SESSION 1

Stentys
- Company Stentys created in 2006
- Consider February 12th 2016
- Listed in 2010. No revenue, no profit, but still listed in 2010. Listed on the basis of 180M.
- Specialized in Coronary Stents. They test their product on people on terminal phase.
- 33 employees in 11 countries
- Big demand, but big competition already
- Issuing 13M in capital increase (fundraising). ‘Stentys launches a 12.6 million rights issue’.
- Accounts
- Not client revenue
- Financial debt is not real, it is short term facilities. They are not borrowing money
long-term.
- Shareholding structure 100% equity (no debt) (makes sense, no revenue, not able to pay
debt)

Case
BUSINESS MODEL
1. Do Stentys match Start-up criteria?
Understand business model → normal company vs startup (tools are different).
3 criteria to identify a Start-Up
- Binary business model (don’t know if it works or not). Ex: mixing chinese and italian food
(not startup, mixing concept), but holiday on the moon (yes, don’t know if it will work).
- Loss making, negative free cash flow
- Only equity financed (if we call a bank saying we are looking for financing, the banker will
have an attack, never mention startup). If you don’t have revenue you can’t pay for debt.
* Startups can be 20 years old, time is not a factor
When the bank agrees to meet you, you are not a startup. Then, is Stentys a startup?
- Negative operating cash flow
- Only equity, no real debt
- Binary business model

FINANCIAL ANALYSIS AND VALUATION

2. Which element is most important in financial analysis?
Cash burn → they are generating nothing.
Without financing, when will the company die?
Focus on cash burn
Step 1: look at cash in BS, photograph at a given moment in time
Step 2: go to CFS, see how much they burn
 Step 3: make the arithmetic

December 2015?
- Considering EBIT trends, but in EBIT we are considering non-cash expenses, so using it would
be wrong.
- Considering cash, bottom line, see cash burn

In BS → 13 million cash, and 1 financial debt → End June 2015: 12 million net cash
In CFS → burn rate: -8 in the first half. Assuming 8 in the second half as well. This divided by 6 is
equivalent to -1,3 per month.
End december 2015: 12 - 8 in second half: 4m cash available
End February 2016: -2,6 accumulated loss → 4m - 2,6 = 1,4 cash end February 16
1 month survival capacity!
Potentially Bankrupt in March 2016?

3. By which simple method would you (roughly) value the company?

3 basic methods:
- Value of net assets (assets - debt)
- Multiples
- DCF → Discounted cash flow doesn’t exist → Discounted operating free cash flow (We start
with EBITDA - taxes - capex - )
Growth to infinity is never above growth of developed economies (2-3%).
These methods with startups don’t work. BMRD company?
In this company, 87, total capital increase since July 20’6 creation through 14 right issues.
→ Innovative startup traditionally valued at what has been invested by shareholders since
beginning.

Economic Balance Sheet Analysis

Fixed Assets Shareholders Equity

- Tangible Assets 800 - Equity 1.000
- Intangible Assets 300

Working Capital Requirements Net Financial Debt

- Current Assets 1.200 - Long Term Fin Debt 400
- (Current Liability) (800) - Short Term Fin Debt 300
- (Cash & cash equivalent)(200)

Capital Employed 1.500 Invested Capital 1.500

Explanation of BS: people put money in, and find additional financing from the bank. Invest it to
keep the business in the long term and to run the business on the day to day.
*Tangible assets are long term investments we can touch, whilst intangibles are long term
investments we cannot touch. We also have financial assets, which are stakes in other companies.
*WCR. Main three items: inventory + clients (AR) - suppliers (AP). Tells us how much we need to run
the business.
Examples of businesses with:
- Positive WCR
- Negative WCR: supermarket (we will pay in cash and they will pay suppliers later),
airline company, school (pay for lessons in advance and teacher paid later).

If a company has a negative WCR, if the revenue is going down, is the cash going up or down?
down. Negative WCR means clients are paying before we pay suppliers. If we have less clients, we
have less cash. If revenue is falling it means less clients.
A Negative Working Capital Cycle is when a business collects money at a faster rate than the time
required to pay its bills. This means the business can free up cash quickly for use elsewhere that
would otherwise be stuck in the cycle.
What would we prefer? negative, however, it is not always possible.

