Hey guys. Can someone please explain: does 5% amortization for term loans mean that amortization term is 20 years? Or how does it work? Thank you in advance.
5% amortization on Term Loans means that the Term Loans amortize over 20 years. However, they may "mature" and be required to be repaid in full, before that. For example, many "Term Loan B" instruments have 1% amortization per year but then mature in 5, 7, or 10 years. So there is some risk if the company cannot refinance or repay the debt by then.
Thanks a lot for the video, quick clarification - can you clarify why do you reduce the EBITDA in order to present the equity funding option? why is its reduced by 50% when the funding is based on 50% equity?
Your understanding is off. We are saying that there are a wide range of outcomes FOR THIS SPECIFIC COMPANY. There are more optimistic cases and more pessimistic cases. Lenders focus on more pessimistic cases because they assume that most companies and people are terrible and unreliable and will not repay Debt. In those pessimistic cases, the company's credit stats and ratios would not comply with the ones lenders are seeking, so lenders would be reluctant to do the deal. As a result, the company needs to use more equity for funding.
Another great video. Have you done any videos on shortcuts in excel that are essential to valuations/modelling? Would really appreciate a video that covers shortcuts for powerpoint/excel/word in reference to financial modelling or other work carried out by analysts. Once again thanks for all the videos so far; they've helped me land an assessment centre and wouldn't have been able to do it without this useful content from your channel!
Can you explain how it was possible to simulate 50% equity and 50% debt with the EBITDA/debt multiple? it wasn't clear please, tomorrow I have an interview
I do not understand your question. EBITDA / Debt is not a valuation multiple; Debt / EBITDA is the metric, and it's a credit stat, not a valuation multiple. But I'm really not sure what you mean by "simulate 50% equity and 50% debt" because EBITDA never reflects the debt/equity split, as it is capital structure-neutral.
@@financialmodelingI had the same confusion, it’s due to the fact that when you demonstrate the options where you add equity funding into the mix the only adjustment to the model we see, is you changing the ebidta debt multiple by decreasing it by the same percentage as the percentage of equity funding you say you are considering, so mine and I think his question is why does changing the ebidta debt multiple account for the increase in financing via equity in your model?
@@Flufferkinze Look at the "Total Debt" vs. "Total Equity" lines under "Post-Transaction Capital Structure." As you change the EBITDA multiples for the Debt at the top, those ratios change, and you can make rough estimates for the Debt and Equity percentages from that. For example, if you set the Term Loan multiple to 0x, Debt / (Debt + Equity) in Year 1 is only 32% rather than the 44% in the base case version.
We have some coverage of credit analysis in the main financial modeling course (Financial Modeling Mastery) and a mini-case study on how to make a recommendation to a distressed company in one of the modules, but it's not a comprehensive course, more of an overview.
Cost of Equity = 1 / (P / E Multiple). So if the P / E multiple is 10x, Cost of Equity = 10%, but if the P / E multiple is 50x, Cost of Equity = 2%. It is not always true that (after tax) Cost of equity < (after tax) cost of debt when the P / E multiple is very high, but it sometimes does become true because the Cost of Equity, as measured above, falls to low levels in that case. There are other ways to measure Cost of Equity (such as with CAPM), but if you measure it based on EPS impact, the rule above holds.
If you're capitalising EPS, the denominator is the delta between cost of equity and growth (r-g); i.e. a 50x P-E-Ratio won't automatically be an indicator for a low cost of equity, but may simply be due to an implied growth rate 200 basis points below true cost of equity.
I have homework similar to this scenario, the firm is entrepreneurial in nature. Its total worth is $1.3 Million and sales are only $150000 in the current year. Its revenues are expected to reach $20.5 Million after 8 years and currently, cash flows are negative. They need $10 to $15 million in the short-term. Which options they should choose to finance their business. ? Your earlier kind of help would be fruitful for me to complete my homework on time.
We do not answer specific homework questions/assignments on this channel. But if the company's cash flows are currently negative, then traditional debt service is impossible, so equity is the best solution.
Have a question that is sort of related to this. But if this was an ADR, how would you arrive at Enterprise Value. I tried to reconcile metrics for NYSE: VLRS. Would you still quote figures like EV/EBIT and EV/Sales off of the different shares in other markets? I have been searching like crazy for this because I keep seeing different metrics quoted for an ADR on market cap, EV, EV/EBIT, P/E. I also see that in P/E the earnings being reported in the countries currency so it distorts the ratio. Is this typical? Thanks if you see this. ( Oh, I have already factored in the ADR share conversion).
Thank you for all the great content you provide ! (from France)
Thanks for watching!
@@financialmodeling this is a great video - any chance you could share the model please?
Thank you... please more videos and more simple basics .. and explanation of terminology
Click "Show More" and scroll down to the links at the bottom.
Great Work!
Thanks for watching!
Very well explained (From India)
Thanks for watching!
Hey guys. Can someone please explain: does 5% amortization for term loans mean that amortization term is 20 years? Or how does it work? Thank you in advance.
5% amortization on Term Loans means that the Term Loans amortize over 20 years. However, they may "mature" and be required to be repaid in full, before that. For example, many "Term Loan B" instruments have 1% amortization per year but then mature in 5, 7, or 10 years. So there is some risk if the company cannot refinance or repay the debt by then.
@@financialmodeling Thank you for your response. It was very helpful.
Thanks a lot for the video, quick clarification - can you clarify why do you reduce the EBITDA in order to present the equity funding option? why is its reduced by 50% when the funding is based on 50% equity?
