Competency Questions

Question 1

How to value a company

Answer 1

For starters, you should understand that the value of a company is equal to the value of its assets, and that:
Value of Assets = Debt (liabilities) + Equity or
Assets = D + E
If I buy a company, I buy its stock (equity) and assume its debt (bonds and loans). Buying a company’s equity means that I actually gain ownership of the company—if I buy 50 percent of a company’s equity, I own 50 percent of the company. Assuming a company’s debt means that I promise to pay the company’s lenders the amount owed by the previous owner.
The value of debt is easy to calculate: since the market value of debt is difficult to ascertain for our purposes, we can safely use the book value of debt.

The four most commonly used techniques to determine the market value of equity are:
1. Discounted cash flow (DCF) analysis
2. Multiples method
3. Market valuation
4. Comparable transactions method

Question 2

Overview of financial statements

Answer 2

There are four basic financial statements that provide the information you need to evaluate a company:
* Balance Sheets
* Income Statements
* Statements of Cash Flows
* Statements of Retained Earnings

These four statements are provided in the annual reports (also referred to as “10Ks”) published by public companies.

Question 3

The balance sheet

Answer 3

The balance sheet presents the financial position of a company at a given point in time. It is comprised of three parts: assets, liabilities and shareholder’s equity. Assets are the economic resources of a company. They are the resources that the company uses to operate its business and include cash, inventory and equipment. (Both financial statements and accounts in financial statements are capitalized.) A company normally obtains the resources it uses to operate its business by incurring debt, obtaining new investors or through operating earnings. The liabilities section of the balance sheet presents the debts of the company. Liabilities are the claims that creditors have on the company’s resources. The equity section of the balance sheet presents the net worth of a company, which equals the assets that the company owns less the debts it owes to creditors.

Question 4

Types of long-term financing on balance sheet

Answer 4

in order of seniority (high to low):
1. Senior secured debt (corporate loans and bonds)
2. Senior unsecured debt (corporate loans and bonds)
3. Mezzanine debt (a blend of debt/equity)
4. Preferred stock
5. Common stock

This type of hierarchy is often referred to as a company’s “capital structure”, which is the outline of the capital the company has access to, as well as the seniority of that capital.

Question 5

The income statement

Answer 5

The income statement presents the results of operations of a business over a specified period of time (e.g., one year, one quarter, one month) and is composed of revenue, expenses and net income.

Revenue: Revenue is a source of income that normally results from the sale of goods or services and is recorded when earned. For example, when a retailer of roller blades makes a sale, the sale would be considered revenue.
Expenses: Expenses are the costs incurred by a business over a specified period of time to generate the revenue earned during that same period of time.

Question 6

Assets vs expenses

Answer 6

A purchase is considered an asset if it provides future economic benefit to the company, while expenses only relate to the current period. For example, monthly salaries paid to employees for services they already provided to the company would be considered expenses. On the other hand, the purchase of a piece of manufacturing equipment would be classified as an asset

Question 7

Net income

Answer 7

Net income: The revenue a company earns, less its expenses over a specified period of time, equals its net income. A positive net income number indicates a profit, while a negative net income number indicates that a company suffered a loss (called a “net loss”)

Question 8

Summary of income statement

Answer 8

To summarize, the income statement measures the success of a company’s operations; it provides investors and creditors with information needed to determine the enterprise’s profitability and creditworthiness. A company has earned positive net income when its total revenues exceed its total expenses.

Question 9

Statement of retained earnings

Answer 9

Retained earnings is the amount of profit a company invests in itself (i.e., profit that is not used to pay back debt or distributed to shareholders as a dividend). The statement of retained earnings is a reconciliation of the retained earnings account from the beginning to the end of the year.

it does provide additional information about what management is doing with the company’s earnings.

Question 10

What decrease retained earnings

Answer 10

Net losses and dividend payments decrease retained earnings.

Question 11

Insights from retained earnings

Answer 11

An investor interested in growth and returns on capital may be more inclined to invest in a company that reinvests its resources into the company for the purpose of generating additional resources.
Conversely, an investor interested in receiving current income is more inclined to invest in a company that pays quarterly dividend distributions to shareholders.)

