NLF Interview
What was Q1 2015 GDP?
-.2%
What does overweight mean?
1) A situation where a portfolio holds an excess amount of a particular security when compared to the security's weight in the underlying benchmark portfolio 2) An analyst's opinion regarding the future performance of a security. Overweight will usually signify that the security is expected to outperform either its industry, sector or, even, the market altogether.
What are five inputs of the Black Scholes Model?
1) Current underlying price 2) Options strike price 3) Time until the option's expiary 4) Implied volatility 5) Risk-free interest rates
What are 3 strengths of the DCF?
1) It produces the closest thing to an intrinsic stock value. P/E, EV/EBITDA, Price-to-sales, etc. aren't useful if the entire sector or market is over or under valued bc they're relative. 2) It relies on the fundamentals of the business not volatile external factors. 3) It relies on free cash flows which helps to avoid the subjective accounting policies and window dressing involved in reported earnings.
What are 3 weaknesses of the DCF?
1) Its based on assumptions and one wrong assumption can cause the dcf valuation to fluctuate wildly. 2) It assumes the company will not only continue to exist after the forecast period, but that cash flow will continue at the same rate. 3) A DCF model is tentative and requires constant vigilance and modification. If something happens such as interest rate hikes, disappointing quarterly results, etc. the inputs and assumptions in the DCF need to be adjusted or the intrinsic value of the stock will be off.
What are some ways the three financial statements are connected?
1) Net income is added to cash flow from operations on the cash flow statement 2) Beginning cash balance is the cash from the balance sheet from the year prior 3) Ending cash becomes the cash balance under current assets on the balance sheet 4) Net income minus dividends paid becomes retained earnings on the balance sheet
What are three steps the Fed can take to influence the economy?
1) Open market operations - buying and selling securities to change the money supply 2) Raising and lowering interest rates 3) Manipulating reserve requirements
How many sectors are in the S&P 500 and what are they?
10 1) consumer discretionary Most sensitive to economic cycles - automobiles, household durable goods, textiles and apparel, retail 2) Consumer Staples Less sensitive to economic cycles - manufactures and distributors of food, beverages, tobacco, hypermarkets 3)Energy Companies involved with oil rigs, drilling equipment, energy related service, oil and gas products, coal, etc. 4) Financials Banking, investment banking, insurance, etc. 5) Healthcare Healthcare providers, R&D for drugs, biotech 6) Industrials Manufacture and distribute capital goods, aerospace and defense, construction, transportation services (Airlines, couriers, roads and rails) 7) Information Technology Tech software, internet, home entertainment, computer, electronic, semiconductor manufacturers 8) Materials Manufacturers of chemicals, glass, paper, metals, steel 9) Telecommunication Provide communication services through fixed-line, cellular, wireless, fiberoptic cable network 10) Utilities Independent distributors of power; electric, gas, or water producing companies
How much value does a company create for every dollar it earns if it returns 10% and has an 8% WACC?
2% or 2 cents
What was Q3 2015 GDP?
2.1%
You have $1 million how would you allocate it?
25% into fixed income securities such as CD's and treasury bonds 10% in real estate (depending on the market conditions) if not that then emerging markets (Turkey, Thailand, South Korea) 40% in US equities spread between sectors that I think will outperform such as financials and new sectors with room for big growth such as 3D-printing and marijuana 25% in foreign equities (Japan's Nikkei is over 18000 points and up 8.5% ytd)
What maturities to US treasury bonds range from?
3 months to 30 years
What was Q2 2015 GDP?
3.9%
How many companies are in the Dow?
30
How many basis points is 3.78%?
378
What is the unemployment rate?
5.1%
What hours are the U.S. equity markets open?
9:30 AM to 4 pm
What is a Eurodollar bond?
A US dollar denominated bond issued by an overseas company and held in a foreign institution outside both the US and the issuers home nation. ex. A USD denominated bond issued by a Japanese company held by a Chinese bank.
What is a Eurobond?
A bond issued in a currency other than the currency of the country or market in which it is issued
What is a callable bond?
A bond that allows the insurer of the bond to redeem the bond prior to its maturity date, usually for a premium
What is a putable bond?
