C'est vraiment intéressant ce truc, a propos de l'économe au canada, très bien fait et vraiment ien pensé

1. Recruitment Ready
Technicals - Basics

2. 2
Outline
1. Corporate Structure
2. Valuation
3. Accounting

3. Corporate Structure

4. 4
Corporate Structure
• Secured Debt
• Underfunded Pension
• Operating Leases
• Unsecured Debt
• Convertible Debt
• Preferred Shares
• Equity
Seniority

5. 5
Weighted Average Cost of Capital
• Several classes of debt, should a single cost of debt be applied for all instruments?
• Which tax rate to use? Is it fair to use the implied tax rate from the I/S?
• How can you calculate cost of equity?

6. 6
Optimal Capital Structure
• The advantage of debt is that it gives tax shields to the company through the interest paid
• It would NOT be optimal for the firm to add on 100% debt as bankruptcy costs eventually
become more important than the benefits derived from tax shields

7. 7
Enterprise Value
Enterprise Value = Market Capitalization
+ Debt
+ Minority Interest
+ Preferred Equity
- Cash
+ Underfunded Pension
+ Capital and Operating Leases
+ Contingent Liabilities
+ Long-term Provisions
+ Tax Liabilities
- Short-term Investments

8. 8
Capital Structure Questions
• Why do you subtract cash from EV? Is it always accurate?
• Should you use the book value or market value of each item when calculating EV?
• Why do we look at both Enterprise Value and Equity Value?
• What’s the difference between Equity Value and Shareholder’s Equity?
• Should cost of equity be higher for a $1B or $100B company?
• Same question for WACC?

9. Valuation

10. 10
DCF
• What is the purpose of a Discounted Cash Flow analysis?
– Obtain intrinsic value of company by forecasting free cash flows 5 to 10 years into the future,
discounting them and the terminal value to today
(USD in million, except share price) 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenue
Intermodal 4,029.00
$ 4,290.89
$ 4,580.52
$ 4,827.87
$ 5,083.74
$ 5,348.10
$ 5,620.85
$ 5,901.90
$
% growth 3.5% 6.5% 6.8% 5.4% 5.3% 5.2% 5.1% 5.0%
Coal 3,983.00
$ 4,158.33
$ 4,255.24
$ 4,311.86
$ 4,369.23
$ 4,427.37
$ 4,486.28
$ 4,545.98
$
% growth -0.2% 4.4% 2.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Industrial Products 3,703.00
$ 3,925.18
$ 4,170.50
$ 4,374.86
$ 4,584.85
$ 4,800.34
$ 5,021.16
$ 5,247.11
$
% growth 6.7% 6.0% 6.3% 4.9% 4.8% 4.7% 4.6% 4.5%
Agricultural 3,124.00
$ 3,402.35
$ 3,671.47
$ 3,888.46
$ 4,072.77
$ 4,212.47
$ 4,354.43
$ 4,472.87
$
% growth -6.7% 8.9% 7.9% 5.9% 4.7% 3.4% 3.4% 2.7%
Chemicals 3,480.00
$ 3,688.80
$ 3,919.35
$ 4,111.40
$ 4,308.75
$ 4,511.26
$ 4,718.77
$ 4,931.12
$
% growth 11.1% 6.0% 6.3% 4.9% 4.8% 4.7% 4.6% 4.5%
Automotive 1,999.00
$ 2,119.94
$ 2,239.72
$ 2,339.16
$ 2,422.90
$ 2,490.02
$ 2,426.52
$ 2,414.39
$
% growth 14.3% 6.1% 5.7% 4.4% 3.6% 2.8% -2.6% -0.5%
Other Revenue 1,265.00
$ 1,328.25
$ 1,397.98
$ 1,452.50
$ 1,507.70
$ 1,563.48
$ 1,619.77
$ 1,676.46
$
% growth 5.4% 5.0% 5.3% 3.9% 3.8% 3.7% 3.6% 3.5%
Total Revenue 21,583.00
$ 22,913.73
$ 24,234.79
$ 25,306.11
$ 26,349.95
$ 27,353.03
$ 28,247.78
$ 29,189.81
$
% growth 3.8% 6.2% 5.8% 4.4% 4.1% 3.8% 3.3% 3.3%
Operating Expenses
Salaries and Expenses 4,732.00
$ 5,018.11
$ 5,307.42
$ 5,542.04
$ 5,770.64
$ 5,990.31
$ 6,186.26
$ 6,392.57
$
% of revenue 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% 21.9%
Equipment and Rent 1,226.00
$ 1,260.26
$ 1,332.91
$ 1,391.84
$ 1,449.25
$ 1,504.42
$ 1,553.63
$ 1,605.44
$
% of revenue 5.7% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Fuel and Utilities 3,549.00
$ 3,757.85
$ 3,974.51
$ 4,150.20
$ 4,321.39
$ 4,485.90
$ 4,632.64
$ 4,787.13
$
% of revenue 16.4% 16.4% 16.4% 16.4% 16.4% 16.4% 16.4% 16.4%
Materials and Supplies -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$
% of revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other Expenses 3,106.00
$ 3,207.92
$ 3,392.87
$ 3,542.86
$ 3,688.99
$ 3,829.42
$ 3,954.69
$ 4,086.57
$
% of revenue 14.4% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Total Operating Expenses 12,613.00
$ 13,244.14
$ 14,007.71
$ 14,626.93
$ 15,230.27
$ 15,810.05
$ 16,327.22
$ 16,871.71
$
% of revenue 58.4% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8% 57.8%
Gross Profit 8,970.00
$ 9,669.59
$ 10,227.08
$ 10,679.18
$ 11,119.68
$ 11,542.98
$ 11,920.56
$ 12,318.10
$

