General Finance
What does beta measure?
Measures a stock’s sensitivity to overall market movements (systematic risk).
Which statement links the Income Statement and Balance Sheet?
Cash Flow Statement
What is the difference between Cash vs accrual accounting?
Cash records when money moves; accrual records when revenue/expenses are earned/incurred.
What is hawkish vs dovish?
Hawkish favors tighter policy; dovish favors looser policy.
What is the difference betweeen Systematic vs unsystematic risk?
Systematic affects all markets; unsystematic is company-specific.
Name a financial ratio
BONUS (+100): What does the ratio do?
*If you get the bonus wrong, you must do 10 pushups
EPS = net income / number of shares
P/E = stock price / EPS
PEG = PE / earnings growth rate
EV/EBITDA = enterprise value / EBITDA
D/E = total liabilities / total shareholder's equity
ROE = net income / shareholder's equity
P/B = market price per share / book value per share
Interest coverage ratio = EBIT / interest expense
Debt service coverage ratio = net operating income / debt service
Gross Margin Ratio = (TR - COGS) / TR
ROA = net income / total assets
Current ratio = current assets / current liabilities
Quick ratio = current assets - inv - prepaid ex) / current liabilities
Cash ratio = cash currently available / current liabilities
And many others...
What happens to FCF when CapEx increases?
Free Cash Flow decreases.
What are 2 major line items on each of the financial statements?
Income Statement: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Net Income
Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt; Shareholders’ Equity.
Cash Flow: Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing; Total Cash Flow, Cash at end of the year
What is the Phillips Curve?
Economic model showing the inverse relationship between inflation and unemployment. Usually, low unemployment means high inflation and vice versa.
Why do institutions prefer index funds?
Low fees, diversification, consistent returns.
What does Operating Leverage mean?
The degree to which fixed costs magnify changes in operating income as revenue changes.
What is a DCF, and what's it for?
Discounted cash flow (DCF) is a valuation method that estimates the value of an investment using its expected future cash flows
How does a change from LIFO to FIFO affect the financial statements during inflation?
Higher inventory
Higher net income
Higher taxes
Lower COGS
What causes a yield curve inversion?
What does ROI measure and how do you calculate it
ROI measures the return of an investment by comparing gains/losses to the cost basis.
The formula: (profit-cost)/cost or net income/cost
What is the difference between operating leverage and financial leverage?
Operating leverage comes from fixed operating costs; financial leverage comes from debt financing.
How do bonds and interest rates work in relation to each other?
Bond prices and interest rates have an inverse relationship. When interest rates rise, newly issued bonds offer higher yields, making existing lower-yielding bonds less attractive, which decreases their prices.
Why does EBITDA overstate cash flow?
Ignores CapEx, working capital changes, and taxes.
How often does CPI Data come out? What does CPI measure?
Monthly
It measures inflation through increases in day-to-day expenses. (basket of G&S)
What is the average annual return of the S&P500
BONUS (+200):What is the investment strategy where you invest fixed amounts of money into the market at recurring intervals ?
The S&P500 returns about 10% annually on average
Dollar Cost Averaging (Relevant Right Now)
How do you calculate WACC? What is it used for?
Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 – Tax Rate) + Cost of Preferred * (% Preferred).
Used as the discount rate for valuing a company or its investment oppportunities.
Weight of Equity * Cost of Equity + Weight of debt * Cost of debt * (1-tax)
What happens in each statement when Inventory goes up by $10, assuming you pay for it with cash?
No changes to the Income Statement.
Cash Flow from operations -10, (and net change in cash)
Balance Sheet: Inventory +10, Cash -10
On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from Operations – it goes down by $10, as does the Net Change in Cash at the bottom. On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the changes cancel out and Assets still equals Liabilities & Shareholders’ Equity.
What’s the formula for Enterprise Value?
Equity Value + Net Debt (Easy)
Why does the Fed prefer PCE (personal consumption expenditures) to CPI (Consumer Price Index)?
PCE adjusts for substitution and has broader coverage.
What are 4 of the Financial Markets?
Stocks Market
Bond Market
Money Market
Forex Market
Derivative Market
Commodities Markets
Cryptocurrency Markets