4. Calculate the Economic Balance Sheet of Stenys

2012

Fixed Assets Shareholders Equity

- Fixed Assets 3 - Equity 46

WCR Net Financial Debt

- Current Assets 3 - Financial Debts 1
- (Current Liabilities) (4) - (Cash & cash equivalent) (45)

Capital Employed 2 Invested Capital 2

2013

Fixed Assets Shareholders Equity

- Fixed Assets 3 - Equity 35

WCR Net Financial Debt

- Current Assets 5 - Financial Debts 1
- (Current Liabilities) (4) - (Cash & cash equivalent) (32)

Capital Employed 4 Invested Capital 4

*Negative net financial debt means more cash than debt

RIGHT ISSUE MECHANISMS

5. What are the key mechanisms of a right issue?
Capital Increase
 - It is always done below the last price. If it is 50 before, and they are issuing at 60, nobody is
going to want them, if you are issuing at 40, everyone wants them But we need to make sure
existing shareholders are not disadvantaged.

TERP shows the weighted average price. It is the new price. It has gone down. There is a right to
offset what has been lost. Right is there to protect existing shareholders. After checking, we see that
whether existing shareholders subscribe or not, it doesn’t affect their value. Therefore, if capital
increase is done correctly, existing shareholders lose nothing.

A theoretical ex-rights price (TERP) is the market price that a stock will theoretically have following a
new rights issue. Companies may use a new rights issuance to offer more shares to shareholders,
usually at a discounted price. Stock prices are affected by new rights issuance because it increases
the number of shares outstanding.
A rights issue is an invitation to existing shareholders to purchase additional new shares in the
company. With the rights, the shareholder can purchase new shares at a discount to the market price
on a stated future date. The rights issued to a shareholder have value, thus compensating current
shareholders for the future dilution of their existing shares' value. Dilution occurs because a rights
offering spreads a company’s net profit over a larger number of shares. Thus, the company’s
earnings per share, or EPS, decreases as the allocated earnings result in share dilution.

TERP = (P x N + p x n) / (N + n)
Right = (TERP - Issuance price) * parity → what it means is that your shares are worth less,
but the bank will allocate you rights
Check.1: TERP + Right Value = Share Price Value before issue announcement
Check.2: Subscribe: N x TERP + n x TERP - n x p = Not subscribe: N x TERP + N x Right

6. What is the value of theoretical ex right price and subscription right?

SESSION 2
Pirelli Case
Main information
- Italian company focused on the tyre market, one of the largest tyre makers
- Specifically focused on two markets:
- High value segment → works with premium and prestige car makers. Larger growth
potential, more than 10% by 2020.
- Standard segment → car and motorcycle tyres for a larger less exclusive client base
with a growth potential of 2.5% per year until 2020.
*In 2014 became the global leader of high value tyres so they have an aim for them
to represent more than half of the sales by 2020
- The company went private in 2005 following its acquisition by the Chinese group ChemChina
but wants to go public again to support their new strategy. They are planning to do so in the
4th quarter of 2017 through a secondary offering selling existing shares.
Financial Statement information, comparables and DCF
- Positive revenues and profit → however, less than comparables
- Estimated negative working capital in 2017
- More long-term financial debt than short-term
- Positive growth rate → higher than comparables
- 4 options of DCF with share price ranging from 4 euros to 11
*Brand is a trap to have a higher value, more margin.

FINANCIAL ANALYSIS
1. Conduct a financial analysis of PIRELLI. In particular, you will ask yourself about the
working capital requirement (WCR) which appears on the balance sheet as of December
 31 of each year, if it is representative of the annual average WCR. What impact can you
draw out on PIRELLI's average level of debt throughout the year?
Every 4th quarter WCR drop → not representative of WCR throughout the year. Seasonality. Mainly
driven by trade payables (you can pay later). Suppliers are partners, if we don’t behave well with
them, bad sign. Therefore, it is not such a good sign that suppliers are paid in many days.

What do we think about the company?

