Corporate Restructuring
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Enforcement and Cash Flow Management to Delay Goodwill
Enforcement and Cash Flow Management to Delay Goodwill Impairments under IFRS Andrei Filip, ESSEC Business School [email protected] Gerald J. Lobo, University of Houston – Bauer College of Business [email protected] Luc Paugam,1 HEC Paris [email protected] Acknowledgements We gratefully acknowledge the helpful comments of Anastasios Elemes, Martin Glaum, Humayun Kabir (discussant), Alexander Müller, Katherine Schipper and of workshop participants at the following workshops: Concordia University, Bocconi University, WHU University, 2016 EUFIN conference (Fribourg, Switzerland), 2017 EAA meeting (Valencia, Spain), and International Accounting Section 2017 Midyear AAA meeting (Tampa, Florida). A previous version of the manuscript was circulated under the title “The Effect of Audit Quality and Enforcement of Accounting Standards on Goodwill Impairment Avoidance”. 1 Corresponding author 0 Enforcement and Cash Flow Management to Delay Goodwill Impairments under IFRS Abstract: Under IFRS, managers can use two approaches to increase the estimated recoverable value of a cash generating unit (CGU) to which goodwill has been allocated in order to justify not recognizing impairment: (1) make overly optimistic valuation assumptions (e.g., about discount rate, revenue growth, terminal growth rate), and (2) increase future cash flow estimates by increasing current cash flows. Because enforcement constrains the use of optimistic valuation assumptions we propose that the strength of enforcement influences the relative use of these two choices. Using an international sample of listed firms that report under IFRS, we document that the use of cash flow increasing management for firms that delay goodwill impairment is more positively associated with enforcement relative to a control sample that recognizes impairments. We also find that as enforcement increases, firms that delay goodwill impairment shorten the cash conversion cycle in the current year by delaying cash payments to suppliers, and that these transactions reverse in the next year. -
Fundamental Analysis and Discounted Free Cash Flow Valuation of Stocks at Macedonian Stock Exchange
Ivanovska, Nadica, Zoran Ivanovski, and Zoran Narasanov. 2014. Fundamental Analysis and Discounted Free Cash Flow Valuation of Stocks at Macedonian Stock Exchange. UTMS Journal of Economics 5 (1): 11–24. Preliminary communication (accepted February 24, 2014) FUNDAMENTAL ANALYSIS AND DISCOUNTED FREE CASH FLOW VALUATION OF STOCKS AT MACEDONIAN STOCK EXCHANGE Nadica Ivanovska1 Zoran Ivanovski Zoran Narasanov Abstract: We examine the valuation performance of Discounted Free Cash Flow Model (DFCF) at the Macedonian Stock Exchange (MSE) in order to determine if this model offer significant level of accuracy and relevancy for stock values determination. We find that stock values calculated with DCF model are very close to average market prices which suggests that market prices oscillate near their fundamental values. We can conclude that DFCF models are useful tools for the companies’ enterprise values calculation on long term. The analysis of our results derived from stock valuation with DFCF model as well as comparison with average market stock prices suggest that discounted cash flow model is relatively reliable valuation tool that have to be used for stocks analyses at MSE. Keywords: valuation, securities, free cash flow, equity, stock-exchange. Jel Classification: G1,G12 INTRODUCTION Valuation of an asset can be determined on three ways. First, as the intrinsic value of the asset, based on its capacity to generate cash flows in the future. Second, as a relative value, by examining how the market is pricing similar or comparable assets. Finally, we can value assets with cash flows that are contingent on the occurrence of a specific event as options (Damodaran 2006). -
Over-Investment of Free Cash Flow
Rev Acc Stud (2006) 11:159–189 DOI 10.1007/s11142-006-9012-1 Over-investment of free cash flow Scott Richardson Published online: 23 June 2006 Ó Springer Science+Business Media, LLC 2006 Abstract This paper examines the extent of firm level over-investment of free cash flow. Using an accounting-based framework to measure over- investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms’ governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment. Keywords Free cash flow Æ Over-investment Æ Agency costs JEL Classification G3 Æ M4 This paper examines firm investing decisions in the presence of free cash flow. In theory, firm level investment should not be related to internally generated cash flows (Modigliani & Miller, 1958). However, prior research has docu- mented a positive relation between investment expenditure and cash flow (e.g., Hubbard, 1998). There are two interpretations for this positive relation. First, the positive relation is a manifestation of an agency problem, where managers in firms with free cash flow engage in wasteful expenditure (e.g., Jensen 1986; Stulz 1990). When managers’ objectives differ from those of shareholders, the presence of internally generated cash flow in excess of that required to maintain existing assets in place and finance new positive NPV projects creates the potential for those funds to be squandered. -