Your understanding is off. We are saying that there are a wide range of outcomes FOR THIS SPECIFIC COMPANY. There are more optimistic cases and more pessimistic cases. Lenders focus on more pessimistic cases because they assume that most companies and people are terrible and unreliable and will not repay Debt. In those pessimistic cases, the company's credit stats and ratios would not comply with the ones lenders are seeking, so lenders would be reluctant to do the deal. As a result, the company needs to use more equity for funding.
Another great video. Have you done any videos on shortcuts in excel that are essential to valuations/modelling? Would really appreciate a video that covers shortcuts for powerpoint/excel/word in reference to financial modelling or other work carried out by analysts.
Once again thanks for all the videos so far; they've helped me land an assessment centre and wouldn't have been able to do it without this useful content from your channel!
th-cam.com/play/PL5hdd9oiuWS8LWdrxu5k4P0K2AJ2IremU.html
th-cam.com/play/PL5hdd9oiuWS_E1OopGSubXxMfzrCRtEBI.html
thanks so much!
Can you explain how it was possible to simulate 50% equity and 50% debt with the EBITDA/debt multiple? it wasn't clear please, tomorrow I have an interview
I do not understand your question. EBITDA / Debt is not a valuation multiple; Debt / EBITDA is the metric, and it's a credit stat, not a valuation multiple. But I'm really not sure what you mean by "simulate 50% equity and 50% debt" because EBITDA never reflects the debt/equity split, as it is capital structure-neutral.
@@financialmodelingI had the same confusion, it’s due to the fact that when you demonstrate the options where you add equity funding into the mix the only adjustment to the model we see, is you changing the ebidta debt multiple by decreasing it by the same percentage as the percentage of equity funding you say you are considering, so mine and I think his question is why does changing the ebidta debt multiple account for the increase in financing via equity in your model?
@@Flufferkinze Look at the "Total Debt" vs. "Total Equity" lines under "Post-Transaction Capital Structure." As you change the EBITDA multiples for the Debt at the top, those ratios change, and you can make rough estimates for the Debt and Equity percentages from that. For example, if you set the Term Loan multiple to 0x, Debt / (Debt + Equity) in Year 1 is only 32% rather than the 44% in the base case version.
Do you have a case study for a company under restructuring?
We have some coverage of credit analysis in the main financial modeling course (Financial Modeling Mastery) and a mini-case study on how to make a recommendation to a distressed company in one of the modules, but it's not a comprehensive course, more of an overview.
ich will have an AC at a local IB, just found this video really helpful for the case study preparation! Thanks a lot!
Thanks for watching!
(after tax) Cost of equity < (after tax) cost of debt when P/E ratio is very high. Please can you explain the reason for this?
Cost of Equity = 1 / (P / E Multiple). So if the P / E multiple is 10x, Cost of Equity = 10%, but if the P / E multiple is 50x, Cost of Equity = 2%.
It is not always true that (after tax) Cost of equity < (after tax) cost of debt when the P / E multiple is very high, but it sometimes does become true because the Cost of Equity, as measured above, falls to low levels in that case.
There are other ways to measure Cost of Equity (such as with CAPM), but if you measure it based on EPS impact, the rule above holds.
If you're capitalising EPS, the denominator is the delta between cost of equity and growth (r-g); i.e. a 50x P-E-Ratio won't automatically be an indicator for a low cost of equity, but may simply be due to an implied growth rate 200 basis points below true cost of equity.
@@financialmodeling do investment bankers really use earnings yield to calculate cost of equity?
Any chance you can provide a download link for the spreadsheet? Great video.
This one is not available. It is a part of our Interview Guide and available through other courses on the site.
I have homework similar to this scenario, the firm is entrepreneurial in nature. Its total worth is $1.3 Million and sales are only $150000 in the current year. Its revenues are expected to reach $20.5 Million after 8 years and currently, cash flows are negative. They need $10 to $15 million in the short-term. Which options they should choose to finance their business. ?
Your earlier kind of help would be fruitful for me to complete my homework on time.
Mergers & Inquisitions / Breaking Into Wall Street Kindly do help me.
We do not answer specific homework questions/assignments on this channel. But if the company's cash flows are currently negative, then traditional debt service is impossible, so equity is the best solution.
Hi, possible to share the excel working file?
It's not available for this one, sorry. But there are similar examples of models in this channel with credit stats/ratios and scenarios.
If the acquirer has cash wouldn't it use that first before considering debt?
Yes, but we are assuming here that the company has little cash available, so the choices are debt or equity.
Have a question that is sort of related to this. But if this was an ADR, how would you arrive at Enterprise Value. I tried to reconcile metrics for NYSE: VLRS. Would you still quote figures like EV/EBIT and EV/Sales off of the different shares in other markets? I have been searching like crazy for this because I keep seeing different metrics quoted for an ADR on market cap, EV, EV/EBIT, P/E. I also see that in P/E the earnings being reported in the countries currency so it distorts the ratio. Is this typical? Thanks if you see this. ( Oh, I have already factored in the ADR share conversion).
You should base the calculation on the company's shares and share price in its home market instead and skip the ADR part.
In which course(s) do you find the case study?
It is in our Interview Guide and will soon be in our Fundamentals/Advanced courses in the Bonus Case Studies there.
which package can i buy this model form
Our IB Interview Guide: breakingintowallstreet.com/biws/investment-banking-interview-guide/