SIG Final Finance Workshop

Accounting

100

What are the three financial statements?

Income statement, Balance Sheet, Cash Flow Statement

200

What does the income statement represent?

Shows the company's revenues and expenses during a particular period. It indicates how the revenues are transformed into the net income or net profit.

300

What is the difference between book value and market value?

• Book Value
  • The value of a company according to its financial statements
  • Usually found by subtracting assets – liabilities
  • Some companies have negative book value!
• Market Value
  • The value of a company according to the stock market
  • Market values are typically higher than book values
  • Why is this the case? Which companies is this more likely to be true?

400

Which of the financial statements shows how much capital expenditures were made in that year?

Cash flow statement

500

What are some line items on the liabilities portion of the balance sheet?

• Accounts Payable
  • Received an item from a supplier, haven’t paid for it yet
• Notes Payable
  • Fancy term for debt that’s owed
• Deferred Revenue
  • Someone bought a product from you, haven’t delivered it yet
• Wages Payable
  • Salaries that still need to be paid

Valuation

100

What is valuation and why is it important?

• Process of finding the price of a company/stock
• Mispriced stocks create opportunities to invest
  • If we think a stock is undervalued based on valuation, then we can buy the stock (go long)
  • If we think a stock is overvalued based on valuation, then we can bet against it (go short)

200

What is the risk free rate conceptually?

Guaranteed to get a return without any chance of default

The only asset we think of as risk-free is government-issued treasury bills

300

What is the difference between intrinsic valuation and extrinsic/relative valuation?

• Relative Valuation
  • Valuing a company based on how it compares to other companies
  • These comparable companies are determined based on how similar their size, industry, and geography is
• Intrinsic Valuation
  • Valuing a company based on its internal metrics (revenue, margins, cash flow)
  • We try to find how much a company is going to make in the immediate future and into infinitely

400

What is beta and why do we pay attention to it?

• What is Beta?
  • Beta is a measure of systematic risk for a security
  • If a stock has a beta of 1, it moves at the same rate as the rest of the market
  • If a stock has a beta of 0, it has no relation to the rest of the market
  • If a stock has a negative beta, it moves in the opposite direction of the market
• Why do we care?
  • Since beta is a measure of risk, it helps us determine if we should invest in a security (am I getting appropriate return for my risk?)

500

What is the difference between enterprise value and equity value?

• Equity Value
  • The market cap of a company: how many shares they have multiplied by the value of each share
  • Can be quickly found by googling it or yahoo finance
• Enterprise Value
  • The “true” value of a company
  • How much its worth if you take into account their cash on hand, debt, preferred shares, and minority holdings
  • Enterprise Value = Equity Value – Cash + Debt + Minority + Preferred

DCF

100

What does it mean to discount cash flows?

Determine how much a project/venture/company is worth in TODAY'S terms. Money today is worth more than money tomorrow due to the opportunity cost of capital

200

What is another term for cost of capital and how do you calculate it (formula)?

WACC - cost of debt * weight of debt * (1-tax) + cost of equity * weight of equity

300

Define the projection period and terminal value

• Projected Period
  • How much money a company is going to make in the next 5-10 years
  • How do we determine this? – we create a thesis to figure out how much we think a company’s cash flows are going to grow by
  • We discount these cash flows to their present value – how do we determine the discount rate?
• Terminal Period
  • How much a company is going to make into infinitely (after our projected period)

400

What are the two terminal value calculation methods?

• Exit Multiples
  • Typically use EV/EBITDA or EV/Revenue
  • We take these ratios and multiply them by a company’s final projected year’s EBITDA or Revenue (depends on which valuation method)
  • Companies are usually trading at certain multiples; we can use that as a reference or look at similar companies
• Gordon Growth
  • We say that a company’s terminal cash flows extend into perpetuity and growth at the same rate as GDP

500

Provide a 3 or 4 step process to creating a DCF?

• Projected Period
  • How much money the company will make in the next 5-10 years
• Terminal Value Calculation
  • How much money the company will make after those 5-10 years
• Cost of Capital Calculation
  • How much do I discount those future cash flows by
• Share Price Calculation
  • How much a share is worth based on all the money the company could make in the projected period and terminal period

LBO

100

What is an LBO?

A leveraged buyout (LBO) is a financial strategy where a company is acquired using a significant amount of borrowed money, typically secured by the assets of the company being acquired.

200

What is the purpose of an LBO?

LBOs are often used by investors to acquire companies, unlock value, and generate returns through operational improvements, financial restructuring, or asset sales.

300

What are the 5 components of an LBO?

Target company, Financing, Equity Investment, Management Team, Exit Strategy

400

What are some advantages of LBOs?

• Potential for High Returns: LBOs offer the potential for significant returns on investment, as investors aim to increase the company's value through strategic initiatives.
• Tax Benefits: Interest payments on debt financing are often tax-deductible, reducing the overall tax burden of the acquired company.
• Alignment of Interests: LBOs align the interests of management and investors, as both parties have a stake in the success of the company.

500

What are risks of an LBO?

• High Debt Levels: Heavy reliance on debt financing increases financial leverage and interest expenses, which can be burdensome if the company's performance deteriorates.
• Operational Risks: Implementing operational improvements and cost-cutting measures may prove challenging, particularly if market conditions are unfavorable or if the company faces industry-specific challenges.
• Economic Conditions: LBOs are sensitive to changes in economic conditions, interest rates, and market dynamics, which can impact the success of the investment.

M&A

100

Who handles M&A?

Investment banks

200

What is M&A and the difference between a merger and acquisition?

• Merger: Combining two companies of similarly equal value
• Acquisition: A company of a larger value acquires a company of smaller value

300

What are the two types of synergies?

Cost and revenue synergies

400

What are 3 ways of funding M&A?

Cash, stock, debt

500

What is the difference between accretive and dilutive M&A transactions?

• Accretive: A deal where the buyer (acquiring company) purchases a company with a higher yield than them (lower P/E)
• Dilutive: A deal where the buyer purchases a company with a lower yield than them (higher P/E)