What is Finance?
What are the key distinctions between private and public markets?
Key distinctions are that public markets are accessible to everyone, liquid, and regulated. Private markets, on the other hand, have limited access, are less liquid, and typically involve private investors like private equity and venture capital.
What are the three main financial statements?
Income statements, Balance Sheets, and Cash Flow Statements
What are non-operating expenses, and where are they usually disclosed?
Non-operating expenses include costs like interest expense and legal fees, usually disclosed in the footnotes of financial statements
What is Equity Value, and how is it calculated?
Equity Value, or Market Capitalization, is calculated as Share Price multiplied by the total number of shares outstanding
What does WACC stand for, and what is its role in a DCF?
WACC stands for Weighted Average Cost of Capital, and it is used as the discount rate in a DCF analysis to determine the present value of future cash flows
Who are the main players in financial markets?
The main players include companies (private and public), governments, individual and institutional investors, and financial intermediaries like banks.
What fundamental question does the income statement address
The income statement addresses how the company uses its assets to generate revenue and how successful it is at doing so
How do tangible and intangible assets differ?
Tangible assets are physical items like buildings and machinery, whereas intangible assets are non-physical, like patents and trademarks
What components are added and subtracted to calculate Enterprise Value?
To calculate Enterprise Value, you add debt and subtract cash from Equity Value. The detailed formula is Enterprise Value = Equity Value + Debt + Preferred Stock + Non-controlling Interest - Cash
How do you calculate the Cost of Equity in WACC?
he Cost of Equity is calculated using the formula: Risk-free rate + Beta × Market Risk Premium
What are the different types of investment banks, and how do they differ?
The different types of investment banks include bulge bracket banks and boutique banks. Bulge bracket banks are large, full-service banks that handle large transactions, often with a global presence, and provide a wide range of services, including M&A, IPOs, and asset management. Boutique banks are smaller, more specialized firms that often focus on specific sectors or types of advisory services, such as mergers and acquisitions
How is the balance sheet structured in terms of assets, liabilities, and shareholder's equity?
The balance sheet is structured with assets on one side and liabilities plus shareholders' equity on the other, showing that assets are financed either through debt (liabilities) or equity
What does depreciation and amortization adjustment impact on the cash flow statement?
Depreciation and amortization adjustments impact the operating cash flow section, as they are non-cash expenses added back to net income to reconcile to cash flow
Explain why cash is subtracted in the Enterprise Value formula.
Cash is subtracted because it is a non-operating asset that reduces the cost of acquiring the business, as the buyer would get the cash when they acquire the company
What happens to the discount rate if a company becomes riskier?
If a company becomes riskier, the discount rate increases, reflecting the higher required return to compensate for the increased risk
Explain why public companies need to disclose information regularly?
Public companies need to disclose information regularly to maintain transparency and remain compliant with regulatory requirements. This ensures market integrity and informs investor
Define working capital and give examples of working capital assets and liabilities.
Working capital is the capital used in a company’s day-to-day operations. Examples include cash, accounts receivable, and inventory for assets, and accounts payable and accrued liabilities for liabilities.
How is deferred revenue recorded on the financial statements, and give an example.
Deferred revenue is recorded as a liability when payment is received before delivering goods or services. An example is a Netflix membership, where payment is received upfront
Can a company have a negative equity value, and why or why not?
No, a company cannot have a negative equity value. However, it can have negative enterprise value if it has excess cash or minimal debt
Explain the concept of terminal value in a DCF model.
Terminal value represents the value of a business's cash flows beyond the projection period and is usually calculated using the perpetuity growth method or exit multiple method
What is the main reason most companies prefer to remain in private markets?
Most companies prefer private markets to avoid the stringent regulatory requirements and public scrutiny of being a public company (such as stripe)
What is the purpose of the cash flow statement, and why is it crucial?
The cash flow statement provides insights into a company’s cash inflows and outflows, making it crucial to assess the liquidity and overall financial health of the business
Why do we test goodwill for impairment, and when does this usually happen?
Goodwill impairment tests happen when a company realizes that it overpaid for an acquisition, often leading to a significant loss on the income statement. This usually occurs if the acquired company underperforms
What is non-controlling interest, and how does it factor into the Enterprise Value?
Non-controlling interest represents the minority ownership in a subsidiary not owned by the parent company and is added to Enterprise Value because it reflects a claim on the business's total assets
How does the choice between using a perpetuity growth method and an exit multiple method for calculating terminal value affect the assumptions you make in a DCF model?
Perpetuity Growth Method: This method requires an assumption about the long-term, sustainable growth rate of the company’s cash flows, typically a rate close to or below the long-term growth rate of the economy. This method is sensitive to the chosen growth rate, and small changes in this rate can have a large impact on valuation.
Exit Multiple Method: This approach relies on selecting a multiple (like EV/EBITDA) based on comparable companies at the end of the projection period. It depends on the accuracy and relevance of the chosen multiple, which should reflect market conditions at the time.