A bond that allows the owner of the bond to force the issuer to buy back the security prior to the maturity date
What is a convertible bond?
A bond that can be converted into a specific amount of company stock at certain times during its life, usually at the discretion of the bond holder.
What is a CD
A certificate of deposit. Like a bond but issued by a bank with a maturity date and specific interest rate. can't take your money out or you are penalized
What is CAPEX?
A company's spending on physical assets such as buildings and equipment.
What is a 10-k/10-Q?
A comprehensive summary report of a company's performance that contains much more detail than the annual report that must be submitted to the SEC. 10-k = yearly 10-k = quarterly
What does an increase in WACC denote?
A decrease in valuation and an increase in risk
What is behavioral finance?
A field of finance that proposes psychology-based theories to explain stock market anomalies and investing decisions. i.e Herd instinct - dot com boom and burst
What is a futures contract?
A financial contractual agreement to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. ex. options
What is the Federal Deposit Insurance Company?
A government corp created by the Glass-Steagall Act of 1933 that provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000* per depositor per bank.
What is the yield curve and why is it important?
A graphical representation of the different interest rates paid by bonds with the same level of risk but different maturities. The three types are normal, flat, and inverted curves. yield = amount of return an investor will realize on a bond
Give an example of a correlation of 0?
A large steel company and a small software company
What is a current ratio and how is it calculated?
A liquidity ratio that measures a company's ability to pay short-term and long-term obligations. (also known as working capital ratio) Ratio of 2:1 is usually pretty good, but varies on the industry. Current Ratio = Current Assets / Current Liabilities
What does a high coupon rate indicate regarding convexity?
A low convexity
What is working capital and how is it calculated?
A measure of both a company's efficiency and its short term financial health. Found by subtracting current liabilities from current assets.
What is standard deviation and how is it calculated?
A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. Measures volatility.
What is duration?
A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. It is the derivative a yield curve, and is expressed in years. The bigger the duration number the greater the interest rate risk/reward for bond prices.
What is Beta and how is it calculated?
A measure of the volatility or risk of a security or portfolio in comparison to the market as a whole. i.e a stock w/ a beta of 1.5 is 50% more volatile than the market. Low Beta stocks - stable, weaker than market when it's strong, experience less dramatic declines during crashes high beta stocks - risky, outperform the market when it's strong and fall further during dips. Beta = Covariance of market return with stock return / variance of market return
What is the Black Scholes Model?
A model of price variation of financial instruments that can determine the price of European options. Regarded as one of the best ways to determine fair prices of options. Best used for pricing call options.
What are open market operations?
A monetary policy tool in which central banks buy and sell bonds to regulate the money supply in the economy. (Fed does this in the US)
What is P/E, how is it calculated, and is a higher or lower p/e better?
A ratio for valuing companies that measures its current share price to its earnings per share. Lower is better because it is how much you are paying for $1 of earnings --> price per share/earnings per share
What is price to book ratio?
A ratio used to compare a stock's market value to its book value
Give me an example of pure arbitrage
A stock and its futures contract are trading at different prices on different exchanges. The stock is higher than the futures contract. Then you would buy the futures contract and short the stock simultaneously.
How is the strength of the dollar and imports/exports related?
A strong dollar boosts imports and a weak dollar boosts exports
What is arbitrage?
A trading strategy designed to profit from small differences in the prices of similar or identical assets.
What is EV/EBITDA, how is it calculated, and is a higher or lower one better?
A valuation known as the enterprise multiple that looks at a company as an acquirer would because it takes debt into account. Lower is better and signals a good target for acquisition. High growth companies tend to have higher enterprise multiples than slow growth companies --> Enterprise value/EBITDA
What is embedded value?
A valuation method used mostly for insurance companies.
What is nominal value in economics?
A value in monetary terms that doesn't adjust for inflation
What are the nine financial holdings in the NLF?
AIG, Allstate, JPMC, Goldman Sachs, Prologis, BB&T Corp, Wells Fargo, Blackrock, Metlife
What does ADR stand for and what are they?
