Financial Modeling and Valuation: A Practical Guid e to Investment Banking and Private Equity, Second Edition: Wiley Finance

PAUL PIGNATARO is Founder of the New York School of Finance, a world leader in providing finance education to banks, firms, and universities throughout the world. He is also Managing Partner of Caterson Consulting, a consulting firm providing merger, acquisition, and private equity services. He is the author of the Investment Banking and Private Equity in Practice series of books. Previously, Paul worked at TH Lee Putnam Ventures, a $1 billion private equity firm affiliated with buyout giant Thomas H. Lee Partners, and at Morgan Stanley, where he worked on various transactions in the technology, energy, transportation, and business services industries.

Preface xv The Amazon Case Study xvi How This Book Is Structured xvii Part One Financial Statements and Projections 1 Chapter 1 The Income Statement 3 Revenue 4 Cost of Goods Sold 4 Gross Profit 4 Operating Expenses 5 Other Income 6 EBITDA 6 Depreciation and Amortization 8 EBIT 8 Interest 9 EBT 9 Taxes 9 Net Income 10 Non-Recurring and Extraordinary Items 10 Distributions 11 Net Income (as Reported) 11 Shares 11 Earnings per Share (EPS) 12 Amazon's Income Statement 12 Revenue 14 Getting to EBITDA 20 Digging up Depreciation 20 Cost of Goods Sold 23 Gross Profit 23 Fulfillment 25 Technology and Content 25 Marketing, General and Administrative, Other Operating Expense (Income), Net 27 Total Operating Expenses 27 EBITDA 27 Beyond EBITDA 28 Depreciation and Amortization 28 EBIT 29 Other Income 30 Interest 31 EBT 31 Taxes 31 Net Income from Continuing Operations 32 Non-Recurring and Extraordinary Items 32 Net Income (after Non-Recurring Events) 33 Distributions 33 Net Income (as Reported) 33 Shares and EPS 34 Income Statement - Making Projections 35 Revenue 35 Cost of Goods Sold 40 Operating Expenses 45 Depreciation and Amortization 46 Other Income 49 Seven Methods of Projections 49 Interest Income 53 Taxes 53 Non-Recurring Events 55 Distributions 55 Equity Method Investment Activity 55 Dividends 57 Shares 57 Basic Shares Outstanding 57 Diluted Shares Outstanding and the Treasury Method 57 Earnings per Share 60 Chapter 2 The Cash Flow Statement 67 Cash from Operating Activities 67 Revenue 69 Cost of Goods Sold 69 Operating Expenses 69 Depreciation 69 Interest 69 Taxes 70 Cash from Investing Activities 71 Cash from Financing Activities 71 Financial Statement Flows Example 72 Amazon's Cash Flow Statement 78 Cash from Operating Activities 78 Cash from Investing Activities 81 Cash from Financing Activities 82 Cash Flow Statement - Making Projections 84 Cash from Operating Activities 85 Depreciation and Amortization 85 Stock-Based Compensation 85 Other Operating Expense 88 Other Expense (Income) 90 Deferred Taxes 91 Changes in Operating Working Capital 91 Cash from Investing Activities 92 Proceeds from Property and Equipment Sales and Incentives 98 Items Based on Cash Available 98 Cash Flow from Financing Activities 101 Effect of Exchange Rate on Cash 101 Chapter 3 The Balance Sheet 107 Assets 107 Current Assets 107 Cash and Cash Equivalents 107 Accounts Receivable 107 Inventory 108 Prepaid Expense 109 Non-Current Assets 110 Property, Plant, and Equipment (PP&E) 110 Intangible Assets 110 Liabilities 110 Current Liabilities 110 Accounts Payable 110 Accrued Liabilities 111 Short-Term Debts 111 Non-Current Liabilities 111 Long-Term Debts 111 Deferred Taxes 111 Amazon's Balance Sheet 112 Current Assets 113 Non-Current Assets 113 Operating Leases 114 Goodwill 114 Other Assets 114 Current Liabilities 114 Short-Term Debt 115 Non-Current Liabilities 115 Other Long-Term Liabilities 116 Shareholders' Equity 116 Common Stock and Additional