Basic

Question 1

What is the difference between the income statement and statement of cash flows?

Answer 1

The cash flow statement takes the accruals basis of the income statement and converts in into a cash position. The income statement shows revenues and expenses, while the cash flow statement shows the sources and uses of cash.

Question 2

Name the top 5 companies with highest market share

Answer 2

1. Apple
2. Amazon
3. Alphabet
4. Microsoft
5. Exxon Mobile

Question 3

How do you determine which valuation methodology to choose?

Answer 3

All valuation methodologies would be conducted and then used to create a football field of valuations to derive a range. From there, it is negotiation.

Question 4

What does spreading comps mean? What must be considered when spreading comps?

Answer 4

Task of collecting and calculating relevant multiples for comparable companies. One offs must be taken into account, such as legal fees, restructurings, write downs, etc.

Question 5

Describe the cash flows from investing section.

Answer 5

Cash generated or used for investing activities, which may include PP&E, CapEx, financial market investments

Question 6

Beginning cash on a CF statement ties to what other number?

Answer 6

Prior period’s ending cash on CF statement

Question 7

What is the formula for retained earnings?

Answer 7

Beg. RE + NI - Dividends=End RE

Question 8

Why is cash reduced in the enterprise value formula?

Answer 8

It is already accounted for in the market value of equity. Plus, you wan to see the net debt figure.

Question 9

What is the definition of valuation?

Answer 9

Determining the worth of an asset, security, company, etc.

Question 10

How do you value a private company?

Answer 10

You could utilize both comparable companies analysis and acquisition comparables.

Can’t use market value of equity, but you could find the value of a similar company. DCF would need WACC, but again you could use a similar publicly traded company.

Question 11

What is the difference between accounts payable and accrued expenses?

Answer 11

Essentially, they are the same. Accounts payable are more for inventory purchases / one off events while accrued expenses are for recurring expenses such as rent, utilities, labor, etc

Question 12

Give me 5 examples of line items sitting in liabilities.

Answer 12

Accounts payable, deferred revenue, accrued expenses, long term debt, deferred tax liabilty

Question 13

All else equal, should the WACC for a company with $100M in market cap be greater than a company with $100B in market cap?

Answer 13

The company with $100M in market cap would have a higher WACC, since it would be expected to have greater % equity returns as well as more expensive debt than a mature $100B company.

HOWEVER, this is dependent on the company’s capital structures. So, I can’t give a precise answer.

Question 14

What is the purpose of changes in NWC portion of the CF statement?

Answer 14

It is used to convert the NI on the income statement to the true cash position for CFO.

Question 15

What is a primary market and a secondary market?

Answer 15

A primary market is the first time shares are issued to institutional investors before going public to the secondary market. The secondary market, such as the NYSE or NASDAQ, is where shares are publicly traded on exchanges.

Question 16

What is the link between the CF statement and balance sheet?

Answer 16

Beginning cash on CF is prior period’s BS cash. Ending Cash on CF statement is equal to cash on same period’s balance sheet. CF depreciation and amortization adjustment comes from PP&E. Investment in PP&E is adjusted for in CFI. Changes in NWC adjustment on CF statement comes from assets and liabilities portion on BS.

Question 17

Net income is the beginning point for which statement?

Answer 17

cash flow statement

Question 18

Describe the cash flows from financing section.

Answer 18

Cash generated or used for financing activities. This may include cash generated by debt or equity issuance or cash used through cost of debt or equity repurchase.

Does NOT include interest expense. Includes dividends PAID.

Question 19

Depreciation and amortization is calculated from where?

Answer 19

PP&E and intangibles on the balance sheet

Question 20

Cash flow statements shows the ____ and ____ of cash.

Answer 20

Sources and uses

Question 21

Would you be calculating enterprise value or equity value when using a multiple based on unlevered free cash flow or EBITDA?

Answer 21

Enterprise value, since FCF or EBITDA represents earnings BEFORE interest. Thus, it represents the amount available to debt and equity holders.

Question 22

Ending cash on a CF statement ties to what on the balance sheet in the same period?

Answer 22

Cash on the balance sheet

Question 23

What is the difference between accounts receivable and deferred revenue?

Answer 23

AR is an asset. It results when payment has NOT been received for services performed. Deferred revenue is a liability that results when payment HAS been received for services NOT performed.

Question 24

What is the formula for NWC?

What does the NWC ratio measure?

Generally speaking, what is working capital?

Answer 24

NWC is net working capital.

Current Assets - Current Liabilities

It measures the ability of a company to pay off short term liabilities with short term assets.

In a FCF projection, I would add a decrease in NWC, because that means inventory was sold, or AR was recieved, thus resulting in an influx of cash. I would subtract an increase in NWC because inventory or AR could have increased, thus a use of cash and the need to offset the NI figure to get the appropriate cash number.