American Depositary Receipt - A negotiable certificate issued by a US bank representing a specified number of shares in a foreign stock and is traded on a US exchange. It is useful because it it a hassle for foreign companies to list shares directly on a us exchange and if you just bought straight from the country of the businesses' exchange the administration and duty costs would be very high per transaction.
What is a quick ratio and how is it calculated?
An indicator of a company's short term liquidity. Measures dollar amount of liquid assets for each dollar of current liabilities. Ratio of 1.5 means a company has $1.50 available to cover every $1 of current liabilities. Quick Ratio = (Cash and equivalents+short term investments+Accounts receivable) / Current Liabilities
What is goodwill?
An intangible asset that arises from an acquisition i.e brand name, customer loyalty, etc. It is the difference between the price paid for a company and the book value
What kind of investment would have a negative Beta?
An investment that moves in the opposite direction of the market i.e. Gold
Give me an example of risk arbitrage
An investor believes a company will be bought out so he buys stock in the company before it is bought out at a premium.
Who is the chancellor of Germany?
Angela Merkel
What is the difference between arithmetic and geometric calculation?
Arithmetic averages (ones from math) can't always be used in the stock market bc. they fail to account for things like if you lose money one year you will have less capital to generate returns the following year. If you return 90%, 10%, 20%, 30%, -90% over a 5 year period you do not average a 12% gain. Must use geometric average. GM = (Add 1 to each # and multiply all the numbers together)^1/amount of #'s - 1
Where is gasoline?
Around $1.30 per gallon
Where is gold?
Around $1150 per troy oz
Where is silver?
Around $15.50 per troy oz
Where is copper?
Around $2.36 per pound
Where is natural gas?
Around $2.40 per million BTU (British Thermal Units)
Where is USD index?
Around $97 (the base of the index is 100)
Where is EUR/USD?
Around 1.1 (1 EURO = 1.1 USD)
Where is GBP/USD?
Around 1.5 (1 GBP = 1.5 USD)
Where is the Russell 2000?
Around 1100
What is the historical return annualized of the of the S&P 500?
Around 12% (some say 7% after you adjust for inflation) But the number is misleading because the market has been so volatile that the S&P has only produced calendar years between 10% and 14% four times since 1970. The 12% comes from crazy years with 30% returns mixed with plunges of 37% returns.
Where is USD/JPY?
Around 120 (1 USD = 120 Yen)
What is the historical standard deviation for the S&P 500?
Around 17
Where is the Dow?
Around 17600
Where is the 10-year UST?
Around 2%
Where is the 30-year UST?
Around 2.85%
Where is the S&P 500?
Around 2000
Where is the Nasdaq?
Around 5000
What is the problem with the way Beta is calculated?
Because it is a historical measure, it can't reliably predict the future. The Beta of a stock will change as more historical data points are added.
What is the terminal value growth rate and why is it used in the DCF?
Because the company will continue to grow and operate after the estimated period that we are forecasting free cash flow for. TVGR allows you to estimate the cash flows of the entire future life of a company after the forecast period is up by making some assumptions
Why do we subtract out Net Debt from the DCF equation?
Because the enterprise value includes a company's debt and as equity investors we are interested in the value of a company's shares alone.
Why would a public company be priced higher than a private company with the same revenues?
Because the investor is paying for a liquidity premium and a transparency premium
Why do we discount cash flows?
Because they are future cash flows and we can't invest them now so they are useless to us so it doesn't make sense to pay for them as if we are receiving them now.
Who was the previous chairman of the Fed?
Ben Bernanke
What is a good net working capital ratio?
Between 1.2 and 2. Anything below one means it doesn't have enough money to pay off its short term debts and a number above two means that its not sufficiently investing its assets.
If you believe interest rates will fall should you buy or sell bonds?
Buy
What is CAPM?
Capital Asset Pricing Model - A model that describes the relationship between risk and expected return that is used in the pricing of risky securities. (Believes investors should be compensated for time value of money and risk) Shows the expected return for stocks.
Where is the federal funds rate?
Close to zero (.25%)
What does CAGR stand for and why are they important?
Compound annual growth rate is the mean annual growth rate of an investment over a specified period of time longer than one year. It is a percent and helps discern which investments are outperforming others.
