Finance Questions
Walk me through the major line items on a cash flow statement
First the beginning cash balance, then cash from operations, then cash from investing activities, then ash from financing activities and finally the ending cash balance.
What happens to each of the three primary financial statements when you change a) gross margin, b) capital expenditures, c)any other change?
Pg. 60
How do you value a company
Pg. 61
What is EBITDA
A proxy for cash flow, EBITDA is earning before interest, taxes, depreciation, and amortization. IT can be found on the income statement by starting with EBIT and adding depreciation and amortization back.
How do you calculate the terminal value of a company
By taking a given year in the future at the which a company is stable (usually year 10), assuming perpetually stable growth after that year, using a perpetuity formula to come up with the value in that year on future cash flows, and discounting that value back to the present day.
Say you knew a company's net income. How would you figure out the its "free cash flow"?
Start with the company's net income. Then add aback depreciation and amortization, since these are not cash expenses. Subtract the company's capital expenditures (called "CapEx" for short, this is how much money the company invests each year in plant and equipment). Then, be sure to add/subtract the change in net working capital. The number you get is the company's free cash flow: Net income +Depreciation and amortization -Cap Ex -Increase (or +decrease) in net working capital =Free Cash Flow (FCF)
Why are the P/E multiples for a company in London different than that of the same company in the States
The P/E multiples can different in two countries even if all other factors are constant because of the difference in the way earnings are recorded. OVerall market valuations in American markets tend to be higher than those in the UK.
What is the difference between the income statement and the statement of cash flows
The income statement is a record of revenue and expenses while the statement of cash flows records the actual cash that has either come into or left the company. The statement of cash flows has teh following categories: operating cash flows, investing cash flows and financing cash flows.
What is the link between the balance sheet and the income statement
The main link between the two statements is that profits generated in the income statement get added to shareholder's equity on the balance sheet as retained earnings. Also, debt on the balance sheet is used to calculate interest expense in the income statement.
What is the link between the balance sheet and the statement of cash flows
The statement of cash flows starts with the beginning cash balance, which comes from the balance sheet. Also, cash from the operations is derived using teh changes in balance sheets accounts (such as accounts payable, accounts receivable, etc.). The net increase in cash flow for the prior year goes back onto the next year's balance sheet.
Why might there be multiple valuations for a single company
There are several different methods by which one can value a company. And even if you use the rigorously academic DCF analysis, the two main methods (the WACC and APV method) make different assumptions about the interest tax shields, which can lead to different valuations. This is the basic principle in corp finance and one of the many rason s that market capitalizations fluctuate.
