Finance/Valuation
Enterprise Value Formula
Equity Value + Debt + Minority Interest + Preferred Stock - Cash & Cash equivalents
Walk me through the three statements
Income Statement: Shows a Company's profitability over a period of time (Revenue - Expenses = Net Income)
Balance Sheet = Shows what a company owns and how it financed those items for a point in time. ( Assets = Liabilities + Stockholders Equity
Cash Flow = Shows the cash flows of company over a period of time (CFFO + CFFF + CFFI = change in cash )
What is a DCF?
A valuation method that estimates the value of an investment using expected future cash flows
What is the purpose of the FED?
Dual Mandate: Maximum employment & stable prices
FCF Formula
EBIT (1-T) + D&A - net working capital - capital expenditures
What is a control premium?
The amount a buyer is willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company
difference between accounts payable and prepaid expenses
prepaid expenses are payments for products/ services to be provided in the future, accounts payable is a liability for services provided but not yet paid for
WACC Formula
(cost of equity * %equity)+ (cost of debt * %debt (1-tax rate)) + (cost of preferred stock * %preferred stock)
What is the Risk Free Rate and what does it represent?
The risk free rate is the yield on the U.S. Ten Year, it is the theoretical rate of return on an investment with zero risk because it is assumed the U.S government will never default on its debt.
CAPM Formula
Capital Asset Pricing Model
Risk Free rate + Beta (Market Risk Premium)
Market risk premium = (Expected Return - Risk Free Rate)
What are all the ways to Value a Company
DCF, Precedent Transactions, Comparable, Market Valuation, Sum of the Parts
difference between accounts receivable and deferred revenue
accounts receivable is when a company provides a service but doesnt yet receive cash, deferred revenue is the collection of cash for services yet to be provided
Why do we project out Free Cash Flow?
FCF is the amount of actual cash that could hypothetically be paid out to debt holders and equity holders from the earnings of a company
Who is the Chair of the Fed and who
were the two previous chairs?
Jerome Powell, Janet Yellen, Ben Bernanke
What is the market risk premium?
required return that investors require for investing in stocks over investing in "risk-free securities", expected return on the market minus the risk free rate
Which valuation method will result in the highest valuation?
Precedent Transactions, it is assumed a premium is always paid
Walk me through what happens to the three statements when you have $10 increase in Depreciation with 40% Tax Rate
1. $10 increase in depreciation on income statement because it is an expense
2. lowers operating profit by 10 because you will pay less taxes
3. tax will decrease by 4.
2. decrease net income by 6 dollars
3. 6 dollar decrease in cash under operating CF
4. 10 dollar increase in depreciation on the CFS because non cash expense
5. net cash is 4 dollars
6. cash on Balance sheet is 4 dollars
7. decrease PP&E by 10 dollars
8. overall, assets fall by $6
PGR vs Exit Multiple and what growth rate should you typically use for PGR?
Assuming a constant growth rate in perpetuity vs. applying an exit multiple under the assumption that when a business is sold that is the multiple at which it will be sold
Between Inflation & GDP
What is OPEC?
Organization of Petroleum Exporting Countries. The purpose is to coordinate and unify the petroleum policies of member countries and ensure stabilization of oil markets.
Debt Seniority levels
senior secured, unsecured, subordinated, convertibles, preferred, equity
Paid in Kind Interest: the option to pay interest on debt instruments and preferred securities in kind, instead of in cash.
Walk me through the three statements and how they connect, and what will happen when you buy $10 in Inventory with Debt
IS: no changes
BS: inventory up by 10, liabilities up 10
CFS: operating activities down 10, financing activities up 10
Walk me through a full DCF
1. project companies free cash flow for 5-10 years
2. calculate terminal value ( exit multiple growth or perpetuity method) to project FCF for period beyond 5-10 years
3. discount FCF and terminal value to present value, using WACC
4. add present value and terminal value, gives EV
5. convert Enterprise value to Equity value and divide by shares outstanding to get implied price
What are the three forms of market efficiency?
Semi- Strong: all public information is part of priced in and investors cannot use technical or fundamental analysis, but information not available to public can help investors
Strong: all information, public and private, is priced in and nothing can give an investor and advantage on the market
A company can achieve the optimal cost of capital through a mix of debt an equity, which is shown at the lowest point on the WACC Curve.