What does CDS stand for and what does it do?
Credit Default Swap - shifts the risk of default of a bond or other-fixed income security onto an insurance company or another CDS seller for a certain premium. (The CDS buyer will guarantee the principle to the CDS seller should the bond issuer default)
In the DCF increasing Net Working Capital projections will do what to the target price?
Decrease the target price ---> you subtract change in net working capital from revenues in the DCF
In the DCF, increasing CAPEX projections will do what to the target price?
Decrease the target price --> increasing CAPEX will make net investment larger
What is D&A and how is it calculated?
Depreciation and amortization. It is found by adding depreciation and amortization together from the income statement. Depreciation is found by dividing an items initial price by its useful life and subtracting that from the initial price every year. To find amortization use and amortization calculator.
What is the difference between depreciation and amortization?
Depreciation is a decrease in an assets value throughout its useful life and amortization is either the paying off of debt over a scheduled period of time (mortgage) or the spreading out of capital expenses over a period of time for accounting and tax purposes. (A patent with a useful life of 15 years that cost 30 mill would be 2 mill in amortization expense every year)
What is the statement of cash flows?
Details the movement of cash in and out of a business. 3 types of cash flows: operational cash flows (cash received or spent as a result of a company's business activities), investment cash flows (cash received or spent through investing activities), financing cash flows (cash received through debt or paid out as debt repayments, or a company issuing stock, paying down debt, or re-purchasing shares)
What is DCF?
Discounted Cash Flow - A valuation method used to determine the attractiveness of a stock. Uses future free cash flow projections and discounts them to arrive at a present value estimate.
What is EBIT and how is it calculated
Earnings before interest and taxes EBIT = Net Income + Interest + Taxes OR EBIT = Revenue - operating expenses
What is EBITDA and how is it calculated?
Earnings before interest, taxes, depreciation, and amortization. A non-GAAP metric that is an indicator of a company's financial performance. (companies can pick and choose what information goes into the EBITDA calculation) EBITDA = Revenue - Expenses (excluding interest, tax, depreciation, amortization)
How do you find GDP?
Either add up what everyone made or what everyone spent (the calculation isn't simple but thats a simple way of looking at it)
What is EV/Sales, how is it calculated, is higher or lower better?
Enterprise value to sales is a valuation measure that gives the investor an idea of how much it costs to by the company's sales. The lower the EV-to-sales the more attractive or undervalued the company is believed to be --> EV/Sales = Enterprise Value/Annual Sales
Which is more expensive to finance, debt or equity?
Equity. For debt the cost of obtaining capital is just interest which eventually goes away rather than equity where you'll always have to pay shareholders their % of profit.
A growth rate that you need for the DCF isn't on Bloomberg, what should you do?
Estimate it yourself by looking at past revenue growth rates then decide if this rate well continue, decrease, or grow by looking at several factors such as company and market outlook, market growth, competition, etc. Better to err on the side of conservatism rather than being overly optimistic about values in the DCF.
Explain how to calculate Free Cash Flow from Net Income?
FCF = Net Income + Depreciation/Amortization - change in working capital - capital expenditure
What are five inputs on a financial calculator?
FV (future value), PV (present value), N (number of periods), I/Y (interest rate), PMT (periodic payment)
Which sectors do you think will outperform 1 year from today?
Financials because it performs well when the economy is strong and a rate-hike is the equivalent of the fed giving the economy a clean bill of health. I think they will also be the most prepared for a correction, and they will also make more money lending in a higher rate market. Information Technology may also outperform because the tech sector has been doing well and they have strong balance sheets (good for M&A)
The government conducts what type of policy?
Fiscal policy - A policy in which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.
Explain the financial crisis in less than one minute
From 2007-2008 the US was in a real estate bubble and prices were at an all time high which led to the subprime mortgage crisis in which investment banks were bundling mortgages and selling shares of them to investors and they were very successful so there was a high demand for them so to make more money banks and insurance companies starting giving mortgage loans to people who shouldn't have qualified and when they defaulted everyone pulled out of mortgage backed securities. The result: Washington Mutual failed, Bear Sterns collapsed along with Lehman Brothers (which managed 600 bill in assets); this almost brought down the entire financial system (dow closed just over 500, worst since 9/11) The US gov stepped in and bought the risky debt offerings and provided cash infusions, bailed out insurance companies like AIG which instituted the "too big to fail idea". This led to big investment banks merging with consumer banks.
