This tutorial series is all about equity investments (AKA minority stakes AKA associate companies) -- cases where one company owns between 20% and 50% of another company. <br />By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" <br />To reflect this, we create a line item called "Equity Investments" (AKA Associate Companies <br />AKA Investments in Equity Interests) on the Assets side of the Balance Sheet. <br /> <br />In Parts 1 and 2 of this series, we walked you through what happens when the parent company -- Liberty Media in this case -- buys a 27% stake in another company (Charter Communications) and then reflects Net Income and Dividends from that company. <br /> <br />In Part 3, you'll see what happens when Liberty Media increases its ownership stake in Charter and pays for it with a combination of cash and debt -- and how that impacts the 3 financial statements. <br /> <br />What Do You Do to Reflect This? <br /> <br />Transaction Adjustments on Balance Sheet - If we've BOUGHT an additional stake, we must reflect the cash, debt, and stock used AND the increase in the Equity Investments line item. <br /> <br />But watch out for limitations! Here, we can't acquire more than 35% for a few years, and can't ever acquire more than 40%. <br /> <br />And watch out for the cash the company has available, plus the amount of debt they can really take on. <br /> <br />Income Statement and Cash Flow Statement -- Change the % ownership for Net Income and Dividends in all future periods... and that's about it! <br /> <br />May need to adjust ending cash balance on the CFS as well. <br /> <br />Arguably, you should change the interest expense to reflect additional debt, but we're just ignoring that here in the interest of simplicity. <br /> <br />Process Outline -- Increasing Your Minority Stake in Another Company <br /> <br />Step 1: Make the assumptions at the top -- purchase price, new ownership percentage, cash and debt used. <br /> <br />Step 2: Set up the financial statements to support "Transaction Adjustments" area -- already done here. <br /> <br />Step 3: On the Balance Sheet, copy and paste Transaction Adjustments from initial stake acquisition... <br /> <br />Step 4: But change them around to reflect the numbers and assumptions for THIS deal. <br /> <br />Step 5: Re-link the post-transaction columns on the Balance Sheet... and be careful! <br /> <br />Step 6: Fix the ending cash balance at the bottom of the CFS for this first post-transaction year. <br /> <br />Step 7: Return to the Income Statement and Cash Flow Statement and change the ownership percentages there. <br /> <br />Step 8: Does everything work? Balance Sheet still balanced? Correct percentages? Cash balances? Equity Investments? <br /> <br />What Next? <br /> <br />Next up: in Part 4, we'll walk through what happens when Liberty Media sells its minority stake in Charter to someone else, including what happens when there's a gain or loss on the sale. <br /> <br />http://www.mergersandinquisitions.com/
