Uber, Instagram, and eBay all benefit from ______ effects.
network effects
If you could only choose 1 of the 3 financial statements, which one would you choose and why?
Cash flow statement
What is the difference between accrual and cash based accounting? Which do public US companies use?
Accrual - recognizes revenue/costs when earned/incurred; Cash - when cash exchanges hands
Accrual
What is the difference between UFCF and LFCF?
UFCF is available to all investors in the capital structure; LFCF is only for common equity holders
What do you subtract from Enterprise Value to get to Equity Value? (Simple equation)
Net debt (Debt - cash)
What is a 10-K? What about a 10-Q?
Annual, quarterly filings
Name 3 current assets and 3 current liabilities
Current Assets: Accounts Receivables (AR), Inventory, Prepaid Expenses
Current Liabilities: Deferred Revenue, Accounts Payables (AP), Short-Term Debt
If you could only have 2 of the 3 financial statements, which would you choose and why?
Income Statement and Balance Sheet
If given 2 back-to-back years, you can piece together the Cash Flow Statement
Name 3 valuation methods
DCF, Comps, Precedent Transactions
Also...
LBO, Sum of Parts, NAV, DDM
What is the formula for UFCF?
UFCF = EBIT * (1 - tax rate) + D&A - Increase in NWC - CapEx
What are 2 ways an equity holder of NVDA stock can earn money?
Price appreciation and dividends
Walk me through $10 of D&A. 20% tax rate
CFS: -8 Net Income, +10 D&A, +2 CFO, +2 net cash
BS: A: +2 cash, -10 PPE; L: 0; E: -8 Net Income
What is goodwill?
Created as a bridge for premium paid on book value in M&A transactions
Name 3 characteristics of a good comparable company
Same industry
Same geography
Similar size, stage of business lifecycle
Name 3 Enterprise Value multiples
EV/Revenue, EV/EBITDA, EV/EBIT
What is the term for an event that causes market expectations to change? What is an example of that?
Catalyst; Quarterly earnings, updated research reports, other news / filings
What is PIK debt?
PIK (Payment In Kind) is debt where the interest is accrued onto the principal, instead of being paid in cash
What is the 4th financial statement?
Statement of shareholder's equity
Besides net debt, what are 2 other items you need to fully bridge from EV to Equity Value?
(-) Preferred Stock
(-) Minority Interest / Non-controlling Interest
How do you calculate Cost of Equity (COE) using the Capital Asset Pricing Model (CAPM)?
COE = Risk-free rate + beta * market risk premium
Explain the full process of shorting a stock. How does it work?
You borrow shares at a price, then immediately sell those shares for cash.
You buy back the shares at a new price (ideally lower) and return them to the lender.
You gain the spread (price 1 - price 2 - fees).
Rank the following from highest to lowest NWC: Utilities company, grocery store, airline
Utilities (AR), grocery store (fast-turnover of inventory, payables, receivables), airline (deferred revenue)
Walk me through the sale of an asset for $100, book value $80, 20% tax rate
IS: +20 gain, + 16 Net Income
CFS: +16 Net Income, -20 Gain, -4 CFO, + 100 CFI, +96 net cash
BS: A: 96 cash, -80 PPE; L: 0; E: +16 Net Income
Walk me through a DCF
1) Project free cash flow for 3-5 years
2) Discount using WACC
3) Calculate terminal value using exit multiple or gordon growth methods
4) Discount terminal value and sum up
5) Bridge from TEV to Equity Value
What are 2 places where a tax rate shows up in a DCF? 200 bonus points for a 3rd.
1) UFCF calculation (EBIT * (1-tax rate))
2) WACC formula
3) Unlevering/relevering beta (bonus!)