In this model, Fiat is the parent company of Ferrari and it's looking to realize value from Ferrari. We're going to be updating the income statement for four steps. Firstly, Fiat has IPO'd a minority stake in Ferrari. Secondly, Ferrari took out some debt and paid a dividend up to its parent Fiat. Thirdly, Fiat took that dividend and paid off some debt, restructured some of its debt. And fourthly, Ferrari is then spun off. We need to update the group financial statements and in particular in this model, the income statements. So here we have the Fiat group income statements, that includes Ferrari, but we've got Ferrari shown his standalone as well. I'll need to make some adjustments to find Fiat post the IPO. So let's set up the Fiat post IPO column. First I'm going to take fiat prior to the IPO and then I'm gonna add on some adjustments. I'm only gonna copy that down for three cells, but margin. I'll copy that across the interest expense. I'll use the same formula again, take the old interest and add on any adjustments. My pre-tax profit can be calculated. I take the operating profit minus the interest expense. And then my income tax expense. It's the same formula I take the original figure plus any adjustments, my affected tax rates copy across the formula's already been used and now I can calculate net income from continuing operations being pre-tax profit minus income tax. Now it's non-con controlling interest where we get to our first adjustments. This looks at step one. We've just done an IPO 10% of Ferrari's being owned by somebody else and some of their net income here is gonna be due to them. So this is the nont controlling interest in net income. So I'm gonna take Ferrari's net income and I'm gonna say that 10% of that which we've got right up the top of our model, 10% of that is due to the NCI Non controlling interests. Now to find the fiat post IPO figure in column F, we can use the same formula we've been using up till now. We can take the prior plus the adjustments, which then leads us onto net income to ordinary shareholders. It's the net income from continuing operations minus the NCI.

Fantastic. So we've got down to a new net income of 543.3. Let's see what that's done to a crucial dilution of EPS. It hasn't changed. We haven't done any shared buybacks or issuances or anything. My fully diluted EPS I can copy the same formula across net income divided by WASO. I take the EPS after the IPO divided by the EPS before the IPO minus one. Unfortunately we have dilution of 4.4%. So why has this happened? Well, at the moment, feat has received in some cash fantastic from the IPO, but it's just sat on that cash. It's not doing anything. So at the moment, the numbers are purely showing us that it's showing that we've given away a 14.1% business or 10% of a 14.1% margin business. And all we're earning in return is interesting income, which is so negligible we haven't even included in the model. So let's now carry on. Let's do steps two, three, and four and see what happens. Then let's start in column H. We'll do the balance sheet for Fiat, excluding Ferrari. We start by taking Fiat post IPO, and then we add on the adjustments column. I'm gonna copy that down and now we'll fill in some of the blanks. Copy across the margin. Pre-tax profit can be calculated. Operating profit minus interest expense. Effective tax rate can be copied across. Net income is pre-tax profit minus income tax.

Lastly, net income to ordinary shareholders is the net income from continuing operations minus NCI. So first of all, we need to de consolidate Ferrari's figures. So I scroll to the left, find Ferrari's figures and subtract, subtract and subtract. I'm do that a couple more times down and we'll make some adjustments to those figures in just a moment.

Now, I'm happy that we've gotten rid of all the Ferrari sales depreciation and operating profit, but when it comes to the interest expense, there Will Be some other effects. One of the steps was also to pay off some of fiat debt and we're gonna have saved interest there as well. So I need to subtract that out. If I go up to the top of the model, I can find that interest rates, it was 7% on 2,933 repaid debt for The tax expense. We start by just de consolidating the old Ferrari tax expense.

Now I need to put in the tax yield on the interest expense that's been saved. Now remember, the debt in fiat has reduced. That means our interest expense has reduced. That means my profit has gone up. And if profit has gone up, that means my tax expense will have gone up as well. So I need to add on this new tax shield, because it's going to mean my tax expense goes up. What is it going to be linked to? It's going to be linked to the amount of debt. So if I scroll up, up, up, up, up, that was paid off. So 2,933 multiplied by the 7% and then I need to multiply it by a tax rate. I'm going to use Fiat ETR. Ideally I'd use an MTR marginal tax rate, but we'll use the ETR here.

Get to me two total income tax expense adjustment of 38.2.

The next thing we need to find an adjustment for is the NCI remember we're getting rid of Ferrari completely, and that means we don't have to recognize the non-controlling interest anymore. So I'm going to subtract out the 24.7 that got created 'cause of the IPO and get rid of that 3.6. So net income that would be attributable to NCI. Not going to do that anymore. That comes to 28.4. Let's have a look at the impact of that. So my fully diluted WASO, that hasn't changed. I can just link that to previous figure, fully diluted EPS. I can take my net income due to ordinary shareholders, divide that by WASO, and then I can look at accretion dilution. So I'm gonna take the new EPS, divide it by the original EPS and then subtract 1.

Now initially I can see that we've got a 23.5% dilution initially. That worries me. Oh my gosh, what have we done? But I have to look at this in the context of what's actually happened. Firstly, why is it dilutive? Well, my earnings have gone down because Ferrari's net income is now gone. If Ferrari's net income has gone, earnings have gone down, but Fiat's shares, which WASO is unchanged. So by that very nature, EPS must have been reduced. Now, at the same time, we did save some interest in all that debt, but that will only have had a very mild impact. So Ferrari's earnings, which were earning us 14.1% return, they've gone. So second of all, does this mean we've had an epic fail? Should we have avoided this situation? Well, no, not at all because be its shareholders, yes, admittedly they've had this reduction in their EPS, but they also got a huge dividend in the form of a free Ferrari share. Ferrari's been spun off. Brand new shares have been created in Ferrari, this completely standalone company, but my Fiat shareholders got those shares and now Ferrari can be valued on its own and maybe any reasons for its undervaluation as part of fiat can be gotten rid of.