Beginning Finance 01

  1. List few types of financial ratios
    • 1. Liquidity
    • 2. Leverage
    • 3. Activity
    • 4. Profitability
    • 5. Growth
  2. What would be a Liquidity ratio?
    Current Ratio

    Current Assets / Current Liabilities

    Quick Ratio

    (Current Assets - Inventory) / Current Liabilities
  3. What would be a Leverage ratio?
    Debt Multiple

    Total Debt / EBITDA

    Interest Coverage

    (EBITDA + Other Income) / Interest

    Cost of Debt Estimate

    Interest Expense / Total Debt
  4. What would be an Activity ratio?
    Inventory Turnover

    COGS / Inventory

    Asset Turnover

    Revenue / Assets

    AR Days

    (AR / Revenue ) * 360

    AP Days

    (AP/ COGS ) * 360
  5. What would be a Profitability ratio?
    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
  6. What would be a Growth ratio?
    Growth %

    (Period 1 - Period 0 ) / Period 0

    Compounded Annual Growth Rate (CAGR)

    (Ending Value / Beginning Value) ^ (1/ # of years) - 1
  7. What is the formula for PV (Present Value) ?
    PV = FV / (1 + r ) ^ N
  8. What is the formula for FV (Future Value) ?
    FV = PV X (1 + I)^ N
  9. What is the formula for Working Capital?
  10. (Current Assets - Cash) - ( Current Liabilities - Current Debt)
  11. Income Statement ......
    • Revenue
    • <COGS>
    • Gross Profit "Unlevered"
    • <SG&A>
    • Operating Income "EBIT"

    * All from Operations
  12. What is the formula to find LTM ( Last Twelve Months)?
    FYE0 + YTD0 - YTD-1

    Current Fiscal year plus year to date

    minus last year's to date
  13. What is EPS?
    Earnings Per Share

    NI (Net Income) / Shares Outstanding

    * Dilution is anything that causes this ratio to fall.
  14. What are few Operating (Unlevered) ratios?
    TEV / REV

    TEV / EBIT

  15. What is Equity ( Levered) ratio?

    Price / Earning

    Price is Share price

    Earnings is Net Income / Earnings

    Also there is Market Cap / Earnings
  16. What are some of the Global factors should we look into?


  17. What comes to mind when you see TEV/ REV?
    • a) Profitability
    • b) Capex
    • c) Leverage
    • d) Growth
    • e) none of them
  18. What comes to mind when you see TEV / EBITDA?
    • a) Growth, Profitability and Size
    • b) Leverage, Risk and MGMT
    • c) Working Capital, Leverage and Profitability
    • d) Capex, Working Capital and MGMT
  19. What would be a quick answer for EBITDA?
    • 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
  20. What comes to mind when you see FCF?
    • EBIT
    • <Taxes>
    • <Capex>
    • +/- Change in NWC
    • + D&A ( Non cash items)
    • FCF " Unlevered"

    * FCF = Free Cash Flow
  21. What is the basic definition for Terminal Value?
    Value for year 6TH through Infinity
  22. Formula for DCF?
    • 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
  23. What is Three main types of Accounting?
    • 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
  24. Valuation of Asset ...
    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
  25. Valuation of Assets (continued)
    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)
  26. What are the important types of SEC filings?
    • 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
  27. 10-K’s are typically separated into four sections:
    • Part I: General Business Overview
    • Part II: MD&A, Financial Statements and Notes
    • Part III: Directors, Officers, Compensation, etc.
    • Part IV: List of Exhibits
  28. In Regards to "Normalizing"

    Above or Below the EBIT Line?
    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
  29. What is the Formula for TEV?
    Terminal Enterprise Value

    MVE + DEBT + Preferred Stock + Minority Interest-Cash
  30. What is 3 different valuation perspective?
    (1) Comparable Public Companies (aka Trading Multiples)

    (2) Precedent Transactions (aka Acquisition Multiples)

    (3) Discounted Cash Flows (“DCF”)
  31. What is minority interest and why is it included in TEV?
    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)
  32. Discounted Cash Flow Overview
    • 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
  33. Discounted Cash Flow Overview (cont'd)
    • 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
Card Set
Beginning Finance 01
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