth rate in terminal year. Now issue is how much should i consider in debt issue and debt repayment and interest costs in normalized terminal year. Consider that existing loan is going to settle over next 3 year from last year projection onwards. Target capital structure is 50:50. And existing is 80:20. Regards
@@owaisashraf8030 Sorry, but you're really asking about things that are beyond the scope of this free UA-cam channel. We can answer quick questions, but can't give exact instructions on financial models, and to answer your question, we would probably need to see your model. Feel free to contact our help desk if you have a paid membership on the site.
Worthy watch video! But i am wondering if we could have the excel template. i visited your website and found nothing. is it possible to have a dummy version?
+Mergers & Inquisitions / Breaking Into Wall Street This was very helpful, thank you,. I do have a question though. Why do you have to do the mid-year adjustment - (1+Discount Rate)^0.5 - in the terminal value perpetuity method calculation? If you don't include this adjustment and use the discount period of 9.5, you'd get the same number. Just having trouble as to why that adjustment is there in the first place?
+Ken Ng It requires a more detailed explanation so we can't get into the details here (see the full courses), but basically it's because the perpetuity growth method assumes mid-year cash flows if you're already using the mid-year convention in the model... so to make it comparable to Terminal Value as calculated with the Terminal Method you need to "reset" the final year back by 0.5.
Great video. Can I just get one simple clarification. Near the end of the video, where the reasons for CapEx to not be equal to D&A in the after terminal period, the third point is about productivity gains and declining technology costs over time. Is this not going to tend to make CapEx smaller than D&A? Thank you very much.
+ReckStyle Yes, it might do that. But our overall point remains the same: regardless of whether CapEx is bigger than D&A or smaller than D&A, it should certainly not be equal to D&A in the Terminal Period. Also, sometimes those types of gains will cause companies to spend *more* on CapEx as a % of revenue to boost their business performance even more over the long term.
Thanks Brian, great piece. I have one question regarding terminal growth rate. Is terminal growth rate for FCFF that we use in TV formula needs to be same as terminal revenue growth rate used in normalized FCFF calculation? Reason I am asking is that I get different percentages when CAPEX is different from D&A.
With regards to discounting the normalised terminal value, im a bit confused as the normal terminal growth rate formula (Final year FCF*(1+g))/(r-g), will get you the terminal value as of the end of the forecast period (say year 5 or 10). With the normalised terminal year, it basically replaces the need for (Final Year FCF*(1+G)), so given the formula, this should bring the terminal value to the end of the forecast period. But i have been using the BIWS materials and i also saw on this tutorial that there is a mid year convention involved and what that does is to push the terminal value back by 0.5 period. So does that mean that the terminal value using the normalised terminal year actually goes to the end of the normalised terminal year (i.e. 1 year after the forecast period) rather than the end of the forecast period itself?
If you have our courses, please email us via the help desk or ask your question directly on the site - you're much better off going through those means rather than this UA-cam channel, which has older and less useful videos. We can explain in more detail if you leave a comment on the site.
Hi , I have a small confusion. Why don't we just extend the projection period to a time when the cash flows will normalize( patent expires or amortization ends) instead of forcefully normalizing ? Or is it the same thing
You could do that, but then you would have to think about how to project other items that go into the company's cash flow and how standard revenue and expenses would change in that time period. So it is easier just to normalize what you already have.
And they're all wrong, as usual. That assumption makes no sense if you assume that the company's FCF keeps growing in the Terminal Period. Groupthink does not mean "correct."
Yes i didn´t think of that until i´ve watched this video!
+Noah Leidinger Thanks for watching!
Great video congrats
Would appreciate if you could help in similar issue but in context to FCFE.
How net borrowing would be normalized in terminal year considering capex of amount X in terminal year and entity’s capital structure would remain same till perpetuity i.e 50:50 debt equity. ? Also what would be the impact on interest net of tax in normalized terminal year. ?
Hard to say with just that description because it depends on the current capital structure vs. the long-term target of 50:50. If the current debt/equity ratio is higher, you might have to adjust down the net interest expense in the Terminal Year, and vice versa if it's lower.
