RX Technicals Questions and Verified Answers | Passed | A+

(Gugg) Let's say a company has $250 in EV, $300 in debt, no cash. What's the equity value? What do you think the debt of the company would trade at? : The book value equity of the company would be ($50), but the market value, what we're focused on would be hovering around zero as there is still option value to the company - maybe a miracle happens. The debt would likely trade at 83.3 cents on the dollar, but that's assuming it's one debt instrument, there's obviously priority to recover and a waterfall to run through. (Gugg) How would you screen for potential companies that may need to restructure? : Practically speaking, 1. Find an industry to target 2. Look for companies with large amounts of funded debt 3. Look at their credit ratings so low investment grade, speculative etc. 4. Look at leverage so debt to EBITDA and then interest coverage. 2 5. If any of them stick out, see how their debt is trading, and maybe look at the lowest market value instrument and try to understand why it is trading that way. (Gugg) Let's say a company sells an asset for $300 that has a book value of $100. Walk me through the 3 statements. : Starting on the income statement, you record a "gain on sale of asset" of $200. If taxed at a 40% tax rate, you are left with $120 of net income. On the cash flow statement you subtract $200 since that was a non-cash gain, but you have $300 of actual cash proceeds leaving your net cash up $220. On the balance sheet, your asset is marked down $100 to zero. Cash is up $220, and net income flows into retaining earnings so shareholder's equity is up $120 and the balance sheet balances. (Gugg) Let's say we are selling a product for $200 and the cost is $100. What happens when a sale occurs in cash? : On our income statement, our revenue is $200, with COGS being $100 and a tax rate of 40%, our net income is $60.