11. 11
Free Cash Flow
After-Tax EBIT 4,462.76
$ 4,830.21
$ 5,093.67
$ 5,303.15
$ 5,489.22
$ 5,664.27
$ 5,832.04
$ 6,008.43
$
+ D&A 1,772.00
$ 1,878.93
$ 2,011.49
$ 2,125.71
$ 2,266.10
$ 2,407.07
$ 2,514.05
$ 2,627.08
$
% of revenue 8.2% 8.2% 8.3% 8.4% 8.6% 8.8% 8.9% 9.0%
- Capital Expenditures 3,497.00
$ 3,780.77
$ 3,877.57
$ 4,048.98
$ 4,215.99
$ 4,376.49
$ 4,519.65
$ 4,670.37
$
% of revenue 16.2% 16.5% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0%
Capex/D&A 197% 201% 193% 190% 186% 182% 180% 178%
- Changes in NWC (7.00)
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$
% of revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Free Cash Flow 2,744.76
$ 2,928.37
$ 3,227.59
$ 3,379.88
$ 3,539.33
$ 3,694.85
$ 3,826.44
$ 3,965.14
$ 162,897.07
$
Discount Year 0.5 1.5 2.5 3.5 4.5 5.5 6.5 6.5
Discount Factor 0.98x 0.93x 0.89x 0.85x 0.81x 0.77x 0.73x 0.73x
PV(Free Cash Flow) 2,859.45
$ 3,005.01
$ 3,000.41
$ 2,995.79
$ 2,981.94
$ 2,944.49
$ 2,909.28
$ 119,519.76
$
(USDin million, except share price) 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E TV
Enterprise Value 140,216.14
$
- Debt 56,310.66
$
+ Cash 1,366.00
$
Implied Equity Value 85,271.48
$
Diluted Shares Outsanding 463.1
Implied Price per Share 184.14
$
Implied EV/2014 EBIT 18.00x
Current Price 152.31
$
Implied Upside 20.9%
WACC Calculation
Tax Rate 38.0%
Cost of Debt 2.6%
Market Beta 1.11
Market Risk Premium 5.5%
Risk Free Rate 1.4%
Cost of Equity 7.5%
Debt 56,310.66
$
Market Cap 70,052.50
$
Debt to Value 44.6%
Equity to Value 55.4%
WACC 4.9%

12. Sensitivity Analyses
12
WACC / Capital Expenditures WACC / Operating Margins
WACC / Intermodal Growth WACC / Long-Term Growth
2.00% 2.25% 2.50% 2.75% 3.00%
4.5% $177.74 $206.33 $242.07 $288.01 $349.27
4.7% $155.53 $179.54 $209.00 $246.02 $293.93
4.9% $136.39 $156.80 $181.46 $211.86 $250.26
5.1% $119.73 $137.26 $158.17 $183.53 $214.92
5.3% $105.09 $120.30 $138.22 $159.65 $185.74
15.00% 15.50% 16.00% 16.50% 17.00%
4.5% $265.76 $253.91 $242.07 $230.22 $218.37
4.7% $230.28 $219.64 $209.00 $198.36 $187.72
4.9% $200.73 $191.10 $181.46 $171.83 $162.19
5.1% $175.74 $166.95 $158.17 $149.39 $140.60
5.3% $154.33 $146.28 $138.22 $130.16 $122.10
56.80% 57.30% 57.80% 58.30% 58.80%
4.5% $256.76 $249.41 $242.07 $234.72 $227.37
4.7% $222.19 $215.60 $209.00 $202.41 $195.81
4.9% $193.41 $187.43 $181.46 $175.49 $169.52
5.1% $169.06 $163.62 $158.17 $152.72 $147.28
5.3% $148.21 $143.21 $138.22 $133.22 $128.23
-2.00% -1.00% 0.00% 1.00% 2.00%
4.5% $233.43 $237.63 $242.07 $246.76 $251.72
4.7% $201.20 $204.99 $209.00 $213.24 $217.72
4.9% $174.35 $177.81 $181.46 $185.32 $189.40
5.1% $151.65 $154.82 $158.17 $161.71 $165.45
5.3% $132.20 $135.13 $138.22 $141.48 $144.93

13. 13
DCF
• Why do we use 5 to 10 years for DCF projections?
• What are the two ways to calculate Terminal Value?
– Terminal EV / EBITDA multiple (try to think where the company will be in 5-10 years)
– Long-term growth (be careful with aggressive figures)
• How do you know if your DCF is too dependent on future assumptions?
• What are some other weaknesses of doing DCF’s?
• Does it make sense to value an oil and gas or mining company with a DCF?
Best way to understand the mechanics of a DCF is to do one yourself!