What is the difference between technical and fundamental analysis?
Fundamental analysis measures the intrinsic value of a stock by looking at every aspect of the company, industry, and economy. Technical analysis measures stocks by studying statistics, charts, and past prices and volumes to identify patterns and trends that can be used to make money w/o caring about the intrinsic value or the company.
What is GDP?
Gross Domestic Product - The total total dollar value of all goods and services produced over a time period. Shows the size of the economy.
What is book value and how is it calculated?
How much a company would be worth if it stopped operating today, sold all of its assets, and paid off all of its debts BV = Tangible assets - liabilities
When should a company buy back stock?
If they think that the market has discounted the stock price too low and management is optimistic that the stock is worth more than the market value
What is the Glass-Steagall Act?
In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. (partially repealed in 1999)
What is the difference between primary and secondary markets?
In primary markets investors buy securities directly from the company issuing them. In a secondary market investors trade securities among themselves, and the issuing company does not participate in the transaction.
Explain what a $10 increase to depreciation would do to all three accounting statements?
Income Statement: EBIT declines by $10, assuming tax rate of 40% net income declines by $6 Cash Flow Statement: Since net income decreased $6 and depreciation increased $10 cash flow from operations increased $4 Balance Sheet: Cumulative depreciation increases $10 so net PP&E decreases $10. We know from cash flow statement that cash increased $4. The $6 reduction of net income caused retained earnings to decrease by $6. Now the balance sheet is balanced. Assets decreased $6 (PP&E -10 and cash +4) and shareholder's equity decreased $6. (retained equity)
In the DCF, increasing revenue prediction will do what to the target price?
Increase
In the DCF, increasing D&A projections will do what to the target price?
Increase the target price because it would make the net investment smaller (because you subtract depreciation charges from CAPEX to find net investment) so increasing D&A would make net investment smaller and thus the cash flow for that year larger and ultimately the target price larger.
What is an IPO?
Initial public offering - first sale of stock by a private company to the public.
What would you use as the risk free rate when valuing a stock?
Interest rate of a 3 month US treasury bill (around .02%)
If the US dollar weakens substantially, you can expect interest rates to do what?
Interest rates will rise - low interest rates result in more money in the system which lowers the value of the dollar and leads to inflation. Higher interest rates strengthen the dollar.
What is IRR and why is it used as other forms of financial analysis?
Internal Rate of Return - One of the most popular methods of evaluating potential projects. The higher the IRR the more valuable the project is. To find it you use the NPV formula and set it equal to zero to calculate the discount rate, which is the IRR and will be like the rate of growth the project is expected to generate.
What is treasury stock method?
It assumes that the proceeds from all in the money options are used to buy shares of common stock
Why does the DCF use diluted shares outstanding as opposed to shares?
It better allows investors to properly access a company's financial situation. The power to change the price of a stock that option holders and people with convertible bonds have needs to be accounted for.
What are some flaws with IRR?
It can be misleading. A project may have a low IRR but a high NPV meaning that although it is adding value very slowly, the project may be adding a great deal of overall value to the company.
If you add a risk stock to a portfolio what happens to the overall risk of the portfolio?
It depends on how it is correlation with the rest of your holdings. It could be a hedge and actually lower the risk
If interest rates rise, should you buy or sell equities?
It depends. Stocks fall at first but sectors like financials can still perform well when rates rise
What happens to WACC as Beta and rate of return on equity increase?
It increases
What does it means for options to be in the money?
It means that an option will produce a profit when exercised.
Who is the head of the SEC?
It was Mary Jo White now it is Jay Clayton
Who is the chairman of the Fed?
Janet Yellen
Which stocks do you think will outperform 1 year from today, small mid or large cap?
Large cap US equities because they are generally safer in market corrections and because they usually have more cash thus they won't need to take on asm much debt with higher rates.
