Basic (Reverse)

Question 1

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

Answer 1

What is the difference between accounts payable and accrued expenses?

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

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.

Answer 4

What is the difference between accounts receivable and deferred revenue?

Question 5

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

Answer 5

Describe the cash flows from investing section.

Question 6

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.

Answer 6

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

Question 7

Cash, Accounts Receivable, Short Term Investments, inventory, prepaid expenses, PP&E, Intangible assets, goodwill, and long term investments

Answer 7

What are 9 asset line items on a balance sheet?

Question 8

Prior period’s ending cash on CF statement

Answer 8

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

Question 9

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

Answer 9

Describe 3 links between the balance sheet and income statement

Question 10

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

Answer 10

Name the top 5 companies with highest market share

Question 11

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.

Answer 11

What is the formula for NWC?

What does NWC measure?

Generally speaking, what is NWC?

Question 12

PP&E and intangibles on the balance sheet

Answer 12

Depreciation and amortization is calculated from where?

Question 13

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

Answer 13

Why is cash reduced in the enterprise value formula?

Question 14

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

Answer 14

Why do you use FCF in a DCF

Question 15

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

Answer 15

What is Net Debt?

Question 16

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.

Answer 16

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

Question 17

Beg. RE + NI - Dividends=End RE

Answer 17

What is the formula for retained earnings?

Question 18

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

Answer 18

Give me 5 examples of line items sitting in liabilities.

Question 19

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

Answer 19

What is the definition of valuation?

Question 20

EV/EBITDA

Answer 20

What is the most common valuation multiple involving EBITDA?

Question 21

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

Answer 21

Name 3 ways to value a company.

Name 2 ways to show impact of acquisitions.

Question 22

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.

Answer 22

What is a primary market and a secondary market?

Question 23

Analyst will take the average multiple of comparable companies. The most common multiple is EV/EBITDA. Other multiples include P/E, price to book, and EV/EBIT. Multiples can be industry specific. Some multiples may also value both debt/equity, or solely debt or equity. EV/EBITDA is both debt and equity, since it excludes interest expense

Answer 23

Describe comparable companies/multiples analysis. What is the most common multiple? What are other multiples/.

Question 24

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

Answer 24

Give me a high level summary of the cash flow statement

Question 25

Stock that the company has repurchased from investors. It is valued on the balance sheet at purchase price.

It is a contra-equity account.

Whether or not the stock is sold at an increase or decrease to the original purchase price, you offset the exact purchase price and then make adjustments in APIC.

Answer 25

What is treasury stock?

How do you adjust treasury stock if you reissue treasury stock?

Question 26

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

Answer 26

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

Question 27

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.

Answer 27

How do you value a private company?

Question 28

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.

Answer 28

what is a deferred tax liability?

Question 29

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,

Answer 29

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

Question 30

Market value of equity because you want the CURRENT value of a firm.

Answer 30

When calculating enterprise value, do you use book value of equity or market value of equity?

Question 31

debt on the balance sheet

Answer 31

Interest expense is calculated from where?

Question 32

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

Answer 32

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

Question 33

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.

Answer 33

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

Question 34

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.

Answer 34

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

Question 35

The value of a entire firm including it’s debt and equity. Market Value of Equity + Debt + Value of Preferred Stock + Minority Interests - Cash

Answer 35

What is Enterprise Value? What is its formula?

Question 36

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.

Answer 36

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

Question 37

Common stock/additional paid in capital, AOCI, preferred stock, treasury stock, retained earnings

Answer 37

What are the components of the equity portion of the balance sheet?

Question 38

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.

Answer 38

When would you not want to use a DCF

Question 39

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.

Answer 39

Describe the cash flows from financing section.

Question 40

Total Debt/EBITDA

Senior debt/EBITDA

EBITDA/Interest expense

EBITDA - CapEx/Interest expense

Answer 40

What are two multiples relating to debt involving EBITDA?

Question 41

Typically, precedent transactions analysis would have the highest value, followed by DCF, market comps, and then market value of equity. however, market value of equity’s rank could change depending on market conditions.

Answer 41

Out of the 3 main valuation techniques, how would you assign which ones had the highest/lowest value?

Question 42

Beta is the relative volatility of a stock compared to the market.

Answer 42

What is beta?

Question 43

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.

Answer 43

What is the difference between accounts payable and prepaid expenses?

Question 44

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.

Answer 44

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

Question 45

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

Answer 45

How is common stock measured on the balance sheet?

Question 46

money market accounts, CDs

Answer 46

What are examples of short term investments?

Question 47

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

Answer 47

Give me a high level view of a P&L

Question 48

Number of shares held by investors.

Answer 48

What does the number of shares outstanding mean?

Question 49

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.

Answer 49

How does depreciation affect the cash balance?

Question 50

cash flow statement

Answer 50

Net income is the beginning point for which statement?

Question 51

It is cash received for services not yet performed. Think of a magazine subscription. A company receives 12 months of payments but it has not issued all 12 issues.

Answer 51

What is deferred revenue and why is it a liability?

Question 52

Results from M&A.

Purchase price - book value of net identfiable assets - write ups + DTL

Answer 52

What is goodwill?

Question 53

Utilize all valuation methodologies to create a football field of valuations

Answer 53

How do you determine which valuation methodology to choose?

Question 54

Cash on the balance sheet

Answer 54

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

Question 55

Add Net Debt (total debt - cash), add value of preferred stock, and add minority interests

Answer 55

How do you derive enterprise value if you only have market value of equity?

Question 56

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.

Answer 56

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

Question 57

Sources and uses

Answer 57

Cash flow statements shows the ____ and ____ of cash.