14. 14
Comparables
Company Ticker LTM NTM LTM NTM ROIC (4)
EBITDA NI EBITDA NI FCFYield (5)
Div. Yield Beta (6)
Canadian National CNR 10.7 x 9.3 x 17.1 x 15.3 x 19.8% 48.2% 25.8% 5.8% 8.6% 1.5% 1.7% 0.72
Canadian Pacific CP 9.6 x 8.0 x 30.6 x 17.2 x 20.9% 51.4% 13.2% 29.6% 42.6% 0.9% 1.1% 0.82
CSX Corporation CSX 7.8 x 7.6 x 14.2 x 14.3 x 16.1% 38.8% 16.0% 1.2% 0.1% 1.7% 2.3% 1.22
Genesee & Wyoming GWR 13.7 x 10.1 x 35.5 x 19.3 x 10.4% 40.6% 11.5% 108.3% 77.6% -0.2% 0.0% 1.44
Kansas Southern KSU 15.5 x 13.2 x 40.8 x 23.8 x 14.3% 39.8% 13.2% 12.5% 23.0% -1.2% 0.8% 1.47
Norfolk Southern NSC 7.8 x 7.2 x 14.0 x 13.3 x 14.5% 38.1% 15.8% 0.1% 2.6% 0.5% 2.7% 0.49
Union Pacific UNP 8.6 x 7.8 x 12.8 x 11.6 x 22.1% 49.8% 28.9% 9.8% 15.1% 2.3% 2.0% 1.11
Mean 10.5 x 9.1 x 23.6 x 16.4 x 16.9% 43.8% 17.8% 23.9% 24.2% 0.8% 1.5% 1.04
Median 9.6 x 8.0 x 17.1 x 15.3 x 16.1% 40.6% 15.8% 9.8% 15.1% 0.9% 1.7% 1.11
Low 7.8 x 7.2 x 12.8 x 11.6 x 10.4% 38.1% 11.5% 0.1% 0.1% -1.2% 0.0% 0.49
High 15.5 x 13.2 x 40.8 x 23.8 x 22.1% 51.4% 28.9% 108.3% 77.6% 2.3% 2.7% 1.47
EV / EBITDAR
(1)
P / E
(2)
Margins Growth
(3)
• How to select comparables?
• Which multiples to use? LTM vs. NTM? What if a company has negative EBITDA?
• Why do we sometimes use the median as opposed to the mean?
• What are the cons of this valuation method?

15. 15
Precedent Transactions
• Precedent transactions can only be useful if the firm is considering being bought out
• Useful when firm is considering to sell a division
• Also relevant for undervalued firms
• Incorporates acquisition premium (usually 20-30%)

16. 16
Valuation
• Which of the three methods yield the highest/lowest valuations?
• How do you present valuation methodologies to a company?
• Why can’t you use an Equity Value / EBITDA multiple?
• Why do you actually use valuations?
• Why would someone want to use EV / EBIT multiples instead of EV / EBITDA?

17. Accounting

18. 18
Classic Machine Question
• On January 1st, company A buys a new machine for $100, financed with $50 in cash and
$50 in debt. It will be depreciated on a straight line basis for 10 years. It will also contribute
to revenue in the coming fiscal year by an additional $10 and COGS of $8. How will this
affect all three financial statements at year end on December 31st? Assume a tax rate of
40% and interest rate of 10%.
Revenue 10.00
$ Net Income (5.00)
$ Cash (45.00)
$
COGS (5.00)
$ Depreciation 10.00
$ PPE 100.00
$
Depreciation (10.00)
$ CFO 5.00
$ Depreciation (10.00)
$
EBIT (5.00)
$ Assets 45.00
$
Interest (5.00)
$ Debt 50.00
$
EBT (10.00)
$ CFF 50.00
$ Debt 50.00
$
Tax 5.00
$ R.E. (5.00)
$
Net Income (5.00)
$ Machine (100.00)
$ L + S.E. 45.00
$
CFI (100.00)
$
I/S C/S B/S

19. 19
Other Accounting Questions
• If depreciation is a non-cash expense, how does it affect the cash balance?
• What happens to the financial statements if inventory goes up by $10 and it is financed
with cash? Why is the income statement not affected by changes in inventory?
• What is working capital?
• When would a company collect cash from a customer and not record it as revenue?
• What is the difference between accounts receivable and deferred revenue?

20. Other Questions?

21. 21
Contact
• Mak Doric – Goldman Sachs (Investment Banking)
– mak.doric@mail.mcgill.ca