Finance Questions

Accounts payable

A companies obligation to pay off short term debt to its creditors or suppliers ex: if a company owes money to food/beverage company, those items are inventory

Accounting Equation

A= L+SE If E increases A increases and vice versa L increase SE decrease L decrease (payind debt) SE increases

When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and depreciated according to the company's accounting policies.

Elon Musk and twitter M&A

$44 billion acquisition of twitter Musk has been threatening to walk away from the deal unless the social media company provides him with data to back up its estimate that false or spam accounts comprise less than 5% of its user base. Musk is on the hook to pay $33.5 billion in cash to fund the deal after arranging debt financing to cover the rest He had previously tweeted that the deal "cannot move forward" until the spam and fake account issue had been resolved. You can say I am torn. I think we need the platform for free speech but I do not know what musks intentions are

Three financial statements and how they relate to one another:

- The balance sheet is a snapshot of a point in time. On the top half, you have the company's Assets and on the bottom half, its Liabilities and Shareholders' Equity (or Net Worth). The assets and liabilities are typically listed in order of liquidity and separated between current and non-current. Typically prepared quarterly or annually. - The income statement covers a period of time, such as a quarter or year. It illustrates the profitability of the company from an accounting (accrual and matching) perspective. It starts with the revenue line and after deducting expenses derives net income. - A statement of Cash flows shows the movement of money in and out of a company over a period of time. Its made up of financing, investing, and operating activities. - The cash flow statement and income statement are linked by net profit. The profit or loss on an income statement is used to calculate cash flow.

How would you value a company?

1. The multiples approach (also called "comps"), in which you multiply the earnings of a company by the P/E ratio of the industry in which it competes (and other ratios). 2. Transactions approach (also called "precedents"), where you compare the company to other companies that have recently sold/been acquired in that industry. 3. The Discounted Cash Flow approach, in which you discount the values of future cash flows back to the present.

3% of 3 5% of 30

3% of 3= 0.09 5% of 30= 1.5

What is a yield curve?

A line that plots yields (interest rates) of bonds having equal credit quality but different maturity dates - Usually talking about US securities treasuries with maturity from 3 months to 30 years The slope of the curve gives an idea of future interest rate changes and economic activity Normal yield curve = short term interest rate is lower than the long term interest rate Flat yield curve= investors expect interest rates to stay over the same time Inverted yield curve= short term rates are higher than long term rates Bigger curve= higher change

"What is the average Price/Earnings PE ratio for the S&P 500 Index?"

About 15-20 times, the PE ratio varies by industry and period in the cycle.

"You have the opportunity to purchase a series of future cash flows that are $200 in perpetuity. The total cost of capital is 10%, how much are you prepared to pay today?"

Answer: [Note: Value = Cash Flow / WACC]. $2,000, because: $200 / 10% = $2,000 (i.e. 10x)

What makes a good financial model?"

Building a financial model takes a lot of practice to be really good at it. The best financial models are clearly laid out, identify all the key drivers of the business, are accurate and precise yet not overly complicated, can handle dynamic scenarios, and have built-in sensitivity analysis and error checking

What does the Fed do?

ControlsinterestratesThe fed reserve is the US central bank and they have a dual mandate to use monetary policy in order to achieve maximum employment and stable prices

Which is cheaper, debt or equity?

Debt because: It is paid before equity / may have security. Ranks ahead on liquidation

"List the main components of WACC (i.e. Weighted Average Cost of Capital)

Debt, equity, tax, beta

If you had $10 million, how would you invest it

Diversify the portfolio, spread the risk What are my goals: risky or safe? If I'm willing to accept more risk, stocks/equities A mutual fund that includes various segments of the market, s&p 500, small caps, and international equities Rates are rising Although rates are rising, they are still low so I wouldn't get the desired return from bonds Another reason why I wouldn't want to put in bonds bc I expect interest rates to go up Wouldn't buy real estate bc it is very competitive as prices are high with low interest rates If I wanted less risk, put in a utility fund you could also say because you are young your risk appetite could be a little higher because you have decades till you retire

When do you capitalize an expense rather than purchase it?

If a purchase will be used for more than 1 year it is capitalized and depreciated Capitalized costs are depreciated or amortized over time rather than being expensed immediately

What is riskier: a stock or a bond and why?

In general, bonds are less risky than stocks The bond market is less vulnerable to price swings or volatility than the stock market Stocks = high risk, high reward - The issuer has no obligation to pay dividends to shareholders

What is going on with interest rates?

Interest rates are rising in order to cool off demand and lower inflation

"What happens to Earnings Per Share (EPS) if a company decides to issue debt to buy back shares?"

Issuance of debt increases after-tax interest expense which lowers EPS. Repurchase of shares reduces the number of shares outstanding which increases EPS Whether it increases or decreases EPS depends on the net impact of the above two points.

ROE

Measure of profitability of a business in relation to equity

What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question - only the balance sheet and cash flow statements are impacted by the purchasing of inventory.

