Accounting
What is the formula for retained earnings and on which financial statements can you find these line items?
Previous retained earnings (balance sheet), + net income (income statement), less dividends (financing activities CF)
How many federal reserve banks are there?
12
What is YTM?
The annual rate of return on a bond accounting for price appreciation and coupon payments when holding till maturity.
Rank the 4 Valuation Methods
Precedents, Comps, DCF, LBO
Where was Sam born?
Denver
What is the formula for EV (all components) and what is each component?
EV = Market Cap + Net Debt + Minority/non-controlling interest + Preferred Stock
Market Cap (market value of equity of a business)
Net debt (book value of debt for a business - includes short and long term, convertibles and everything else minus cash on balance sheet)
Minority/ non-controlling interest: a stake in a company that is otherwise controlled by a parent company (think ABC owns 90% of XYZ, on the BS they will recognize their 90%, as well as 10% attributable to NCI. In the case of income generated (say 100), ABC recognizes 10 of this as net income attributable to minority interest on its balance sheet and on the income statement as income attributable to minority interest)
Preferred shares: give their owners a priority claim whenever a company pays dividends or distributes assets to shareholders. They offer no preference, however, in corporate governance, and preferred shareholders frequently have no vote in company elections.
What is the Fed Funds Rate (number)
3.75-4%
What are the two types of bond markets?
Rate markets, based on interest rates set by central banks: treasuries and other govt issued securities)
Spread markets: bonds that are priced relative to rate instruments (think a corporate bond, it is priced relative to the increased perceived risk with the corporation vs a government issue)
Walk from EBIT to Share Price
EBIT, add D&A, less taxes, less changes in WC, less Capex = unlevered free cash flow
Use terminal value approach (either terminal multiple approach or gordon growth) to find a terminal value
Discount both of these back to the present
Sum together to get EV of the company, net out net debt, minority interest, preferred shares
Divide by diluted shares outstanding for share price
Which fund member used to teach the chefs at the restaurant they worked at English after work.
Noah
$10 depreciation increase through the three financial statements (40% tax rate)
$10 decrease in op profit, assuming 40% tax rate $6 decrease in net income
6 down in net income on cf from ops, add back D&A, up 4 now
4 flows into cash on BS, $10 depreciation flows into PPE, assets down 6, net income down 6 from income statement flows into retained earnings on BS so liabilities are down 6 and balance sheet balances
Monetary vs Fiscal Policy - Relate this to today (can provide hint)
Monetary policy is action by the central bank and fiscal policy by the government, during the pandemic both of these were used extensively to support the economy which has led to the runaway inflation seen today
Explain the tax shield and how it ties into the capital structure?
Allowable deduction from taxable income that results in a reduction of taxes owed. Capital structure: that is why debt is cheaper than equity
What is the PEG Ratio? (Why use it)
PEG ratio = P/E / annual EPS growth. The PEG ratio is used widely because companies with higher growth rates tend to have higher P/E ratios. The PEG ratio allows you to compare companies with different growth rates on an apples-to-apples basis. PEG ratio indicates whether a company’s high P/E reflects a high stock price or promising growth prospects.
Where does Aidan Caddy?
Boston Golf Club
How does a 100 dollar subscription for software paid for on Jan. 1 get recognized on the statements (hint can be provided)
revenue: 25 recognized for the first quarter
Deferred revenue on BS: increase in 75 dollars (service not performed yet)
Cash up 100 dollars
Cash up 100 = net income up 25 (via retained earnings), and liabilities up 75 (deferred revenue)
How does the fed raise and lower interest rates?
They buy and sell bonds: think of supply and demand and how when the fed buys bonds, prices go up so rates go down - vice versa, if they sell bonds prices, go down and rates go up
What is duration? What are the two types?
A measure of the sensitivity of a bond to interest rates: the time it takes in years for an investor to be paid back by a bonds cash flows: Macaulay duration (the time it takes in years to be repaid, modified duration (the percent change in the price of a bond for every percent change in interest rates)
What is a DDM and when would you use it? (List the 3 sectors it could apply to that we cover)
Dividend discount model - similar to gordon growth (same formula with D1/r-g)
Used when a company is growing consistently and pays a consistent dividend (REITS, Financials, Energy)
Which two fund members have moms with the same name?
What is the difference between a deferred tax asset and a deferred tax liability? Can you give an example of either (hint think about depreciation schedules)?
Deferred tax asset: a company overpays on its taxes in the current period in order to receive a future tax relief benefit
A company depreciates an asset on its books more than what is required by GAAP standards, overpaying now but less in the future
Deferred tax liability: Vice versa, line item on the balance sheet that shows taxes that are to be paid but not due until a later date:
A company depreciates an asset less than tax code requires: creating a difference in its accounting income vs taxable income - creates the deferred tax liability line item, and as the company continues depreciating its assets, the difference between straight-line depreciation and accelerated depreciation narrows, and the amount of deferred tax liability is gradually removed through a series of offsetting accounting entries.
What is the PE of the S&P 500, now versus historically? (Think rationally, range works)
Range of 25x-30x - the historical average is 19-20x: higher now because earnings are shrinking as rates rise and damper corporate profits
If you were nervous about interest rates rising, would you want higher or lower duration bonds? (Why)
Lower duration - for every % change in interest rates, the change in the price of the bond changes in the opposite direction based on the interest rate change * the duration (if a bond has a duration of 10 and interest rates increase by 1 percentage point, then that bond's price would be expected to decline by approximately 10 percent)
Compare P/E to EV/EBITDA to EV/Sales - who would use what?
P/E: Earnings - reflective of non operating expenses like interest, restructuring, and other CFO line items - p refers to price (market cap) which is just the equity portion of the business, not the entire company - used for bank stocks, consumer, etc.
EV/EBITDA: EBITDA focuses on operating line items, and adds back D&A which varies company to company - more complete picture of the core operations of a business - EV also encompasses an entire company’s capital structure - used for utilities, industrials, other positive cash flow businesses
EV/Sales: Sales: most universal metric: measures a companies value relative to its sales during the year - used by unprofitable companies like tech in order to create a level playing field
What was Mike's stock pitch for his first MEF interview
Chewy