Would you run a DCF first or last when you are analyzing a company?
Last so that I could use quicker valuation methods first so that if I didn't like what i saw with those I wouldn't have to waste time doing a dcf.
What does LBO stand for and what is it?
Leveraged Buyout - The acquisition of another company using a significant amount of borrowed money. In many cases the company being bought and its assets are used as collateral for the loans.
What is liquidity and why is it favorable for an investor?
Liquidity is the degree to which an asset or security can be quickly bought or sold (converted to another asset) without affecting the asset's price. It is favorable because it means that an investor can react to market moves quickly without losing his money
Explain a company's typical capital structure?
Made up of debt and equity. The three types of debt are senior, mezzanine, and subordinated. They are paid off in that order and senior has the lowest interest rate and subordinated has the highest. It can be issued as bank loans and bonds. Equity is broken down into common stock and preferred shares. Preferred shares have no voting rights but pay a dividend and have access to assets in the result of a bankruptcy before common stock holders.
What is hedging?
Making an investment to reduce the risk of adverse price movements in an asset. Normally consists of taking an offsetting position in a related security, such as a futures contract.
What are leading economic indicators and what are some examples?
Measurable economic factors that tend to change right before the market starts to change. ex. stock market, retail sales, building permits, housing market, business start ups.
In general which type of policy has a quicker effect, monetary or fiscal?
Monetary because interest rates can be set every month but a decision to increase government spending may take time to decide where to spend the money.
The Fed conducts which type of policy?
Monetary policy - The actions of a central bank or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.
What are the 9 sub-sectors of financials?
Money center banks, property and casual insurers, Real estate investment trusts, regional banks, asset managers, life insurers, diversified financial services, consumer finance, specialty finance
How do you calculate the terminal value using exit multiple?
Multiply final year projected cash flows by a valuation multiple such as EV/EBITDA and assume that the company will be bought out
How do you find the intrinsic value per share of a company using its P/E ratio?
Multiply the industry mean P/E by the company's EPS
What is nominal yield?
NY = Amount of interest paid / Face value
What is your view on the market one year from today?
One year from today the presidential election will have just happened. Historically bear markets along with wars and recessions tend to occur in the first half of the presidential term (bull markets more likely to occur later in the second half of the year) That mixed with the interest rate rise that I will believe will happen early next year make me think the market will be in unfavorable conditions 1 year from today.
What are the three main concepts on the statement of cash flows?
Operating cash flows, investment cash flows, and financing cash flows
Why do we use P/E and EV/EBITDA but not P/EBITDA OR EV/E?
P and E are measures for a company's valuation per share so it would make no sense to pair it with something large like EBITDA OR EV because its not consistent. Also EBITDA is before interest so you have to use a measure with it that includes debt, hence EV
Other than DCF, what are other ways to value a company?
P/E, EPS, ROE, ROA, Price-to-book, comparable company analysis, precedent transaction analysis, leveraged buyout, embedded value (insurance companies)
What is PEG, how is it calculated, is higher or lower better?
Price to earnings to growth ratio allows investors to evaluate stock price compared to the underlying company's earnings and growth. The lower the ratio is the better the stock is, PEG values vary by industry --> PEG = P/E / Annual EPS Growth
What are the two types of arbitrage?
Pure and risk - pure is risk free and risk is speculative because it is based on presumptions about future events that may not occur
What is ROA and how is it calculated?
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. Shows how efficiently management is using its assets to generate profit. Calculated as a percentage, higher is better. ROA = NET INCOME / TOTAL ASSETS
What is ROE and how is it calculated?
Return on equity (or RONW -Return on net worth) measures a corporation's profitability by revealing how much profit the company generates with the money shareholders have invested. The higher the better. ROE = Net Income / Shareholder's equity
What is ROIC and how is it calculated?
Return on invested capital is used to asses a company's efficiency at allocating the capital under its control to profitable investments. A ROIC of 20% means for every dollar invested the company generates 20 cents in income. ROIC = Net Income - Dividends / Total Capital
If you believe interest rates will rise should you buy or sell commodities?