Basic financial analysis has 3 elements
- PL: Sales, EBITDA, Net Profit → conclude
- BS: Financial Structure at BS and make Net Financial debt on Equity, and Net Financial Debt
on EBITDA → conclude
- CFS: analyze only Free Cash Flow (should be able to refinance NFD from 3 to 5 years)
- WCR is not as relevant
In this case…
- PL: Revenue strongly up, mainly driven by the high value segment. EBITDA going up,
investing in high value. Net Profit going up as well.
- BS:
- NFD / EQUITY: Now Equity higher than NFD
- NFD / EBITDA: Maximum is 3.5. At this point, the probability of default will be 5 -
12%. Above, 5.5 - 6, probability of default is about 30-40%. After, it goes up very
sharply. The credit rating will be double B.
- CFS: Solid Cash flow

How to build up an efficient straight to the point dashboard? DUPONT → split ROE on 3 ratios or
indicators.
- Net margin
- Asset turnover
- Leverage effect
In this case, ROE is relatively low. The average in developed economies is 8-10%, and they are below.
- Margin is okay
- Asset tells us how much we produce with one asset. In this case, it is below one. Capital-
intensive businesses are below one, food companies will be between 1-2, and retail will be
between 2 and 6, and in consulting it should be more than 6 (you just need a brain). But in
this case, it seems to be improving.
- Leverage above 2 means more debt than equity. Debt + Equity / Equity

Balance Sheet Window Dressing → Regarding WCR

Every year in the last quarter they stop paying their suppliers. Is it good? no. But it is such a good
company that suppliers don’t care. It reduces the WCR, which means that it is roughly 600m below
the average of the year. Out of this, we can conclude that it is easy to manipulate.
Why are they doing this? They want to have a better balance sheet for investors. If they are not
paying they will have more money which could be used to invest. If they reduce WCR they need less
financial debt, then if you compute NFD / EBITDA → better financial structure.
COMPARABLE EV/EBIT MULTIPLES ANALYSIS
2. Analyze the Compound Annual Growth Rates (CAGR) of the companies comparable to
PIRELLI mentioned in appendix 2 over the 2016-2020 period.
Calculate, for PIRELLI's comparable, the CAGR of EBIT over the period 2016- 2020 and the
EV/EBIT 2017 multiple.

Which traditional valuation methods work?

Corporate Valuation
- Traditional methods: asset, peers multiples (p/e, EVs, P/B), DOFCF.
- Brand Valuation: relief from royalty, cost approach, excess earning, goodwill impairments.
The brand is the extra price you pay.
- Real options: scenario based, probability-based. Develop different scenarios of what we
want to do with the brand. For example, can we use the HEC logo in Singapore?
- Non-conventional valuation methods: start-up, pre-money, distressed, equity kicker

When using multiples, we first have to find comparables. For example, for Apple, we would instantly
go to Samsung, Huawei… but it is a luxury product, so we sometimes have to go beyond competitors.
LVMH, for example, has similar business models and margins. When using EV multiples, look at the
growth rate as well. For example, when looking for BMW, Renault has a different strategy but similar
growth rates.
In this case, we are looking for Market Cap, the market value of Equity.

Checking the multiples, we see that considering CAGR, Continental is the closest, but still, the growth
rate is higher in Pirelli.

PIRELLI EV/EBIT VALUATION RANGE

3. Compute for PIRELLI the EBIT CAGR over the 2016-2020 period.
Deduce a valuation range for PIRELLI’s stock knowing that there are 1bn of shares.
EV / EBIT → regla de tres utilizando lo obtenido para Continental, como hemos dicho es la
comparable que vamos a utilizar.
Is it better to use EV / EBITDA? It is more difficult to manipulate EBITDA, so use EBITDA, but in this
case, given that Pirelli is capital intensive (sales/total assets is low) we use EBIT because they have to
invest a lot.

What is the share price?

EV = Market value of Equity + Average NFD
NFD has been cooked, we have 3.5 million of debt, but need to add the 600k that has been cooked.
EV → EV/EBIT 12 - 13x → 933 million x 12 = 11.196
EqV → EV - NFD → 11.196 - 4.131 = 7.100
NFD in 2017 is 3.531 + 600 = 4.131
1 billion shares → 1,000 → 7.100 / 1.000 = 7.1 per share using 12x multiple

Furniture problem example

Using comparables
- P/E: 12.7x →P/E = Share price / EPS → Share price = 12.7 x 6,2 = 78.74
(7,8 million shares → EqV = 614.17)
- EV/EBITDA: 9.4x → EV = 9.4 x 52 = 488.8 → EqV = EV - NFD = 488.8 - 260 → Share price =
228.8 / 7.8 = 29.3
*The two companies are comparable but they don’t have the same level of debt, so we
should use the second method.
Could we use EV / Net Profit? NO. In EV we deduct debt and NP considers debt (after the
impact on debt), so it is being considered twice. Debt has to be considered either on the
numerator or denominator.

