Beginning Finance 01
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. What would you like to do?
List few types of financial ratios
- 1. Liquidity
- 2. Leverage
- 3. Activity
- 4. Profitability
- 5. Growth
What would be a Liquidity ratio?
Current Assets / Current Liabilities
(Current Assets - Inventory) / Current Liabilities
What would be a Leverage ratio?
Total Debt / EBITDA
(EBITDA + Other Income) / Interest
Cost of Debt Estimate
Interest Expense / Total Debt
What would be an Activity ratio?
COGS / Inventory
Revenue / Assets
(AR / Revenue ) * 360
(AP/ COGS ) * 360
What would be a Profitability ratio?
Gross Profit Margin
Gross Profit / Sales = (Sales - COGS) / Sales
EBIT / Sales = (Sales- COGS - SG&A) / Sales
EBITDA / Sales = (Sales - COGS - SG&A + D&A) / Sales
Net Income %
Net Income / Sales
What would be a Growth ratio?
(Period 1 - Period 0 ) / Period 0
Compounded Annual Growth Rate (CAGR)
(Ending Value / Beginning Value) ^ (1/ # of years) - 1
What is the formula for PV (Present Value) ?
PV = FV / (1 + r ) ^ N
What is the formula for FV (Future Value) ?
FV = PV X (1 + I)^ N
What is the formula for Working Capital?
(Current Assets - Cash) - ( Current Liabilities - Current Debt)
Income Statement ......
* All from Operations
- Gross Profit "Unlevered"
- Operating Income "EBIT"
What is the formula to find LTM ( Last Twelve Months)?
FYE0 + YTD0 - YTD-1
Current Fiscal year plus year to date
minus last year's to date
What is EPS?
Earnings Per Share
NI (Net Income) / Shares Outstanding
* Dilution is anything that causes this ratio to fall.
What are few Operating (Unlevered) ratios?
TEV / REV
TEV / EBIT
TEV / EBITDA
What is Equity ( Levered) ratio?
Price / Earning
Price is Share price
Earnings is Net Income / Earnings
Also there is Market Cap / Earnings
What are some of the Global factors should we look into?
What comes to mind when you see TEV/ REV?
- a) Profitability
- b) Capex
- c) Leverage
- d) Growth
- e) none of them
What comes to mind when you see TEV / EBITDA?
- a) Growth, Profitability and Size
- b) Leverage, Risk and MGMT
- c) Working Capital, Leverage and Profitability
- d) Capex, Working Capital and MGMT
What would be a quick answer for EBITDA?
- a) Proxy for a Cash Flow
- b) Proxy for Risk
- c) Proxy for a IE
- d) Proxy for a CAPEX
- e) None of the above
- f) All above
What comes to mind when you see FCF?
* FCF = Free Cash Flow
- +/- Change in NWC
- + D&A ( Non cash items)
- FCF " Unlevered"
What is the basic definition for Terminal Value?
Value for year 6TH through Infinity
Formula for DCF?
- a) FCF / (1 + r )^N
- b) PV X (1 + r ) ^N
- c) RF + Beta X (RM - RF)
- d) (LTM Multiple from Comps) x ( EBITDA)
- e) None of the above
What is Three main types of Accounting?
- Financial accounting –How financial information of a business is recorded and classified (i.e. financial statements of public companies)
- Managerial accounting –Typically used within an organization by management for planning and decision making
- Tax accounting –Branch of accounting used to comply with jurisdictional tax regulations
Valuation of Asset ...
Acquisition or Historical Costrepresents the amount of cash (or cash equivalent) paid in acquiring the asset
Current Replacement Costrepresents the amount currently required to acquire the asset
Current Net Realizable Valuerepresents the amount of cash that a firm would receive if it sold the asset (less the cost involved to sell theasset)
Present Value of Future Net Cash Flows represents the future benefits of the asset discounted to the current period by an appropriate discount rate
Valuation of Assets (continued)
Generally Accepted Accounting Principles (GAAP) stipulate which valuation method to use depending on the type of asset
Non-monetary assets such as inventory, equipment, building and land appear at acquisition cost (less accumulated depreciation value which will be discussed later)
- Monetary assets such as cash and accounts receivable generally appear on the balance sheet at their net present value (i.e. their current cash or cash equivalent value)
- *Cash appears as the amount of cash on hand or in the bank
- *Accounts receivables appear as the amount of cash the firm expects to receive but undiscounted since the firm expects to receive payment in a short period of time (e.g. days to several months)
What are the important types of SEC filings?
- 1. S-1: Basic registration form used for the offering of public securities
- 2. S-2: Simplified version of the S-1
- 3. S-4: Registration of public securities due to a business combination (M&A) or exchange offer
- 4. 10-K: Audited annual report that must be filed with the SEC ( Must be filed within 90 days)
- 5. 10-Q: Unaudited quarterly report filed with the SEC ( Must be filed within 45 days)
- 6. 8-K: Report that is used to report any new material news/events within the company that may be important to investors
- 7. 8-KA: “A”at the end indicates that the 8-K has been amended
- 8. 11-K:Annual report of employee stock purchase, savings and similar plans (additional filing to 10-K)
- 9. SC 13-D: Schedule that discloses beneficial ownership schedule of a company (Any person or group of persons who acquires 5% or more of a class of registered equity securities must file a Schedule 13-D within 10 days of acquisition)
- 10. DEF 14A: Proxy Statement is sent by publicly listed corporations to their shareholders providing material information on corporate matters subject to vote at the annual meeting
10-K’s are typically separated into four sections:
- Part I: General Business Overview
- Part II: MD&A, Financial Statements and Notes
- Part III: Directors, Officers, Compensation, etc.
- Part IV: List of Exhibits
In Regards to "Normalizing"
Above or Below the EBIT Line?
If the charge/income is aboveEBIT, then this item affects EBIT, EBITDA and every other line item below EBIT in the income statement
If the charge/income is belowEBIT, then it only affects items such as pretax income and net income and not EBIT and EBITDA
What is the Formula for TEV?
Terminal Enterprise Value
MVE + DEBT + Preferred Stock + Minority Interest-Cash
What is 3 different valuation perspective?
(1) Comparable Public Companies (aka Trading Multiples)
(2) Precedent Transactions (aka Acquisition Multiples)
(3) Discounted Cash Flows (“DCF”)
What is minority interest and why is it included in TEV?
1. If you own more than 50% but less than 100% of another entity,you are required to consolidate its financials on to your companyfinancials. Minority interest represents the portion of equity thatyour company does not own – it is a liability
2. Therefore, in a TEV / Revenue calculation, if your denominatorrepresents a fully consolidated operating figure, it is necessary togross up your numerator (TEV) to keep the equation balanced or“apples to apples”
3. In a leveraged multiple such as P/E, this adjustment is not aconcern because the earnings calculation is net of minorityinterest (i.e. minority interest expense has already been takenout)
Discounted Cash Flow Overview
- Forecasting FreeCash Flows
- Identify components of FCF
- Keep in mind historical figures
- Project financials using assumptions
- Decide # of years to forecast
- Estimate Cost of Capital
- Perform a WACC analysis
- Develop target capital structure
- Estimate cost of equity
Discounted Cash Flow Overview (cont'd)
- Estimating Terminal Value
- Determine whether to use cash flow multiple (i.e.,EBITDA multiple) or growth rate method (i.e.,Gordon Growth Method)
- Discount it back to present value
- Calculating Results
- Bring all cash lows to present value
- Perform sensitivity analysis
- Interpret results
What would you like to do?
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