Question 12

Statement of cash flows

Answer 12

However, the Income Statement does not provide information about the actual source and use of cash generated during its operations.
That’s because obtaining and using economic resources doesn’t always involve cash

Question 13

Cash flows from operating activities:

Answer 13

Cash flows from operating activities: Includes the cash effects of transactions involved in calculating net income.

Question 14

Cash flows from investing activities

Answer 14

Cash flows from investing activities: Basically, cash from non- operating activities or activities outside the normal scope of business. This involves items classified as assets in the balance sheet and includes the purchase and sale of equipment and investments.

Question 15

Cash flows from financing activities

Answer 15

Cash flows from financing activities: Involves items classified as liabilities and equity in the balance sheet; it includes the payment of dividends as well as issuing payment of debt or equity.

Question 16

Calculating equity value of publicly traded firm

Answer 16

multiply it by the number of shares outstanding, and you have the equity market value of the company.

Question 17

Acquisition premium

Answer 17

Typically, if someone wants to acquire a firm, it will sell for a price above the market value of the firm. This is referred to as an acquisition premium. If the acquisition is a hostile takeover, or if there is an auction, the premiums are pushed even higher. The premiums are generally decided by the perception of the synergies resulting from the purchase or merger.

Question 18

Dynamics behind NPV

Answer 18

In general, a dollar today is worth more than a dollar tomorrow for two simple reasons. First, a dollar today can be invested at a risk-free interest rate (think savings account or U.S. government bonds), and can earn a return. A dollar tomorrow is worth less because it has missed out on the interest you would have earned on that dollar had you invested it today. Second, inflation diminishes the buying power of future money.
Plain and simple, a discount rate is the rate you choose to discount the future value of your money.. A discount rate can be understood as the expected return from a project that matches the risk profile of the project

Question 19

CAPM

Answer 19

In order to find the appropriate discount rate used to discount the company’s cash flows, you use the Capital Asset Pricing Model or (CAPM). This is a model used to calculate the expected return on your investment, also referred to as expected return on equity. It is a linear model with one independent variable, Beta. Beta represents relative volatility of the given investment with respect to the market. For example, if the Beta of an investment is 1, the returns on the investment (stock/bond/portfolio) vary identically with the market returns. A Beta less than 1, like 0.5, means the investment is less volatile than the market.

A company whose value does not vary much, like an electric utility, would be expected to have a Beta under 1.

A Beta of greater than 1, like 1.5, means the investment is more volatile than the market.

Question 20

Free cash flows

Answer 20

Free cash flow is essentially all of the extra cash a firm has after its operations and other areas (i.e., working capital, such as accounts receivable and accounts payable and regular capital expenditures) to invest in what it chooses.
The free cash flow (FCF) of an all-equity firm in year (i) can be calculated as:

= Earnings Before Interest and Taxes x (1 - t) + Depreciation & Amortization
- Capital Expenditure (“CapEx”)
- Net increase in working capital (or + net decrease in working capital)
+ Other relevant cash flows for an all equity firm

he free cash flow used for DCF analysis is expected future free cash flow. Bankers will typically construct projections, using a combination of guidelines from the company and a derivation of reasonable estimates using their own assumptions.

Question 21

Terminal year

Answer 21

The terminal year represents the year (usually 10 years in the future) when the growth of the company is considered stabilized.

Question 22

PV of terminal year FCF

Answer 22

= TYFCFx(1+g)
/(1+r)^10(R-G)

Adding this to discounted FCF’s gives value in DCF

Question 23

WACC

Answer 23

formula uses market value of debt and equity

Question 24

Debt tax shield

Answer 24

= total debt of company for that year x corporate tax rate x Weighted average interest rate on that debt calculated for each year of the projected cash flows

Question 25

Multiple Analysis or Comparable
Company Analysis

Answer 25

Quite often, there is not enough information to determine the valuation using the comparable transactions method. In these cases, you can value a company based on market valuation multiples, which you can do by using more readily available information. Examples of these valuation multiples include price/earning multiples (also known as P/E ratios, this method, which compares a company’s market capitalization to its annual income, is the most commonly used multiple) EBITDA multiples, and others.