Valuation problem example

Company RCKY
- EPS: 2.30
- EBITDA: 30.7
- Shares outstanding: 5.4
- Net Debt: 125
Company Deckers
- No debt
- P/E: 13.3
- EV / EBITDA: 7.4
What is the value of RCKY shares?
- P/E: 13.3 → Share price = 13.3 x 2.30 = 30.59
- EV / EBITDA: 7.4 → 7.4 x 30.7 = 227.18 → EqV = EV - NFD = 227.18 -125 → Share price =
102.18 / 5.4 = 18.9
Since they have different NFD, EV / EBITDA is better.
SESSION 3
Guest speaker - STALLERGENES GREER

SESSION 4
Guest speaker - PAYPAL
Snapshot
- Founded by Elon Musk and born from merger in 2000 and the software company Confinity
- Acquired eBay in 2002 for 15 billion dollars before being spun off as a separate entity in 2015
- Headquartered in SJ, California
- It is a technology platform and global digital payments company. The revolutionized the
game, it serves as an electronic alternative to paper-based payment methods like money
orders and checks
- It provides mobile, in-app, and online payment solutions for merchants and consumers

Key aspects of paypal

- Digital Wallet: enables consumers to send and receive payments, withdraw funds from their
bank accounts, and hold balances in their PayPal accounts in various currencies.
- Merchant services: provides service to merchants to help them process payments, including
credit card processing.
- Cross-border trade: enables global commerce by making payments possible across different
locations
- Credit: consumer credit products, such as paypal credit, a private-label credit card program
- Cryptocurrency: as of 2021 allows users to buy, sell and hold certain cryptos
- Peer-to-peer payments: expanded into Venmo for peer-to-peer payments and traditional
payment processing.

Key aspects of PayPal business

- Brand recognition: powerful brand in online payments and a vital payment method for
online merchants, operating as a two-sided network
- Prominent brands include PayPal Credit, Xoom, Hyperwallet, Braintree, Honey, Venmo…
- Fees: charge 3.49% of the transaction plus 49c in fixed costs higher than its peers.
- The unbranded business segment, including PayPal Complete Payments, is its primary
growth focus.
- The core yellow button checkout option is mature and not growing as fast as
Visa/Mastercard.
- Global presence: PayPal operates in 200 countries worldwide and earns revenue from
facilitating cross-border payment transfers, that others are unable to do. Clients can receive
money in over 150 currencies, withdraw funds in 56 currencies, and hold balances in PayPal
accounts in 25 currencies. PayPal's operations are primarily focused on North America,
Europe, and Asia-Pacific.
- Partnerships: Paypal has entered into partnerships with a multitude of other companies
across the payments and ecommerce space, including banks, cyber security firms, social
 media platform and other card network companies (Examples; Visa, Mastercard, Airbnb,
Uber, Apple, MangpPay.)
- External growth: acquisitions of Venmo, GoPay…
SHOULD WE BUY THE STOCK?

SESSION 5
Guest speaker - CRYPTOCURRENCIES
- US Dollar global currency, the world’s currency → used to obtain GOLD. But gold is different
from fiat currency. To produce dollars you just have to ‘press a button’, to produce gold you
have to mine.
For example, in 1971, the US issued more dollars than they actually hold gold to back it.
Therefore, by 1971, the US owned 11b worth of gold, but owed 50b to the world. Nixon
decided to default on the world.
Gold was the definition of stability before, from 1971 on, money is not tied to the physical
world anymore.
Can countries go now on the perpetual deficit?
It is not gold that goes up in price, but money that goes down in value.
Then why do we trust the dollar? Kissinger and Nixon tried to find something else to back
the dollar. In 1974 agreed with Saudi Arabia to back the dollar with OIL. Oil agreed to price
their oil with dollars.
20th century is a game-changer, digital age has transformed ownership into debt

- Bitcoin takes away the intermediator. Therefore, it is able to prove that if I send you
something, I don’t have it anymore.