Think of NWC as the amount of dollars tied up to run a business. Therefore, if more dollars are tied up because NWC increases, then your FREE cash flow would decrease.

Question 25

When would a company collect cash from a customer but not record it as revenue?

Answer 25

Magazine subscriptions are a good example of deferred revenue. A company would receive 12 months’ of payments, but not have delivered 12 magazines.

Cash would increase in the cash account, and deferred revenue would increase in the liability account. As the magazines are delivered, revenue will result and the offset will occur in deferred revenue. Deferred revenue would decrease, thus the change in NWC would increase and I would subtract that from the FCF calculation (assuming assets stayed the same). Therefore, there is no change to the cash figure since cash was already updated.

Question 26

Name 3 ways to value a company.

Name 2 ways to show impact of acquisitions.

Answer 26

1. Comparable companies/multiples analysis 2. DCF 3. Precedent transactions analysis
2. Merger consequences (accretion/dilution analysis) 2. LBO

Question 27

How could a company have a positive EBITDA but still go bankrupt?

Answer 27

Since EBITDA is earnings before INTEREST, the company could have to pay off a lot of interest, thus leading to bankruptcy.

Also, the company may have a lot of AR and a lot of AP due, thus also leading to bankruptcy. Remember, EBITDA is derived on an accrual basis.

Poor management of CapEx spend

Question 28

What is an IPO? Why do companies become public? What are downsides to becoming public?

Answer 28

This is the first sale of stock to the public in company that was just private.

Companies become public to raise additional capital, cash out as original owners of the company, provide employee/investor compensation

Downsides to becoming public are increased regulatrory scrutiny, share of profits with investors, increased overhead,

Question 29

When would you not want to use a DCF

Answer 29

I would not use a DCF if the financials I were analyzing were incomplete or inaccurate. Furthermore, if the cash flows are highly volatile, I would not use a DCF projection.

Question 30

Interest expense is calculated from where?

Answer 30

debt on the balance sheet

Question 31

If you couldn’t use DCF or multiples, how would you value a company?

Answer 31

Derive EV via: market value of equity (then add net debt, value of preferred stock, and minority interest), or liquidation valuation.

Question 32

Describe the cash flow from operations portion. Give me the high level understanding and detailed view.

Answer 32

Cash generated or used from conducting normal operating activities, sales, or changes in net working capital.

Take NI, adjust for non cash expenses, adjust for changes for working capital excluding current maturities of long term debt and dividens payable, subtract gains and add losses.

Includes interest expense and dividends received.

Question 33

What is goodwill?

Answer 33

Results from M&A.

Purchase price - book value of net identifiable assets - write ups + DTL = Goodwill

Question 34

Give me a high level summary of the cash flow statement

Answer 34

Takes net income and adjusts for non cash expenses (Depreciation/Amortization), non expense purchases (CapEx), changes in NWC (CA-CL), and financial repayment or issuance

Question 35

Describe 3 links between the balance sheet and income statement

Answer 35

Net income is used to derive retained earnings. Interest expenses is calculated by debt from the balance sheet. Depreciation and amortization used from PP&E on balance sheet

Question 36

What are examples of short term investments?

Answer 36

money market accounts, CDs

Question 37

Why do you use FCF in a DCF

Answer 37

FCF is the theoretical amount of cash available to both debt and equity holders, excluding cash flows from financing.

It shows a good picture of the company’s operating cash flows with the inclusion of CapEx

Question 38

When looking to acquire a company, do you use equity value or enterprise value to value that company?

Answer 38

Enterprise value since that valuation includes both equity and debt. Acquisitions value both debt and equity.

Question 39

What is Net Debt?

Answer 39

A company’s total debt minus its cash. (Total debt - cash)

Question 40

How is common stock measured on the balance sheet?

Answer 40

It’s measured at par value, and the excess value goes into APIC.

Question 41

What does the number of shares outstanding mean?

Answer 41

Number of shares held by investors.

Question 42

How does depreciation affect the cash balance?

Answer 42

It reduces pre-tax income. It sits in the operating income portion of the IS. Thus, it reduces pre tax income and ultimately taxes owed.

Question 43

what is a deferred tax liability?

Answer 43

Results from the differences between GAAP accounting and the accounting on the tax return. GAAP income tax would show as higher than tax return taxes.

It results from accelerated deductions. Those deductions are utilized now instead of later, thus creating a tax liability.

Question 44

What is the difference between accounts payable and prepaid expenses?

Answer 44

Accounts payable is a liability that results when services have been received but payment has not been made. Prepaid expenses are an asset that results when payment has been made for services not yet received.

Question 45

Give me a high level view of a P&L

Answer 45

Revenues-COGS=Gross Profit -Operating expenses-Depreciation/Amortization=Operating Income -Interest expenses/Other expenses=Pre Tax Income -Taxes=Net Income