Once you have done this, you can add debt to ascertain enterprise value. When using these methods, you look at which multiples are used for other companies in the industry to ascertain equity value.

Question 26

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

Answer 26

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 the following categories: operating cash flows, investing cash flows and financing cash flows.
Interestingly, a company can be profitable as shown in the income statement, but still go bankrupt if it doesn’t have the cash flow to meet interest payments.

Both statements are linked by Net Income.

Question 27

2. What is the link between the balance sheet and the income statement?

Answer 27

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

Question 28

3. What is the link between the balance sheet and the statement of cash flows?

Answer 28

he statement of cash flows starts with the beginning cash balance, which comes from the balance sheet. Also, cash from operations is derived using the changes in balance sheet 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 .

Question 29

4. What is EBITDA?

Answer 29

A proxy for cash flow, EBITDA is earnings before interest, taxes, depreciation, and amortization. It can be found on the income statement by starting with EBIT and adding depreciation and amortization back.

Question 30

5. Say you knew a company’s net income. How would you figure out its “free cash flow”?

Answer 30

Start with the company’s net income. Then add back 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
– Capital Expenditures
– Increase (or + decrease) in net working capital

Question 31

6. Walk me through the major line items on a cash flow statement.

Answer 31

The answer: first the beginning cash balance, then cash from operations, then cash from investing activities, then cash from financing activities and finally the ending cash balance.

Question 32

7. What happens to each of the three primary financial statements when you change a) gross margin, b) capital expenditures, c) any other change?

Answer 32

Think about the definitions of the variables that change. For example, gross margin is gross profit/sales, or the extent to which sales of sold inventory exceeds costs. Hence, if
a) gross margin were to decrease, then gross profit decreases relative to sales. Thus, for the income statement, you would probably pay lower taxes, but if nothing else changed, you would likely have lower net income. The cash flow statement would be affected in the top line with less cash likely coming in. Hence, if everything else remained the same, you would likely have less cash. Going to the balance sheet, you would not only have less cash, but to balance that effect, you would have lower shareholder’s equity.

b) If capital expenditure were to say, decrease, then first, the level of capital expenditures would decrease on the statement of cash flows. This would increase the level of cash on the balance sheet, but decrease the level of property, plant and equipment, so total assets stay the same. On the income statement, the depreciation expense would be lower in subsequent years, so net income would be higher, which would increase cash and shareholder’s equity in the future.

) Just be sure you understand the interplay between the three sheets. Remember that changing one sheet has ramifications on all the other statements both today and in the future.

Question 33

8. How do you value a company?

Answer 33

One basic answer to this question is to discount the company’s projected cash flows using a “risk-adjusted discount rate.” This process involves several steps. First you must project a company’s cash flows for 10 years. Then you must choose a constant growth rate after 10 years going forward. Finally, you must choose an appropriate discount rate. After projecting the first five or 10 years performance, you add in a “terminal value,” which represents the present value of all the future cash flows another 10 years. You can calculate the terminal value in one of two ways:
a) you take the earnings of the last year you projected, say year 10, and multiply it by some market multiple like 20 times earnings, use that as your terminal value; or
b) you take the last year, say year 10, and assume some constant growth rate after that like 10 percent. The present value of this growing stream of payments after year 10 is the terminal value. Finally, to figure out what “discount rate” you would use to discount the company’s cash flows, tell your interviewer you would use the “capital asset pricing model” (or “CAPM”). (In a nutshell, CAPM says that the proper discount rate to use is the risk-free interest rate adjusted upwards to reflect this particular company’s market risk or “Beta.”) For a more advanced answer, discuss the APV and WACC methods.

You should also mention other methods of valuing a company, including looking at “comparables”—that is, how other similar companies were valued recently as a multiple of their sales, net income or some other measure. Or you might also consider the company’s “breakup value,” the value of breaking up all of its operations and selling those to other firms.

Question 34

10. What is the formula for the capital asset pricing model?

Answer 34

The capital asset pricing model is used to calculate the expected return on an investment. Beta for a company is a measure of the relative volatility of the given investment with respect to the market, i.e., if Beta is 1, the returns on the investment (stock/bond/portfolio) vary identically with the market’s returns.