Paid-in Capital 117 Treasury Stock, Accumulated Other Comprehensive Loss and Retained Earnings 117 Chapter 4 Depreciation Schedule 119 Straight-Line Depreciation 120 Accelerated Depreciation 121 Declining Balance 121 Sum of the Year's Digits 122 Modified Accelerated Cost Recovery System (MACRS) 122 Deferred Taxes 125 Deferred Tax Asset 125 NOL Carryback Example 126 Deferred Tax Liability 127 Projecting Depreciation 129 Straight-Line Depreciation 129 Anchoring Formula References 133 Projecting Deferred Taxes 152 Chapter 5 Working Capital 155 Operating Working Capital 156 Amazon's Operating Working Capital 158 Inventories 160 Accounts Receivable, Net and Other 162 Accounts Payable 163 Pignataro808893_ftoc.indd xi 07 Feb 2022 01:10:58 pm Accrued Expenses and Other 165 Unearned Revenue 166 Projecting Operating Working Capital 168 Receivables 168 Inventories 170 Accounts Payable 172 Accrued Expenses 174 Unearned Revenue 174 Operating Working Capital and the Cash Flow Statement 176 Changes in Inventory 178 Accounts Receivable 179 Changes in Accounts Payable 181 Changes in Accrued Expenses 182 Changes in Unearned Revenue 182 Chapter 6 Balance Sheet Projections 183 Cash Flow Statement Drives Balance Sheet vs. Balance Sheet Drives Cash Flow Statement 183 Assets 185 Inventories 186 Accounts Receivable 188 Liabilities 192 Shareholders' Equity 195 Balancing an Unbalanced Balance Sheet 196 NYSF Balance Sheet Balancing Method 201 Chapter 7 The Debt Schedule, Circular References, and Finalizing the Model 205 Debt Schedule Structure 206 Modeling the Debt Schedule 206 Short-Term Debt 206 Mandatory Issuances/(Retirements) and Non-Mandatory Issuances/(Retirements) 210 Long-Term Debt 214 Debt Interest 214 Long-Term Lease Liabilities 216 Total Issuances/(Retirements) 219 Total Interest Expense 219 Cash Available to Pay Down Debt 220 Interest Income 224 Circular References 235 Circular Reference #Value! Errors 242 Automatic Debt Paydowns 243 Basic Switches 252 Finalizing the Model 252 Part Two Valuation 277 Chapter 8 What Is Value? 279 Book Value 279 Market Value 279 Enterprise Value 280 Multiples 284 Three Core Methods of Valuation 286 Comparable Company Analysis 287 Precedent Transactions Analysis 287 Purchase Multiples 288 Discounted Cash Flow Analysis 289 Chapter 9 Discounted Cash Flow Analysis 291 Midyear vs. End-of-Year Convention 291 Unlevered Free Cash Flow 292 Weighted Average Cost of Capital (WACC) 300 Cost of Debt 301 Cost of Equity 301 Market Risk Premium 304 Beta 306 Levering and Unlevering Beta 307 Terminal Value 308 Multiple Method 308 Perpetuity Method 309 Amazon DCF Analysis 310 WACC 312 Cost of Equity 312 EBITDA Method 320 Perpetuity Method 322 Chapter 10 Comparable Company Analysis 327 Last Twelve Months (LTM) 329 Calendarization 330 Netflix as a Comparable Company 331 Netflix 2020 Year End 332 Revenue 333 Operating Expenses 335 Depreciation 335 Interest 337 Taxes 338 Non-Recurring Events 339 Earnings per Share (EPS) 339 Netflix Quarterly Income Statement 340 Netflix LTM Adjustments 345 Netflix Projections 345 Revenue 350 COGS 351 Depreciation 351 Interest 351 Taxes 352 Non-Recurring Events 353 Shares and Earnings per Share 353 Calculating Comparable Metrics 357 Market Value and Enterprise Value 360 Multiples 361 Chapter 11 Precedent Transactions Analysis 365 Identifying Precedent Transactions 365 Amazon Precedent Transaction Analysis 366 Chapter 12 Conclusion 375 52-Week High/Low 375 Comparable Company Analysis 376 Precedent Transactions 378 Discounted Cash Flow 379 Football Field 381 Appendix 1 Model Quick Steps 387 Appendix 2 Financial Statement Flows 389 Income Statement to Cash Flow 389 Cash Flow to Balance Sheet 390 Appendix 3 Excel Hotkeys 391 About the Author 393 About the WebSite 395 Index 397