After Midterm Class 5- Flashcards
bad debt expense
bad debt expense usually dont get paid 100 cents on the dollar, the whole reason this whole bad debt expense exists is a recognition of the fact if I make 100 dollars worth of sales on credit I probably will not get 100 dollars, so if I make the sale I make an estimation historically it has been eh case that 2% is what I end up not collecting so use that as an estimate
margins*
always x/ revenue
so % of sales*
margin means percent of sales
operating margins
operating income or ebit
gross margins
so for every dollar of sales I got 37 cents left over by time I get to that point on the income statement
if AR is growing a lot more than revenue does than thats an issue
if persistent lag over time* that means ppl are booking sales and calling it revenue on income statement but if outstanding balance is high they havent gotten cash yet so can mean a couple of things*
could mean customers are taking too long to pay them OR
they are extending credit to a bunch of customers that they shoudlnt be for example car dealership or car loan, same thing with mortgages as soonas I close the transaction I get to call it revenue, if they are going to pay me doesnt matter I can call it revenue, if we inc revenue new sale
ppl only focused ons ales are a little bit misguided but i also care about quality of sales and payment
need an a handle for what is going on
where do I actually need to go and dig more deeply especially in a market where everyone has access to the same information
buy traffic feed from in and out of traffic Walmart
look in period stronger in this product line and weakness in sales to south America, breakdown by segment and geography all very useful then they have a whole section they have to disclose talking about risk factors** like risk that our largest customers go out of business
after FS you get notes of company and that is where they give you the granular info : here is how we deal with inventory costs, they dnt give you complete information but give you a lot more
“Notes” section or “notes to consolidated financial statements”
so look at notes* so if they change their revenue recognition policies, if they change from FIFo to LIFO they have to flag it for everyone
still 10K and 10Q
price is truth
herbal life could be life but go bankrupt before
“markets can stay irrational longer than you an stay solvent”
patrick 11.20.24
when you issue equity and then dilute shares it isnt good!!!! look on midterm B notes as well
of shares= 10
you want to be mindful if that stock based number is that crazy relative to everything else
- no hard and fast rule but as a % of expenses or sales or whatever standardized metric you want to use you need to compare that across companies
it can have a diluted effect creating shares out of thin air and giving to employees
-more shares out there all else being equal
- if I am a company and I issue a bunch of stock:
Question 1
if I am an existing share holder: why are you diluting us? now I have to split net income from company with more people, why are you diluting the shares?
all else being equal if I increase shares or if I issue more shares I will decrease EPS- each share is receiving less net income so price goes down
Net income= 100
so each share has 10 dollars worth of net income associated with it , so EPS= 100/10 so I earn 10 dollars a share, but if its still net income of 100 but if I inc
the shares to 20
then 100/20= 5 dollars a share! WE DONT WANT THIS lowers what we get!
Question 2- why do you need the money?
EPS math for diluting shares
Question 1
if I am an existing share holder: why are you diluting us? now I have to split net income from company with more people, why are you diluting the shares?
all else being equal if I increase shares or if I issue more shares I will decrease EPS- each share is receiving less net income so price goes down
Net income= 100
so each share has 10 dollars worth of net income associated with it , so EPS= 100/10 so I earn 10 dollars a share, but if its still net income of 100 but if I inc
the shares to 20
then 100/20= 5 dollars a share! WE DONT WANT THIS lowers what we get!
Question 2- why do you need the money?
patrick 12.4.24
bonds
we think market is price X market could decide otherwise they may like my bond a lot more or a lot less so the actual price they pay, they being investors can change but contractual obligation is how much company has to pay them at the end and what they have to pay them now and the end in interest
Municipial bond lawyers right when city state , like taxes temporary differences under gap can depreciate one way but for IRS I can epreciate another way so difference, those are temporary differences for taxes bought a plant for 100 mill over course of its life I will depreciate 100 million but he timing will be different BUT with interst on municipal bond is taxable
but for policy reasons we want to make it easier for state and government entities to raise money when they need to so they said ok we are going to make a sepcial carve out with interst resceved from municipal bonds
bond contracts= regular bond from company get 50 bucks then have to pay axes on it*** 5% interst on rate but if municipal bond I get to keep that I dont have to pay taxes on municipal bonds thats the benefit huge benefit will not get taxed at the federal level so investors would be more inclined to make those investments when the MTA or state of NY has to raise a couple billon dolars they arent literally goign to investors but a nice thing about me giving them my money is that I dont have to pay taxes on them
municipal bond markets can be changed by interest rates and macro economics and business a d deals happening, specifically related to what arthur miller his uncle figured out how to do
corporate vs municipal bonds
corporate you have to pay taxes on the bond!!! so only get 25 really
federeal gov you do not have to pay taxes on their bonds!!!!!
but because of this tax benefit municipal bonds usually have lower % coupon rate, so run out ot buy a thing that inc the price of the thingthen lower yield or lowers return in investign right so if everyone is a rational ivnestor, hey what is hte tax equivalent yield of municipal bond or what is the pretax value of municipal bond
municipal ields 5% always assume lower risk then yes want to go for municipal bond
with corporbate bonds vs munic
after tax really only geting 25/1000= 2.5% but with municipal bonds I get 5%!!!!
when they earn interst that shows up as earned income sometimes spelled out separately sometimes they call it Net interst expense how much did I pay vs. how much did I receive so still have to put that in oncome statement but dont have to pay IRS taxes that is a permanet difference so dont put into account for differeal tax liabilities
if IRS says no then you dont owe us money on that
one of hte many permanent differed differences doesnt affect tax at all
covenants
covennants yes going to give you money but you cant blow it all so have to maintain X dollars minimum cash at all times, need to maintain a certain ratio of this to that to give the ivnestors comfort again cant light money on fire
paymebts for bonds do not change! so whatever face value is liek if it is 1000 they have to repay me at maturity then recalculate total cash flows every year
pattern cash flows
first pay 1000 day 1 get 50 dollars buck of interst each year then at year 5 they give me lump sum of 1000
but look if you can get lower price 900 then get higher return! 7 better than 1000 day 1
what if price changes, more you pay for something the lower your returns will be all else being equal**
but if interest rates go down they are willing to accept less, how much less and who is willing to pay or sell determines if price is now 1100
central idea=more you pay for something the lower your returns will be all else being eual**
PAY LESS MAKE MORE
value investing when talk about stocks future cash flows are far from certian so have to try to understand what the company can do in terms of net income free cash flow next year and for years after that as well*
- What would merchandise inventory be at 2/1/09 if Home Depot used FIFO instead of
LIFO?
practice exam 1 Q4
- What would merchandise inventory be at 2/1/09 if Home Depot used
Inventory FIFO = Inventory LIFO + Reserve
Inventory FIFO = $10,673M + $500M = $11,173M