Accounting Adjustments on the Discounted Free Cash Flow Valuation Model for Appraising Smes in Greece
Chinese Business Review, Oct. 2016, Vol. 15, No. 10, 498-506 doi: 10.17265/1537-1506/2016.10.006 D DAVID PUBLISHING Accounting Adjustments on the Discounted Free Cash Flow Valuation Model for Appraising SMEs in Greece Athanasios D. Karampouzis, Dimitrios Ginoglou University of Macedonia, Thessaloniki, Greece The present paper examines accounting issues that come up when evaluating a private firm under the Greek accounting standards. More specifically, we try to provide an accounting framework for appraisers who, when they try to retrieve intrinsic values of SMEs, make use of the Free Cash Flows to the Firm (FCFF) model. We focus on adjusting the firms’ statements’ items in order to produce a nominator that is consistent with the FCFF theory, taking in response—among others—the Greek tax legislation and the Greek General Chart of Accounts. Finally, we produce a rather normative formula, which can be positively used upon this very model (FCFF valuation) in order to assess the value of a private firm in Greece. The formula is explained thoroughly enough via a practical example of a real Greek private firm. Keywords: firm valuation, private firm, FCFF, taxation Introduction Valuation of a firm via discounted free cash flows to the firm is a common way to evaluate a non-public enterprise, because of the flexibility that offers. Free cash flows to the firm are cash flows available to the potential investor (especially in cases of mergers, acquisitions, audit etc.) after deduction—from net income—of investments in fix and working capital, after addition of net non-cash charges and after-tax interest charges. -
Uva-F-1274 Methods of Valuation for Mergers And
Graduate School of Business Administration UVA-F-1274 University of Virginia METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS This note addresses the methods used to value companies in a merger and acquisitions (M&A) setting. It provides a detailed description of the discounted cash flow (DCF) approach and reviews other methods of valuation, such as book value, liquidation value, replacement cost, market value, trading multiples of peer firms, and comparable transaction multiples. Discounted Cash Flow Method Overview The discounted cash flow approach in an M&A setting attempts to determine the value of the company (or ‘enterprise’) by computing the present value of cash flows over the life of the company.1 Since a corporation is assumed to have infinite life, the analysis is broken into two parts: a forecast period and a terminal value. In the forecast period, explicit forecasts of free cash flow must be developed that incorporate the economic benefits and costs of the transaction. Ideally, the forecast period should equate with the interval in which the firm enjoys a competitive advantage (i.e., the circumstances where expected returns exceed required returns.) For most circumstances a forecast period of five or ten years is used. The value of the company derived from free cash flows arising after the forecast period is captured by a terminal value. Terminal value is estimated in the last year of the forecast period and capitalizes the present value of all future cash flows beyond the forecast period. The terminal region cash flows are projected under a steady state assumption that the firm enjoys no opportunities for abnormal growth or that expected returns equal required returns in this interval. -
How Risky Is the Debt in Highly Leveraged Transactions?*
Journal of Financial Economics 27 (1990) 215-24.5. North-Holland How risky is the debt in highly leveraged transactions?* Steven N. Kaplan University of Chicago, Chicago, IL 60637, USA Jeremy C. Stein Massachusetts Institute of Technology Cambridge, MA 02139, USA Received December 1989, final version received June 1990 This paper estimates the systematic risk of the debt in public leveraged recapitalizations. We calculate this risk as a function of the difference in systematic equity risk before and after the recapitalization. The increase in equity risk is surprisingly small after a recapitalization, ranging from 37% to 57%, depending on the estimation method. If total company risk is unchanged, the implied systematic risk of the post-recapitalization debt in twelve transactions averages 0.65. Alternatively, if the entire market-adjusted premium in the leveraged recapitalization represents a reduction in fixed costs, the implied systematic risk of this debt averages 0.40. 