Sell because high rates will lead to strong dollar which will mean you can buy the commodity for less dollars which decreases the price
Who is the prime minister of Japan?
Shinzo Abe
What is the income statement?
Shows revenue, expenses, and net profit from both operating and non-operating activities. Divided into operating and non-operating sections. Non-operating expenses example: currency exchange, costs of restructuring, employee benefits and pension contributions.
What is the balance sheet? How do you use the balance sheet to determine a business' net worth?
Statement of net worth broken into 3 section: assets, liabilities, and equity. A= L + E Business' net worth = Assets - Liabilities
What is the only security that is not affected by inflation?
TIPS - Treasury Inflation Protected Securities are bonds where the principle and coupon payments are tied to the CPI and increase to compensate for any inflation. Hard to sell bc they have lower yields and most ppl aren't concerned about inflation.
How do you determine which terminal value growth rate to use?
The Gordon Growth model which assumes that cash flow of the last projected year will stabilize and continue at the same rate forever is used most of the time. Sometimes the exit multiple model is used where some income or cash-flow measure (net income, EBITDA, etc.) is multiplied by a projected price-to-free cash flow which is determined by looking at how comparable companies are valued in the market. (it is much more simple and is used for acquisitions)
What is operating cash flow and how is it generated?
The amount of cash generated by a company's normal business operations. OCF = Revenues - operating expenses
What is net investment and how is it calculated?
The amount of money spent by a company on capital assets, such as property, plants, and equipment. It is calculated by subtracting depreciation from capital expenditure (found on statement of cash flows)
What is efficient market theory?
The belief that all market participants receive and act on all of the relevant information as soon as it becomes available. Meaning that stock prices always incorporate and reflect all relevant information.
Give me an example of the relationship between all three accounting statements
The calculation of free cash flow
What is free cash flow and how is it calculated?
The cash that a company is able to generate after laying out the money that is required to maintain or expand its asset base --> operating cash flow - capital expenditures
What is default risk?
The chance that companies and individuals will be unable to pay their debts
What are the two rules for equities to be available for the NLF?
The company must be over 800 in market cap and can't have IPO'd with in the last 6 months
What is the market risk premium?
The difference between the expected return on a market portfolio and the risk-free rate.
What is the default premium?
The difference in yield between a corporate bond a the yield on a government bond with the same maturity
How do you determine the discount rate on a bond?
The discount rate is determined by looking at a company's default risk
Why do you have so much faith in the future of financial companies?
The housing market is growing which will create a bigger demand for mortgages, financial institutions are paying back government loans and increasing share buy backs and dividend payments (sign of strength).
What is time value of money?
The idea that money today is worth more than money tomorrow
What is the enterprise value and how is it calculated?
The measure of a company's total value, more comprehensive than market cap: EV = market cap + debt + minority interest + preferred shares - cash and cash equivalents
What is correlation in relation to equities?
The measure of how two securities move in relation to each other. Ranges between -1 and 1. Perfect positive correlation (+1) implies that as one security moves, either up or down, the other security will move in lockstep in the same direction.
What is operating leverage?
The percentage of costs that are fixed vs variable. If a company has a high operating leverage if it makes more revenues those revenues will go straight to net income.
How do you calculate embedded value?
The present value of future profits considers the potential profits that shareholders will receive in the future, while adjusted net asset value considers the funds belonging to shareholders that have been accumulated in the past.
What is a strike price?
The price at which an option holder can buy or sell an underlying security
What is spreading comps?
The process of collecting and calculating relevant multiples for comparable companies
What is convexity?
The second derivative of the yield curve. It is a risk management tool and demonstrates how the duration as a bond changes as interest rates change.
What is the market value of equity and how is it calculated?
The total dollar market value of all the company's outstanding shares. (market cap)
Name five holdings in the fund outside of the energy/financials sectors?
Walt Disney Co, Nike, Comcast, Time Warner, Autozone, AT&T, Verizon
What is WACC?
Weighted Average Cost of Capital is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.
What is current yield?
What you will earn if you buy and hold the bond for one year CY = Annual Interest / market price of bond
What is quantitative easing?
