Beginning Finance 01

• 1. Liquidity
• 2. Leverage
• 3. Activity
• 4. Profitability
• 5. Growth

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

(Current Assets - Inventory) / Current Liabilities

Debt Multiple

Total Debt / EBITDA

Interest Coverage

(EBITDA + Other Income) / Interest

Cost of Debt Estimate

Interest Expense / Total Debt

Inventory Turnover

COGS / Inventory

Asset Turnover

Revenue / Assets

AR Days

(AR / Revenue ) * 360

AP Days

(AP/ COGS ) * 360

Gross Profit Margin

Gross Profit / Sales = (Sales - COGS) / Sales

EBIT %

EBIT / Sales = (Sales- COGS - SG&A) / Sales

EBITDA %

EBITDA / Sales = (Sales - COGS - SG&A + D&A) / Sales

Net Income %

Net Income / Sales

Growth %

(Period 1 - Period 0 ) / Period 0

Compounded Annual Growth Rate (CAGR)

(Ending Value / Beginning Value) ^ (1/ # of years) - 1

PV = FV / (1 + r ) ^ N

FV = PV X (1 + I)^ N

• Revenue
• <COGS>
• Gross Profit "Unlevered"
• <SG&A>
• Operating Income "EBIT"

* All from Operations

FYE0 + YTD0 - YTD-1

Current Fiscal year plus year to date

minus last year's to date

Earnings Per Share

NI (Net Income) / Shares Outstanding

* Dilution is anything that causes this ratio to fall.

TEV / REV

TEV / EBIT

TEV / EBITDA

P/E

Price / Earning

Price is Share price

Earnings is Net Income / Earnings

Also there is Market Cap / Earnings

Growth

Risk

Size

• a) Profitability
• b) Capex
• c) Leverage
• d) Growth
• e) none of them

• a) Growth, Profitability and Size
• b) Leverage, Risk and MGMT
• c) Working Capital, Leverage and Profitability
• d) Capex, Working Capital and MGMT

• a) Proxy for a Cash Flow
• b) Proxy for Risk
• c) Proxy for a IE
• d) Proxy for a CAPEX
• e) None of the above
• f) All above

• EBIT
• <Taxes>
• <Capex>
• +/- Change in NWC
• + D&A ( Non cash items)
• FCF " Unlevered"

* FCF = Free Cash Flow

Value for year 6TH through Infinity

• a) FCF / (1 + r )^N
• b) PV X (1 + r ) ^N
• c) RF + Beta X (RM - RF)
• d) (LTM Multiple from Comps) x ( EBITDA)
• e) None of the above

• Financial accounting –How financial information of a business is recorded and classified (i.e. financial statements of public companies)
• Managerial accounting –Typically used within an organization by management for planning and decision making
• Tax accounting –Branch of accounting used to comply with jurisdictional tax regulations

Acquisition or Historical Costrepresents the amount of cash (or cash equivalent) paid in acquiring the asset

Current Replacement Costrepresents the amount currently required to acquire the asset

Current Net Realizable Valuerepresents the amount of cash that a firm would receive if it sold the asset (less the cost involved to sell theasset)

Present Value of Future Net Cash Flows represents the future benefits of the asset discounted to the current period by an appropriate discount rate

Generally Accepted Accounting Principles (GAAP) stipulate which valuation method to use depending on the type of asset

• Monetary assets such as cash and accounts receivable generally appear on the balance sheet at their net present value (i.e. their current cash or cash equivalent value)
• *Cash appears as the amount of cash on hand or in the bank
• *Accounts receivables appear as the amount of cash the firm expects to receive but undiscounted since the firm expects to receive payment in a short period of time (e.g. days to several months)

Non-monetary assets such as inventory, equipment, building and land appear at acquisition cost (less accumulated depreciation value which will be discussed later)

• 1. S-1: Basic registration form used for the offering of public securities
• 2. S-2: Simplified version of the S-1
• 3. S-4: Registration of public securities due to a business combination (M&A) or exchange offer
• 4. 10-K: Audited annual report that must be filed with the SEC ( Must be filed within 90 days)
• 5. 10-Q: Unaudited quarterly report filed with the SEC ( Must be filed within 45 days)
• 6. 8-K: Report that is used to report any new material news/events within the company that may be important to investors
• 7. 8-KA: “A”at the end indicates that the 8-K has been amended
• 8. 11-K:Annual report of employee stock purchase, savings and similar plans (additional filing to 10-K)
• 9. SC 13-D: Schedule that discloses beneficial ownership schedule of a company (Any person or group of persons who acquires 5% or more of a class of registered equity securities must file a Schedule 13-D within 10 days of acquisition)
• 10. DEF 14A: Proxy Statement is sent by publicly listed corporations to their shareholders providing material information on corporate matters subject to vote at the annual meeting

• Part I: General Business Overview
• Part II: MD&A, Financial Statements and Notes
• Part III: Directors, Officers, Compensation, etc.
• Part IV: List of Exhibits

If the charge/income is aboveEBIT, then this item affects EBIT, EBITDA and every other line item below EBIT in the income statement

If the charge/income is belowEBIT, then it only affects items such as pretax income and net income and not EBIT and EBITDA

Terminal Enterprise Value

MVE + DEBT + Preferred Stock + Minority Interest-Cash

(1) Comparable Public Companies (aka Trading Multiples)

(2) Precedent Transactions (aka Acquisition Multiples)

(3) Discounted Cash Flows (“DCF”)

1. If you own more than 50% but less than 100% of another entity,you are required to consolidate its financials on to your companyfinancials. Minority interest represents the portion of equity thatyour company does not own – it is a liability

2. Therefore, in a TEV / Revenue calculation, if your denominatorrepresents a fully consolidated operating figure, it is necessary togross up your numerator (TEV) to keep the equation balanced or“apples to apples”

3. In a leveraged multiple such as P/E, this adjustment is not aconcern because the earnings calculation is net of minorityinterest (i.e. minority interest expense has already been takenout)

• Forecasting FreeCash Flows
• Identify components of FCF
• Keep in mind historical figures
• Project financials using assumptions
• Decide # of years to forecast

• Estimate Cost of Capital
• Perform a WACC analysis
• Develop target capital structure
• Estimate cost of equity

• Estimating Terminal Value
• Determine whether to use cash flow multiple (i.e.,EBITDA multiple) or growth rate method (i.e.,Gordon Growth Method)
• Discount it back to present value

• Calculating Results
• Bring all cash lows to present value
• Perform sensitivity analysis
• Interpret results