For long-term projects, what are the two methods for revenue recognition?
Give this one a try later!
1. Percentage of Completion Method: In the percentage of completion
method, revenue is recognized based on the percentage of work
completed during the period. This method is used far more common since
it's in a company's best interest to record partial revenue once earned. Two
conditions must be met to use this method: the collection of payment must
be reasonably assured, and the total project costs with the estimated
completion date are required to be provided.
2. Completed Contract Method: The completed contract method
recognizes revenue once the entire project has been completed. This
method is rarely used in the US, as it would result in a company under-
reporting revenue that has been earned under the accrual-based system.
,When applying a peer group derived EV/EBITDA multiple onto your target company,
what is an argument for using the group's median multiple instead of the mean?
Give this one a try later!
The simple reason is: Medians remove the distortive impact of outliers on
the peer group multiple. When using larger peer groups, the median is
preferable over the mean because it limits distortions from outliers, which
increases as more companies are included. The mean might be preferable
for smaller peer groups with fewer than five comparable companies and no
outliers.
What is an illiquidity discount?
Give this one a try later!
The illiquidity discount used when valuing private companies is related to
being unable to exit an investment quickly. Most investors will pay a
premium for an otherwise similar asset if there's the optionality to sell their
investment in the market at their discretion. Therefore, a discount should be
applied when performing trading comps since shares in a public company
include a premium for being sold in the public markets with ease (called
the "liquidity premium").
Conceptually, what does the discount rate represent?
Give this one a try later!
The discount rate represents the expected return on an investment based
on its risk profile (meaning, the discount rate is a function of the riskiness of
the cash flows). Put another way, the discount rate is the minimum return
threshold of an investment based on comparable investments with similar
, risks. A higher discount rate makes a company's cash flows less valuable, as
it implies the investment carries a greater amount of risk, and therefore
should be expected to yield a higher return (and vice versa).
How are seller notes in M&A modeled?
Give this one a try later!
Seller notes (or seller financing) are modeled the same way as any other
debt instrument. Therefore, it'll show up in the Sources & Uses schedule as a
source of funds since these notes helped finance the deal. In most cases,
seller notes will come in the form of subordinated debt with a high, fixed
interest rate given its position in the capital structure. But often, the option
for PIK interest or conversion feature will be attached.
Can companies amortize goodwill?
Give this one a try later!
Under GAAP, public companies are prohibited from amortizing goodwill as
it's assumed to have an indefinite life, similar to land. Instead, goodwill must
be tested annually for impairment.
However, privately held companies may elect to amortize goodwill and
under some circumstances, goodwill can be amortized over 15 years for tax
reporting purposes.
Why is the effective and marginal tax rate often different?
Give this one a try later!
, Effective and marginal tax rates differ because the effective tax rate
calculation uses pre-tax income from the accrual-based income statement.
Since there's a difference between the taxable income on the income
statement and taxable income shown on the tax filing, the tax rates will
nearly always be different. Thus, the "Tax Provision" line item on the income
statement rarely matches the actual cash taxes paid to the IRS.
Where do financial sponsors typically get their capital?
Give this one a try later!
Financial sponsors raise capital to fund their investments from insurance
companies, pension funds, sovereign wealth funds, endowments, high net
worth individuals, and financial institutions.
What is the relationship between depreciation and the salvage value assumption?
Give this one a try later!
Most companies will use a salvage value assumption in which the remaining
value of the asset is zero by the end of the useful life. The difference
between the cost of the asset and residual value is known as the total
depreciable amount. If the salvage value is assumed to be zero, the
depreciation expense each year will be higher and the tax benefits from
depreciation will be fully maximized.
Straight Line Annual Depreciation = (Asset Historical Cost − Salvage Value) /
Useful Life Assumption
If a company has continuously incurred goodwill impairment charges, what do you
take away from seeing this in their financials?
Give this one a try later!
1. Percentage of Completion Method: In the percentage of completion
method, revenue is recognized based on the percentage of work
completed during the period. This method is used far more common since
it's in a company's best interest to record partial revenue once earned. Two
conditions must be met to use this method: the collection of payment must
be reasonably assured, and the total project costs with the estimated
completion date are required to be provided.
2. Completed Contract Method: The completed contract method
recognizes revenue once the entire project has been completed. This
method is rarely used in the US, as it would result in a company under-
reporting revenue that has been earned under the accrual-based system.
,When applying a peer group derived EV/EBITDA multiple onto your target company,
what is an argument for using the group's median multiple instead of the mean?
Give this one a try later!
The simple reason is: Medians remove the distortive impact of outliers on
the peer group multiple. When using larger peer groups, the median is
preferable over the mean because it limits distortions from outliers, which
increases as more companies are included. The mean might be preferable
for smaller peer groups with fewer than five comparable companies and no
outliers.
What is an illiquidity discount?
Give this one a try later!
The illiquidity discount used when valuing private companies is related to
being unable to exit an investment quickly. Most investors will pay a
premium for an otherwise similar asset if there's the optionality to sell their
investment in the market at their discretion. Therefore, a discount should be
applied when performing trading comps since shares in a public company
include a premium for being sold in the public markets with ease (called
the "liquidity premium").
Conceptually, what does the discount rate represent?
Give this one a try later!
The discount rate represents the expected return on an investment based
on its risk profile (meaning, the discount rate is a function of the riskiness of
the cash flows). Put another way, the discount rate is the minimum return
threshold of an investment based on comparable investments with similar
, risks. A higher discount rate makes a company's cash flows less valuable, as
it implies the investment carries a greater amount of risk, and therefore
should be expected to yield a higher return (and vice versa).
How are seller notes in M&A modeled?
Give this one a try later!
Seller notes (or seller financing) are modeled the same way as any other
debt instrument. Therefore, it'll show up in the Sources & Uses schedule as a
source of funds since these notes helped finance the deal. In most cases,
seller notes will come in the form of subordinated debt with a high, fixed
interest rate given its position in the capital structure. But often, the option
for PIK interest or conversion feature will be attached.
Can companies amortize goodwill?
Give this one a try later!
Under GAAP, public companies are prohibited from amortizing goodwill as
it's assumed to have an indefinite life, similar to land. Instead, goodwill must
be tested annually for impairment.
However, privately held companies may elect to amortize goodwill and
under some circumstances, goodwill can be amortized over 15 years for tax
reporting purposes.
Why is the effective and marginal tax rate often different?
Give this one a try later!
, Effective and marginal tax rates differ because the effective tax rate
calculation uses pre-tax income from the accrual-based income statement.
Since there's a difference between the taxable income on the income
statement and taxable income shown on the tax filing, the tax rates will
nearly always be different. Thus, the "Tax Provision" line item on the income
statement rarely matches the actual cash taxes paid to the IRS.
Where do financial sponsors typically get their capital?
Give this one a try later!
Financial sponsors raise capital to fund their investments from insurance
companies, pension funds, sovereign wealth funds, endowments, high net
worth individuals, and financial institutions.
What is the relationship between depreciation and the salvage value assumption?
Give this one a try later!
Most companies will use a salvage value assumption in which the remaining
value of the asset is zero by the end of the useful life. The difference
between the cost of the asset and residual value is known as the total
depreciable amount. If the salvage value is assumed to be zero, the
depreciation expense each year will be higher and the tax benefits from
depreciation will be fully maximized.
Straight Line Annual Depreciation = (Asset Historical Cost − Salvage Value) /
Useful Life Assumption
If a company has continuously incurred goodwill impairment charges, what do you
take away from seeing this in their financials?