When a central bank of a country purchases securities in order to lower interest rates and increase the national money supply in hopes of boosting the economy. This would mean people would have more money and would lead to a higher GDP.
What is cash flow crunch?
When a company doesn't have enough cash to pay its obligations
What is "money left on the table"?
When a company rises a lot on the first day of trading after an IPO and could have completed the offering at a higher price
How and why do you unlever and relever Beta?
When doing WACC you unlever beta because not all capital obligations involve debt (and therefore default or bankruptcy risk. Comparisons between different obligations require a beta calculation that is stripped of the impact of debt. Then you must relever beta because debt adds risk so you must account for it.
What is an accretive acquisition?
When the acquisition adds to the acquiring company's EPS
What is a dilutive acquisition?
When the acquisition decreases the acquiring company's EPS
Under normal circumstances are risk and return positively correlated?
Yes
What does a business having lots of free cash flow signal and is it good for an investor?
Yes It signals a company's ability to pay debt and dividends, buy back stock and facilitate the growth of business.
What is YTM and what does it mean for a bond?
Yield to maturity - The total return anticipated on a bond if the bond is held until the end of its lifetime.
How would a $10 increase in depreciation in year 4 affect the DCF valuation of a company?
Your FCF increases by $4 and your valuation will increase by the present value of $4
If you believe interest rates will fall, which should you buy: a 10-year coupon bond or a 10-year zero coupon bond?
Zero coupon bond bc its more sensitive to fluctuations in interest rates
Would buying a call option mean you were bullish or bearish on the security?
bullish
What are the three main accounting statements?
Income statement, balance sheet, statement of cash flows
In the DCF, increasing EBIT projections will do what to the target price?
Increase
Who is the president of the European Central Bank?
Mario Draghi
Who is the head of the Federal Deposit Insurance Company?
Martin J. Gruenberg
What are lagging economic indicators and what are some examples?
Measurable economic factors that change after the economy has already begun to follow a particular pattern or trend ex. unemployment, corporate profits and labor cost per unit of output, and interest rates.
Who is the prime minister of India?
Narendra Modi
Give an example of a correlation of -1?
Oil prices and airline stocks
How do you find levered Beta?
Same equation as for unlevered beta but substitute unlettered beta in for beta as the numerator
What should be the value of the perpetuity growth rate for the terminal value in a DCF?
Somewhere between inflation and GDP
How exactly does shorting a stock work?
If i wanted to short a stock I would find someone to loan me shares then the shares would be sold and credited to my account. At some point I would have to buy back the shares and return them to the person who loaned them to me so if the price of the stock drops I can buy back the shares at a lower price, return them the shares, and keep the difference.
List the last 5 chairmen of the Federal Reserve
Janet Yellen, Ben Bernanke, Allen Greenspan, Paul Volcker, G. William Miller
What is the risk free rate?
The minimum rate an investor could expect to receive from an investment if it hand risk. Usually based on the current interest rate of a 3-month UST bill.
What does face value refer to?
The nominal value or dollar value of a security stated by the issuer. For stocks it is the original cost of the stock shown on the certificate. For bonds it is the par value, or the amount paid to the holder at maturity
What is CAPM used for in the DCF?
To calculate cost of equity which is used in finding WACC
Give an example of a correlation of 1?
Two high end hotel chains
Is inflation favorable or unfavorable for investors?
Unfavorable. Even if it doesn't hurt their earnings, which it easily could, their cash is now worth less so they have less buying power. Bad for bond holders because the principle received at maturity will be worth less.
How do you compute total diluted shares outstanding?
Using treasury stock method
Which sectors do you think will underperform 1 year from today?
Utilities and Telecommunications Utilities because they have been underperforming and volatile ytd, many ppl think they're valued too high, high debt ratios, utilization rates of electric and gas utilities has declined while production has spiked. Telecom because capex is rising, profit margins are falling, and it has the highest debt to equity ratio of any non financial sector.
Who is the president of China?
Xi Jinping
Which stocks will outperform 1 year from today, growth or value?
Value because they have less inflated stock prices/ P/E'S, and valuations and generally perform better during corrections.
Where is Crude Oil?
$44 a barrel
How many federal reserve banks are there?
12