SESSION 6
Guest speaker - StartUps

SESSION 7
Néo Case
NPV & IRR
How can we legally boost IRR without changing assumptions? Without discounting the full year,
making a more realistic discount factor. If I want to minimize NPV and IRR, I discount the full year.
Therefore, as cash flow increases throughout the year, we can just discount half a year.

Financial analysis
- Company operates at full capacity throughout the whole year → volumes are not realistic
 - Commodity prices and exchange rates → High and volatile prices → risk is not reflected in
the model

Key Financial ratios

- ROCE increases
- ROE decreases
Why? they have less debt, less leverage means a lower return on equity → debt pushes up ROE
Leverage effect
If a company has no FD, ROE = ROCE
If a company has FD, ROE = ROCE + FD/E x (ROCE - i x (1-t))

SESSION 8
LBO
Acquire a target company creating a Holding, often called SPU or SPV (special purpose vehicle or
unit), with which you make the acquisition. The holding will be funded with debt mostly. Debt
provided by lenders. Equity investment provided by investor sponsors (usually PEs).

The main objective of LBO financial arrangements is to seek to increase the financial profitability of
the shareholders by resorting to borrowing and, more broadly, to finance the acquisition by the
acquired company.
The leverage effect will be higher if:
- The economic profitability after tax of the entity in question is important
- That the rate of borrowings made is relatively low in view of the economic profitability
- The weight of the debt is high compared to equity financing
- That the tax allows limiting the tax on the result of exploitation obtained while ensuring a
tax deductibility of the charges of interest. Leverage can be increased by fiscal leverage
What makes a good LBO candidate?
- Stable & high ROCE? & > Cost Debt after tax?
- Low Net Financial Debt? & High Free Cash Flow?
- > 95% control from the acquisition holding?

10 steps to build an LBO model

1. Target’s ROCE > Holding’s Cost Debt after tax
2. Equity Value (DCF, Equity = EV – Net Financial Debt)
3. Financing: Equity, Senior, Junior, Mezzanine, CB, Hybrid
4. Debt principal and Interest payments
5. Target Dividend Payment with Target Free Cash Flow
6. Tax paid by the Holding
7. Free Cash Flow for the Holding
8. Sources & Use of funds for the Holding
9. Financial situation of the Holding (Debt reimbursed?)
10. Internal Rate of Return for Financial Sponsors

Question 6 case - Present the financing plan of the holding over the period end of 2017 to the end of
2022, considering the repaymentof the junior debt, and conclude on the relevance of the financial
package envisaged.

Debt: senior + junior

Senior debt paid by constant annuity
Junior debt paid at the end
Step 1: Find constant annuity

*Dividend can’t be paid higher than net profit

LBO 1 Valuation - Problem
Which steps to perform the LBO Internal Rate of Return?
- Step 1: Target company Initial Valuation
EBIT: 250m
The LBO has been done on the basis of an EBIT multiple of 8x → 250 x 8 = 2.000
EV = 2.000
- Step 2: Holding company Capital Structure
Equity: 30% → 0,3 * 2.000 = 600
Debt: 70% → 0,7 * 2.000 = 1.400
- Step 3: Target company exit Enterprise Value
EBIT: 320m
At the LBO exit, the target company was valued at 8,5x EBIT → 320 x 8,5 = 2.720
- Step 4: Target company exit Equity valuation
Debt = 520 + 400 = 920
Equity = EV - Debt
Equity = 1.800
- Step 5: Capital gains for Equity Investors
Equity Exit valuation (m) → 1.800
Initial Equity Invesment, 30% of LBO (m) → 600
Capital Gains for Equity investors → 1.200
- Step 6: Equity Investors’ Internal Rste of Return (IRR)
Year 1 Year 2 Year 3 Year 4
-600 0 0 +1.800
NPV = -600 + 1.800/(1 + Discount Rate)^4 → 600 = (1 + DR)^4 → Trial and error → IRR = 31.6%

LEVERAGE EFFECT FORMUA

If a company has no debt ROE = ROCE
If a company adds debt ROE = ROCE + NFD / E (ROCE - CD (1-t)
ROCE is low, don’t do LBO, because CD will be higher. ROCE - CD is more important than NFD / E.