Risk-free rate = the Treasury bond rate for the period for which the projections are being considered
Market return
Excess market return
Leveraged Beta
Discount rate for (leveraged) equity (calculated using the CAPM)

Question 35

11. Why might there be multiple valuations for a single company?

Answer 35

As this chapter has discussed, 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 interest tax shields, which can lead to different valuations. This is the basic principle in corporate finance and one of the many reasons that market capitalizations fluctuate

Question 36

13. Why are the P/E multiples for a company in London different than that of the same company in the States?

Answer 36

The P/E multiples can be different in the 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 U.K.

Question 37

14. Whatarethedifferentmultiplesthatcanbeusedtovalueacompany?

Answer 37

he most commonly used multiple is price-to-earnings multiple, or “P/E ratio.” Other multiples that are used include revenue, EBITDA, EBIT and book value. The relevant multiple depends on the industry. For example, internet companies are often valued with revenue multiples; this explains why companies with low profits can have such high market caps. Many companies are valued using EBITDA. Furthermore, P/E ratios come under scrutiny because net income is the “E” and net income includes interest and tax payments, which might not be the same post-acquisition.

Question 38

15. How do you get the discount rate for an all-equity firm?

Answer 38

You use the capital asset pricing model, or CAPM.

Question 39

17. How much would you pay for a company with $50 million in revenue and $5 million in profit?

Answer 39

If this is all the information you are given you can use the comparable transaction or multiples method to value this company (rather than the DCF method). To use the multiples method, you can examine common stock information of comparable companies in the same industry, to get average industry multiples of price-to-earnings. You can then apply that multiple to find the given company’s value.

Question 40

18. What is the difference between the APV and WACC?

Answer 40

WACC incorporates the effect of tax shields into the discount rate used to calculate the present value of cash flows. WACC is typically calculated using actual data and numbers from balance sheets for companies or industries.

APV adds the present value of the financing effects (most commonly, the debt tax shield) to the net present value assuming an all-equity value, and calculates the adjusted present value. The APV approach is particularly useful in cases where subsidized costs of financing are more complex, such as in a leveraged buyout.

Question 41

19. How would you value a company with no revenue?

Answer 41

First you would make reasonable assumptions about the company’s projected revenues (and projected cash flows) for future years. Then you would calculate the net present value of these cash flows.

Question 42

0. What is Beta?

Answer 42

Beta is the value that represents a stock’s volatility with respect to overall market volatility.

Question 43

3. Walk me through the major items of an income statement.

Answer 43

Know all the items that go into the three major components: revenue, expenses and net income. Know that depreciation and amortization are non-cash expenses.

Question 44

22. Name three companies that are undervalued and tell me why you think they are undervalued.

Answer 44

For example, let’s say that Coke received some bad PR recently and its stock took a hammering in the market. However, the earnings of Coke are not expected to decrease significantly because of the negative publicity (or at least that’s your analysis). Thus, Coke is trading at a lower P/E relative to Pepsi and others in the industry: it could be considered undervalued.

Question 45

25. Is 10 a high P/E ratio?

Answer 45

The answer to this or any question like this is, “it depends.” P/E ratios are relative measurements, and in order to know whether a P/E ratio is high or low, we need to know the general P/E ratios of comparable companies. Generally, higher growth firms will have higher P/E ratios because their earnings will be low relative to their price, with the idea that the earnings will eventually grow more rapidly that the stock’s price.

Question 46

26. Describe a typical company’s capital structure.

Answer 46

A company’s capital structure is just what it sounds like: the structure of the capital that makes up the firm, or its debts and equity (refer to the balance sheet section earlier). Capital structure includes permanent, long-term financing of a company, including long-term debt, preferred stock and common stock. The statement of a company’s capital structure as expressed above reflects the order in which contributors to the capital structure are paid back, and the order in which they have claims on company’s assets should it liquidate. Debt has first priority, then preferred stock holders, then common stock holders. Be sure to understand the difference between “secured” and “unsecured.”

