Income Statement
What is the top-line and the bottom-line of the this statement?
Revenue and Net Income
What is the key equation that always holds when looking at a Balance Sheet?
A = L + SE
What is the first line item on the Cash Flow Statement
What does DCF stand for and what is the goal of creating one of these models?
Discounted Cash Flow Analysis, to value a company based on its future cash flows.
Who are the two candidates running for president?
Trump and Kamala
Earning Before Interest Taxes
Revenue - COGS - Operating expenses - D&A
Explain what assets, liabilities, and equity each represent?
Assets: The resources with positive economic value that can be exchanged for money or bring positive monetary benefits in the future.
Liabilities: The outside sources of capital that have helped fund the company’s assets. These represent unsettled financial obligations to other parties.
Equity: The internal sources of capital that have helped fund the company’s assets, this represents the capital that has been invested into the company.
What are the 3 main sections of the cash flow statement?
CFO, CFI, CFF
What specific cash flow is used in a DCF, and why is it used?
Unlevered Free Cash Flow, capital structure neutral
Who is the prime minister and president of Israel?
Benjamin Netanyahu
Isaac Herzog
When should revenue be recognized? When should expenses be recognized?
You recognize revenue when it is earned. (Have you delivered the promised benefit to your customer?)
You incur expenses when the benefit is derived.
If you have a balance sheet and must choose between the income statement or the cash flow statement, which would you pick?
If I have the beginning and end of period balance sheets, I would choose the income statement since I can reconcile the cash flow statement using the other statements.
Walk me through how CFO is calculated.
= Net income + depreciation + amortization - change in NWC
Explain the 2 methods of deriving Termival Value
What did the President of Ukriane allege Russia did in order to have more troops.
Dozens of North Korean recruits lining up to collect Russian military fatigues
What is the difference between the cost of goods sold (COGS) and operating expenses (OpEx) line item?
Cost of Goods Sold: Represents direct costs that are associated with the production of the goods that the company sells or the services it delivers.
Operating Expenses: Often called indirect costs, operating expenses refer to the costs that are not directly associated with the production or manufacturing of goods or services. Common types include SG&A and R&D.
In the event of a bankruptcy, how as the assets of a company distributed
It depends on the cap structure and the different tranches of debt that exist. Creditors are always paid before equity holders.
What is "change in NWC" and what does an increase/decrease mean for cash flows?
Working Capital = Current Assets – Current Liabilities
Increase --> cash outflow
Decrease --> cash inflow
What is WACC, and how is it calculated?
Weighted Average Cost of Capital
Formula: ...
What new Chinese economic policy did Xi recently announce.
China pledged on Saturday to "significantly increase" debt to revive its sputtering economy
How does a $10 increase in depreciation flow through the income statement and into the other 3 financial statements? (assuming 20% tax rate)
Income Statement: A $10 depreciation expense is recognized on the income statement, which reduces operating income (EBIT) by $10. Assuming a 20% tax rate, net income would decrease by $8 [$10 – (1 – 20%)].
Cash Flow Statement: The $8 decrease in net income flows into the top of the cash flow statement, where the $10 depreciation expense is then added back to the cash flow from operations since it is a non-cash expense. Thus, the ending cash balance increases by $2.
Balance Sheet: The $2 increase in cash flows to the top of the balance sheet, but PP&E is decreased by $10 due to depreciation, so the assets side declines by $8. The $8 decrease in assets is matched by the $8 decrease in retained earnings due to net income decreasing by that amount, thereby the two sides remain in balance.
Walk me through the balance sheet (covering the main sections and what makes them different)
The balance sheet shows a company’s financial position – the carrying value of its assets, liabilities, and equity – at a specific point in time.
Current Assets: Highly liquid assets that can be converted into cash within a year, including cash and cash equivalents, marketable securities, accounts receivable, inventories, and prepaid expenses.
Non-Current Assets: Illiquid assets that would take over a year to be converted into cash, namely plant, property, & equipment (PP&E), intangible assets, and goodwill.
Current Liabilities: Liabilities that become due in a year or less, including accounts payable, accrued expenses, and short-term debt.
Non-Current Liabilities: Liabilities that won’t become due for over a year, such as deferred revenue, deferred taxes, long-term debt, and lease obligations.
Shareholders’ Equity: The capital invested into the business by owners, consisting of common stock, additional paid-in capital (APIC), and preferred stock, as well as treasury stock, retained earnings, and other comprehensive income (OCI).
Debt repayment shows up in cash flow from financing on the cash flow statement. Why don’t interest payments also show up there?
Difference is that interest payments correspond to the current period and are tax-deductible, so they have already appeared on the income statement
Since they are a true cash expense and already appeared on the IS, showing them on the cash flow statement would be double-counting them
Debt repayments are a true cash expense but they do NOT appear on the IS, so we need to adjust for them on the cash flow statement
Explain how Cost of Equity is calculated and what each of the elements mean?
Cost of Equity = Risk-Free Rate + Equity Risk Premium * Levered Beta
Risk-free rate - what interest rate we earn by investing in ‘riskless’ securities, such as 10/20 year US treasury notes
Equity risk premium - the extra yield you could earn by investing in an index that tracks the overall stock market
Intuition: we could get 3% from govt securities, but we could make more by putting money in stock market since it historically generates higher returns
What number should we choose?
See a range from 3% to 10%
Generally use a number in the middle
Some banks use Ibbotson’s that provides estimate each year
Beta - “riskiness”/volatility of this company relative to all other companies in the stock market
What was the outcome of the Moldova EU referendum?
50.39% Voted Yes - ambiguity in whether Moldova will join