Mezzanine Debt
A Junior debt is paid back at the end. The coupon interest is therefore higher (senior debt 5%, junior
debt will cost 10%, because risk is higher). Trick to have junior debt with low coupon? gift to the
lender → at the end you give him a bit of equity → normally this equity will be 5% of your equity.
Mezzanine debt is junior debt to which you add an equity kicker at the end (under the form of
warrant).

LBO 2 Mezzanine - Problem

- For a 5 years LBO, a company, FNA, is valued at € 2,2bn (€ 2 239,2 m)
- The deal financial structure is as follow (€ 2 239m):
- Senior Debt → Senior 5 years Debt: €521,2m
- Mezzanine → Junior Subord. 5 years Debt: € 254m & Equity Kicker
 - Bank Loan → Subordinated 5 years Debt: € 968m
- [Link] Shareholders' Equity: €496m

- On top of the 5y Senior Debt (€ 521m), Investors finance a 5 Years Junior subord. debt for €
254m. Accordingly, Financial Sponsors will bring "only" € 496m.
- To have 14% total return, Mezzanine Debt Investors ask for:
- A 7,67% cash yield on the Bond and an Equity stake at the exit (Equity kicker) → this
is the yearly bond payment
- Mezzanine Investors will acquire short term bonds and shares for € 254m. → this is
the bond redemption

1) Value of the Equity Kicker (K), necessary to reach an IRR of 14% ?

2) At the time of the exit, FNA will have the following characteristics:
- EBITDA:€498,6m
Fin. Debt: €1 247,2m*
Exit: 6,5x EBITDA.
What is the Equity kicker as a percentage of Equity invested in the LBO?
3) For Financial Sponsors: Stake? Equity multiple they use? ROE?
4) What can you conclude?
*; Mezzonine: € 254m, Bank Loan: € 968m, additional ST debt: € 25,2)

Solution

SESSION 9
PMI - Gilles Ourvoie
PMI is very different from one case to another. Context dependency is why there is such a high
failure rate.
- Understand how the strategy works in a company / main strategic objectives. Why do we
make a deal? to implement the strategy. Therefore, the strategy needs to be understood
and make sure it is aligned/agreed between companies. Sometimes a deal is made without
taking a look at strategy, and bankers conduct them even if they have no rationale because
of the fees they receive.
Main strategic objectives include revenues, costs (who’s going to be fired), investments,
control over existing assets (relations with specific customers, countries, suppliers → often
used to kill competition), human capital (can be ultimately transformed into financial, adds
value), other intangibles (r&d, licenses…)
- Pace of integration. Do we have specific constraints in terms of delivery? are they feasible?
important not only for external stakeholders but also for employees. It is one of the most
important parameters of tactics. Having time is important in tactics for success.
For example, having some parts of the business lose money where a quick turnaround is
required is a constraint.
 - Disruption / transformational impact. Is it natural to transform a company? no, people
resist, and the buyers will usually try to describe their “rules of the game” as they acquire.
Anticipating resistance is important.
- Type of organization focus and leverage.
- Type of transaction.
- Public/private
- Hostile/friendly
- Carve-out/not
- New ownership/minority shareholding

High complexity level should also be considered. There are technical challenges + human network
effects (rumors…)—multiple integration objectives, are partly conflicting. We have to understand
what is urgent and important, so there is tactical management.
The result of these elements = strong probability to fail.

How do we manage it?

1. Prioritizing urgencies
2. Clarifying strategy intent
3. Securing consistency
4. Anticipating resistance
5. Strengthening execution (having a strategy in mind, implement)
6. Increasing methods
7. Optimizing path and pace
8. Preserving day-to-day
9. Building cooperation
10. Growing M&A and PMI value - communicate on benefits

*PMI - post-merger integration, but in reality, it should not be post, integration should be analyzed
beforehand.