If I could use only one statement to review the overall health of a company, which statement would I use, and why?

Statement of Cash flows Cash is king. The statement of cash flows gives a true picture of how much cash the company is generating.

A company has learned that due to a new accounting rule, it can start capitalizing on R&D costs instead of expensing them. Part I) What is the impact on the company's EBITDA? Part II) What is the impact on the company's Net Income? Part III) What is the impact on the company's cash flow? Part IV) What is the impact on the company's valuation?

Part I) What is the impact on the company's EBITDA? EBITDA increases by the exact amount of R&D expense that is capitalized. Part II) What is the impact on the company's Net Income? Net Income increases and the amount depends on the depreciation method and tax treatment. Part III) What is the impact on the company's cash flow? Cash flow is almost unimpacted (constant) - however, cash taxes may be different due to changes in depreciation expense, and therefore cash flow could be slightly different. Part IV) What is the impact on the company's valuation? Valuation is essentially constant - except for the cash taxes impact/timing impact on the net present value (NPV) of cash flows.

Amortization

Paying off debt over time in equal installments

What is fiscal policy?

Performed by the federal government (determined by Congress) to increase the nation's economy EX: tax cuts, government spending, stimulus checks

Alexsar?

Private equity investment firm that purchases smaller growth companies and mainly focuses on manufacturing and business services and distribution. Their transaction values are between $15- $100 mill Coopersmith- makes bread

What is the difference between a stock and a bond

Stock: equity ownership in a company - Companies issue stock to raise money, fund growth, and create products - Raise money to create more value for a firm -Ex: a shoe company needs to purchase new shoes Bond: Debt issued by government or corporation to raise money - In a loan, the borrower is the government or corporation, and the investor loans the money which is paid back with interest

What is monetary policy?

The nation's central bank promotes economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.

What is WACC

The weighted average cost of capital (WACC) represents a firm's average cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. The weighted average cost of capital is a common way to determine required rate of return because it expresses, in a single number, the return that both bondholders and shareholders demand in order to provide the company with capital. A firm's WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will demand greater returns.

How do you record PP&E and why is this important?

There are essentially four areas to consider when accounting for Property, Plant & Equipment (PP&E) on the balance sheet: (I) initial purchase, (II) depreciation, (III) additions (capital expenditures), and (IV) dispositions. PP&E is the main capital asset that generates revenue, profitability, and cash flow.

Why would two companies merge? What major factors drive mergers and acquisitions?

There are many reasons companies go through the M&A process: to achieve synergies (cost savings), enter new markets, gain new technology, eliminate a competitor, and because it's "accretive" to financial metrics.

When should a company consider issuing debt instead of equity?

There are many reasons to issue debt instead of equity: (1) It is a less risky and cheaper source of financing compared to issuing equity; (2) If the company has taxable income, issuing debt provides the benefit of tax shields; (3) If the firm has immediately steady cash flows and is able to make their interest payments; (4) higher financial leverage helps maximize the return on invested capital; (5) when issuing debt yields a lower weighted cost of capital (WACC) than issuing equity.

"How do you calculate the WACC?"

This is calculated by taking the proportion of debt to total capital, times the debt rate, times one minus the effective tax rate, plus the proportion of equity to capital, times the required return on equity.

Can you talk to me about a current event in the economy

War on Ukraine is causing a food and fuel crisis Sharply rising commodity prices have been the most immediate economic impact of the conflict Gas and oil prices went up because Russia was a supplier of both oil and gas and they've been cut off Gas is up 50% per gallon from a year ago Groceries prices up 30% from a year ago The two above are key contributors to inflation Gas prices are higher than ever- in from NJ over $5 Gas prices are higher than ever in the U.S. War threatens global growth and there is a fear of recession Markets are extremely volatile as investors try to understand the impact of the war Fear of recession Commodities: Russia and Ukraine also supply 30% of the world's wheat. So that impacts the entire world's food supply. If any question comes up about commodities go right to the issue with wheat because that is a commodity and how it is impacting the food supply chain. If there is less of something, prices increase Gas also commodity

What does negative working capital mean?

When the company's current operating liabilities exceed the value of current operating assets, this can happen when a large cash payment decreases current assets to a large amount of credit extended in the form of accounts payable. Often arises when businesses generate cash quickly ( grocery store) b/c it can sell products to their customers before it has to pay its bills to vendors for the original goods.

What is working capital?

Working capital is typically defined as current assets minus current liabilities. In banking, working capital is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).

Accounts Recievable

balance of money due to a firm for a good or service delivered / used but not paid for by its customers Any amount owed by customers for a purchase on credit ex: electric company that bills its client after they received electricity

Inflation

the value of money. High inflation, the value of money goes down and low inflation it goes up. I'm other words, inflation is high now so one dollar buys so much less, eggs, gas etc... Inflation increased to 8.6% Because the latest inflation number (8.6) was announced this past Friday, Stock market was down big and will be down again today. Investors are nervous about inflation and are selling stocks