1. Introduction Highly leveraged transactions such as leveraged buyouts (LBOs) and lever- aged recapitalizations have grown explosively in number and size over the last several years. These transactions are largely financed with a combination of senior bank debt and subordinated lower-grade or ‘junk’ debt. Recently, the debt in these transactions has come under increasing scrutiny from investors, politicians, and academics. All three groups have asked in one way or another how risky leveraged buyout debt is in relation to the return it *Cedric Antosiewicz provided excellent research assistance. Paul Asquith, Douglas Diamond, Eugene Fama, Wayne Person, William Fruhan (the referee), Kenneth French, Robert Korajczyk, Richard Leftwich, Jeffrey Mackie-Mason, Merton Miller, Stewart Myers, Krishna Palepu, Richard Ruback (the editor), Andrei Shleifer, Robert Vishny, and seminar participants at the Securities and Exchange Commission, the University of Chicago, and MIT’s Sloan School made helpful comments on earlier drafts. -
A Roadmap to Initial Public Offerings
A Roadmap to Initial Public Offerings 2019 The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2019 Deloitte Development LLC. All rights reserved. Other Publications in Deloitte’s Roadmap Series Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Consolidation — Identifying a Controlling Financial Interest Contracts on an Entity’s Own Equity -
A Guide to Going
AST Business Cycle Momentum Series A GUIDE TO GOING PUBLIC AST is a leading provider of ownership data management, analytics and advisory services to public and private companies as well as mutual funds. AST’s comprehensive product set includes transfer agency services, employee stock plan administration services, proxy solicitation and advisory services and bankruptcy claims administration services. Read AST’s Thought Leadership Series: To, Through and Beyond the IPO. Visit AST’s IPO Content Library (lp.astfinancial.com/ipo-content-library2.html)with a dozen helpful articles for your reference before, during and after the IPO. 1 Table of Contents 1 Initial Public Offering Services 4 The Process 6 The IPO Timetable 10 After Going Public 12 Your First Annual Meeting 15 FAQs 17 Additional Ways AST Can Help 19 Corporate Governance Advisory and Proxy Solicitation Services Closed-End Fund IPO Services Equity Plan Solutions IPO Services Special Purpose Acquisition Company (SPAC) IPO Services Appendices 25 Direct Registration System (DRS) Frequently Asked Questions Sample Client Lock-up Release Reminder Sample Shareowner Lock-up Expiration Notice Sample Shareowner Lock-up Conversion Portal Notice Glossary 33 2 EVERY COMPANY BEGINS AS AN IDEA. When nurtured, that idea has the potential to grow into something big. Shifting from a privately held company to a public entity can be like moving from a calm country bike ride to the fast-paced streets of New York. Along even the greatest rides, you are bound to encounter rocky paths alongside the smooth roads of reward. At AST ®,we put great emphasis on helping navigate the full range of these transitional processes. -
Recapitalization: Voting & Non- Voting Interests
Recapitalization: Voting & Non- Voting Interests Overview Recapitalization is basically a change in a corporation’s capital structure. Corporations recapitalize for a variety of reasons, but generally to make the company more stable or to bring in new investors. For closely held companies, recapitalizations can also be very effective in estate planning. When business interests pass to a successive generation, senior family members can transfer company stock in a tax-efficient manner by generating discounts. If the business agreement restricts certain rights, such as the right to vote or the ability to freely transfer the stock, those restricted business interests are typically worth less to an outside buyer, and hence “discountable” for valuation purposes. Regardless of whether the transfer is by gift or by sale, recapitalization into voting and non-voting stock can allow the assets to be transferred at a lower value. Description and Operations The process by which an existing corporation can be reconfigured to create different classes of stock—such as voting and non-voting stock—is called “recapitalization.” Though not labeled a “recapitalization,” a limited liability company or a partnership can undergo a similar transformation by establishing voting and non-voting interests. Creation of Preferred and Common Stock with C Corporations Recapitalization can refer to the creation of common and preferred stock. Preferred stock has dividend and liquidation priority over common stock. In other words, the owner of preferred stock has a greater degree of security than the owner of common stock. Before 1990, a parent would shift common stock to a child and keep the preferred stock. -
Clearing up Confusion Over Calculation of Free Cash Flow