SESSION 10
Voltalia Case
Project finance company - high leverage
Financial analysis
- Big EBITDA
- Huge debt
- Negative Free Cash flow → they can’t repay debt, therefore, risk is very high
- Leverage effect analysis → see ROCE and debt relationship.
- ROE = 1,6%
- ROCE = 3,9%
ROE < ROCE → Leverage effect is acting negatively, cost of debt is higher than CE.

Share price analysis

 - Dividend yield (%) - Price Earning Ratio (x)
The normal life cycle is: problem stock → growth stock → blue chips → yield or value stock
(at some point, they are so big that generating growth is not so obvious, and they don't
know what to do with the money).
In the case of Voltalia → growth stock

LBO
Not good candidate
- Not generating positive Free Cash Flow (and no visibility of when it will turn positive)
- High level of financial debt

WACC
Example

WACC IS AT MARKET VALUE, MARKET VALUE OF EQUITY

Ke = rf + be*rp → Ke = 0,3 + 1,3(8,3) = 11,09%
Kd = rf + spread → Kd = interest expense / total financial debt = 4.786/116.189 = 4,11%
Market value of equity = nº shares x share price = 10,20 x 9,62 = 98,124
Net financial debt = 116,189
Tax rate = 34%
WACC = (0,1109 * 98,124 / 214,313) + (0,0411 * (1 - 0,34) * 116,189 / 214,313) = 6,5%

How would we compute the WACC of a company with net cash? See Apple example
Should we always use book value of debt, or market value of debt?
4 ways to compute the cost of equity
1. If computing WACC, we use CAPM
Assessing Beta (share price volatility indicator), 5 criteria
- Fixed operating cost
- Fixed financial cost
- Business volatility
- Growth
- Quality of the business model or management
Rank from 0.5 to 2 (good to bad) → have the Beta
2. When working on a capital increase or share buyback. The expected return will be the
earning yield, which is 1/PE (share price/eps)
3. When structuring a convertible bond or hybrid financing, we assess the expected return on
equity in a few years, applying the Grdon-Shapiro model (expected return k = dividend yield
+ earning growth rate)
4. In asset management, we will look at total shareholder return, which is dividend yield +
capital returns
3 theories of Modigliani-Miller regarding WACC:
- The WACC depends on the risk of the CE
- The WACC is independent from the capital structure → if we use more debt it reduces
WACC, however it is compensated with the increase in risk → professor says in real life the
tax shield effect should not be considered.
- Investors are not sensitive to distribution

Capital Increase
The higher the share price, the lower the number of shares you are creating → LOWER DILUTION
FOR EXISTING SHAREHOLDERS.
A right is an option.

Apple case
*If a company pays no dividend, its share price = ROE

Financial analysis
P&L
- Increasing sales
- Increasing EBITDA
- Increasing EPS
Balance Sheet
- Negative net financial debt (NFD = FD - cash → meaning there is more cash than debt),
which keeps decreasing
- The size of their balance sheet is 0 → CE and Cap invested is negative
Cash Flow
- Increasing positive cash flow
- Capital increase in 2019,2010. Why? just stock option exercise (share price exercise).
WCR
- WCR = stock + acc. receivables - acc. payables
- Negative and keeps decreasing → money by the company is received before it is paid out to
suppliers

In 2012, equity of 100M and 40M EBITDA → Bad performance relative to available cash → due to
FALLING INTEREST RATES. It is not a good or bad performance, it just reflects the money market.

WACC
Net Financial Debt: -77.573
Tax: 25%
Eq. Beta: 1,1
Risk free: 3,7
Risk premium: 6
Number of shares: 938
Share price: 350
Ke = rf + be*rp = 3,7 + 1,1* 6 = 10,3%
Equity = 938 x 350 = 328.00
NFD + E = -77.573 + 328.00 = 250.727
WACC = 0,103 * 328.00 / 250.727 = 13,36% → WRONG WAY

Example:
E = 140 → 140% x Ke
NFD = -40 → -40% x money market return x (1-t)
Total 100

In Apple…
Ke is correct → 10.3%
Equity = 328 / 250,5 = 131% of CS
NFD = 100% - 131% = -31% of CS
Cost of capital = 131% x 10,3% - 31% x 0,4333% x (1-0,25) = 13,38%
Money Market Return: 0,4333%
Cost of equity: 10,3% < Cost of Capital: 13,38%