Appreciate your response
I need your assistance how to normalize the debt issues, debt repayment and interest costs on terminal year. For example dep is $ 10 m on last year of projection. I assumed capex of $10 + stable growth rate in terminal year. Now issue is how much should i consider in debt issue and debt repayment and interest costs in normalized terminal year. Consider that existing loan is going to settle over next 3 year from last year projection onwards. Target capital structure is 50:50. And existing is 80:20.
Regards
@@owaisashraf8030 Sorry, but you're really asking about things that are beyond the scope of this free UA-cam channel. We can answer quick questions, but can't give exact instructions on financial models, and to answer your question, we would probably need to see your model. Feel free to contact our help desk if you have a paid membership on the site.
Worthy watch video! But i am wondering if we could have the excel template. i visited your website and found nothing. is it possible to have a dummy version?
+Hani Farraj Click "Show More". Then scroll to the bottom. Then click the links.
+Mergers & Inquisitions / Breaking Into Wall Street This was very helpful, thank you,.
I do have a question though. Why do you have to do the mid-year adjustment - (1+Discount Rate)^0.5 - in the terminal value perpetuity method calculation? If you don't include this adjustment and use the discount period of 9.5, you'd get the same number. Just having trouble as to why that adjustment is there in the first place?
+Ken Ng It requires a more detailed explanation so we can't get into the details here (see the full courses), but basically it's because the perpetuity growth method assumes mid-year cash flows if you're already using the mid-year convention in the model... so to make it comparable to Terminal Value as calculated with the Terminal Method you need to "reset" the final year back by 0.5.
Great video. Can I just get one simple clarification. Near the end of the video, where the reasons for CapEx to not be equal to D&A in the after terminal period, the third point is about productivity gains and declining technology costs over time. Is this not going to tend to make CapEx smaller than D&A? Thank you very much.
+ReckStyle Yes, it might do that. But our overall point remains the same: regardless of whether CapEx is bigger than D&A or smaller than D&A, it should certainly not be equal to D&A in the Terminal Period. Also, sometimes those types of gains will cause companies to spend *more* on CapEx as a % of revenue to boost their business performance even more over the long term.
Thanks Brian, great piece. I have one question regarding terminal growth rate. Is terminal growth rate for FCFF that we use in TV formula needs to be same as terminal revenue growth rate used in normalized FCFF calculation? Reason I am asking is that I get different percentages when CAPEX is different from D&A.
No. The rates will be different because FCFF is after expenses, taxes, CapEx, etc.
With regards to discounting the normalised terminal value, im a bit confused as the normal terminal growth rate formula (Final year FCF*(1+g))/(r-g), will get you the terminal value as of the end of the forecast period (say year 5 or 10).
With the normalised terminal year, it basically replaces the need for (Final Year FCF*(1+G)), so given the formula, this should bring the terminal value to the end of the forecast period.
But i have been using the BIWS materials and i also saw on this tutorial that there is a mid year convention involved and what that does is to push the terminal value back by 0.5 period. So does that mean that the terminal value using the normalised terminal year actually goes to the end of the normalised terminal year (i.e. 1 year after the forecast period) rather than the end of the forecast period itself?
If you have our courses, please email us via the help desk or ask your question directly on the site - you're much better off going through those means rather than this UA-cam channel, which has older and less useful videos. We can explain in more detail if you leave a comment on the site.
Hi , I have a small confusion. Why don't we just extend the projection period to a time when the cash flows will normalize( patent expires or amortization ends) instead of forcefully normalizing ? Or is it the same thing
You could do that, but then you would have to think about how to project other items that go into the company's cash flow and how standard revenue and expenses would change in that time period. So it is easier just to normalize what you already have.
Mergers & Inquisitions / Breaking Into Wall Street Thankss !!
Virtually everyone in Wall Street sets Capex and D&A to the same amount as a % of Revenue for the terminal period...
And they're all wrong, as usual. That assumption makes no sense if you assume that the company's FCF keeps growing in the Terminal Period. Groupthink does not mean "correct."