Clearing Up Confusion Over Calculation of Free Cash Flow Dr. Howard Keen, Assistant Professor of Finance, Temple University, USA ABSTRACT This paper addresses student confusion over the calculation of the key valuation measure of free cash flow. Confusion is shown to arise from the measure used to represent capital expenditures and from the treatment of depreciation expense. Even for students who have had a full complement of undergraduate finance courses, the former is clearly a point of confusion for many students and its handling has important implications for the latter. This paper illustrates the lack of clarity and consistency in standard textbook treatment of this issue, provides evidence of resulting student confusion and offers clear and easy-to-understand guidelines for students to follow to help avoid that confusion. By adhering to the guidelines presented, even beginning students should be better able to navigate through what can appear to be mystifying presentations of how to incorporate capital spending and depreciation into the computation of a firm’s free cash flow. INTRODUCTION The motivation for this paper was born out of the teaching of the Finance Capstone course to senior Finance majors at Temple University. The paper focuses on the confusing treatment of the key components of capital expenditures and depreciation within the context of deriving free cash flow (FCF). A review of representative corporate finance textbooks reveals a glaring lack of clarity and consistency in the presentation of the use of gross or net fixed assets to derive ―capital expenditures‖ and in the separate explicit inclusion of depreciation. The question of whether capital expenditures is represented by a change in gross or net fixed assets is clearly a point of confusion for many students, even those who have had the full complement of undergraduate finance courses. -
CASE STUDY How Carlyle Creates Value Deep Industryhow Expertise.Carlyle Global Creates Scale and Value Presence
CASE STUDY How Carlyle Creates Value Deep industryHow expertise.Carlyle Global Creates scale and Value presence. Extensive network of Operating Executives. And a wealth of investment portfolio data; we call it The Carlyle Edge. These are the four pillars of Carlyle’s value creation model. By leveragingDeep these industry core expertise. capabilities Global and scaleresources—Carlyle and presence. hasExtensive established network a 30-year of Operating overall Executives. track record And of investinga wealth in companies,of investment working portfolio to make data; them we better call it Theand Carlyleserving Edge. our investors’ These are needs. the four pillars of Carlyle’s value creation model. By leveraging these core capabilities and resources—Carlyle has established a 25-year overall track record of investing in companies, working to make them better and serving our investors’ needs. Carlyle, along with several other investors, led the recapitalization of the Bank of N.T. Butterfield & Son Limited. The new equity capital, which allowed the bank to remain independent, was part of a comprehensive plan to increase equity capital and de-risk Butterfield’s balance sheet. In addition, the new capital provided flexibility to restructure Butterfield’s investment portfolio, provision for non-performing loans, decrease earnings volatility, and maintain capital ratios well in excess of regulatory requirements. About Butterfield and the Transaction Carlyle invested in Butterfield in March 2010 through Carlyle Global Financial Services Partners. Established in 1958, Butterfield is the largest independent Bermuda-based depository institution. A publicly traded company, Butterfield shares are listed on the New York (NYSE), Bermuda (BSX) and Cayman Islands (CSX) stock exchanges. -
Is a Mezzanine Recapitalization Right for Your Business? Prepared By
Is a mezzanine recapitalization right for your business? Prepared by: Steve McCann, Manager, Center for Business Transition, RSM US LLP [email protected], +1 563 888 4015 October 2017 Owners of middle market companies still in growth mode face a • Subordinated, mezzanine debt. Pricing is typically in the variety of challenges and options in terms of raising capital to fund 12 to 15 percent range, with 11 to 13 percent being cash their continued growth. Likewise, owners of these companies may and the remainder payment in kind (PIK). This option also be searching for optimal ways to exit their business, when the may include warrants. time is right. The financing levels within a company usually have • Preferred equity. Pricing is typically in the 8 to 14 percent morphed into the present state and create a need for a fresh, real range, mostly PIK. This option may also include warrants viewpoint to fund an expansion or a business transition. but is less dilutive than common equity. Common equity. This option includes 35 to 40 percent In both these instances there are a variety of options available • of total capitalization, with a target internal rate of return to finance growth or provide shareholder liquidity, including: of 18 to 25 percent. • Senior secured debt, or first lien. In this option pricing tends In addition to the above alternatives, shareholders have other to increase with leverage, is dependent on availability of options to grow and achieve liquidity, including: collateral and is typically the London Interbank Offered Rate (LIBOR) plus 3 to 5 percent.