2012 mock pm q32

anyone know why accts payable is included as debt?

Because from EV you have to subtract all liabilities

remember, for total invested capital we only cou t long term debt ( not current liab which is not interest bearing). I got this confused when doing the mock too

Where in the book does it say to subtract all liabilities in the calculation of EV? Page 427 of vol 4 says it includes “the market value of debt.” On page 547 for the calculation of the CCM method, it again just says “market value of debt” without specifiying the components.

This is one area I’m majorly confused on – when to and when not to include all liabilities in the calculation of “total debt”. Volume 2 (FRA) on page 4 specifically defines total debt as:

=the total of interest-bearing short-term and long-term debt, excluding liabilities such as accrued expenses and accounts payable

But then in the Fixed Income questions (p 145 of volume 5 explicitly defines total debt as “current liabilities + long-term debt”) and other questions such as this one, “total debt” includes accounts payable.

At the very least this question gives you a hint that total debt should include accounts payable, because it gives you the debt to total capital ratio, and if you take total liabilities divided by assets, you get that ratio. And there isn’t even an answer available if you happen to include in total debt just notes payable and long-term bonds.

well as i understand it:

equity value = EV - net debt


equity value = value of invested capital - total debt

I just didn’t think the ‘total debt’ figure should include accounts payable – and can’t find it in the text either

although geezie is right, the hint here is the debt/capital ratio that they give which implies that invested capital includes accounts payable (which i didnt think ws usually the case) … anyways… on to the next one