Question 47

28. What is meant by the current ratio? What is meant by the quick ratio?

Answer 47

The current ratio measures the ability of a company to pay its short-term obligations. The higher, the better. It is current assets /current liabilities. The quick ratio also measures the ability of a company to meet its short- term obligations. The higher, also the better. However, the quick ratio doesn’t include inventory, as this is often considered a non-liquid current asset. So, the formula is (current assets-inventory)/current liabilities.

Question 48

30. What is a coverage ratio? What is a leverage ratio?

Answer 48

Coverage Ratios are used to determine how much cash a company has to pay its existing interest payments. This formula usually comes in the form of EBITDA/interest. Leverage ratios are used to determine the leverage of a firm, or the relation of its debt to its cash flow generation or equity. There are many forms of this ratio. A standard leverage ratio would be debt/EBITDA or net debt/EBITDA. Debt/equity is another form of a leverage ratio, yet it measures the relation of debt to equity that a company is using to finance its operations.

Question 49

31. What is net debt?

Answer 49

Net debt is debt—cash and cash equivalents, or the true amount of debt that a firm has, after it uses its existing cash to pay off current outstanding debt.

Question 50

32. Is accounts receivable a source or use of cash? Is accounts payable a source or use of cash?

Answer 50

This type of question is important, because it taps your understanding of how a company can use its cash, credit and collections. Accounts receivable is a use of cash, because for every dollar that should be coming in the door from those that owe money for goods/services, that cash has been delayed by a collection time period (i.e., a company is waiting to “receive” money). Conversely, accounts payable (think: a credit card), is a source of cash, because companies have the ability to purchase items without immediately paying cash.

Question 51

33. What is goodwill?

Answer 51

Goodwill is an asset found on the balance sheet. However, unlike many other assets, it is intangible. It can be the premium that one firm pays for another over the current market valuation. It can also reflect the value of other things, such as a corporate brand. If Coca-Cola were purchased by Pepsi, one could expect Pepsi to pay a large premium over Coca-Cola’s existing assets and a massive Goodwill entry on Pepsi’s balance sheet, to reflect the Coca-Cola global brand.

Question 52

34. If you were to advise a company to raise money for an upcoming project, what form would you raise it with (debt versus equity)?

Answer 52

As with earlier questions, the right answer is “it depends”. First and foremost, companies should seek to raise money from the cheapest source possible. However, there might exist certain conditions, limitations or implications of raising money in one form or another. For example, although the cheapest form of debt is typically the most senior (corporate loans), the loan market might not have any demand for a company to issue a new loan. Or the company might not have the cash flow available to make interest payments on new debt. Or the equity markets might very well receive a new offering from this company, more than the debt markets (thus equity is cheaper than debt). Or the cost of raising an incremental portion of debt might exceed that of raising equity. All of this should be considered when answering this question. Be prepared to ask more clarifying questions—your interviewer will most likely be glad you did.

Question 53

35. What are deferred taxes?

Answer 53

In short, deferred taxes take either the form of an asset or liability. They arise for many reasons, but from an interviewing perspective, it’s important that you understand they are kept on the balance sheet and are meant to hold the place for future tax adjustments. In essence, if you paid more in taxes than you owe, you’d have a deferred tax asset that you could use to offset future taxes. If you paid less in taxes than you owed, you would have a deferred tax liability, of which you would add to future tax payments.

Question 54

What is net working capital

Answer 54

= change in current assets (negative change in inventory - change in prepaid expenses) - change in current liabilities (accounts payable + accrued expenses)

Question 55

Key margins

Answer 55

Gross Margin: This represents the difference between sales and the cost of goods sold (COGS), divided by sales. It reflects the efficiency of the production process.

Operating Margin: Calculated by dividing operating income by net sales, this margin shows how much profit a company makes on a dollar of sales after paying for variable costs of production but before paying interest or tax.

Net Profit Margin: This is the percentage of revenue left after all expenses have been deducted from sales. It tells you the overall profitability of a company.

EBITDA Margin: Earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by total revenue. This margin measures a company’s operating profitability as a percentage of its total revenue.

Cash Flow Margin: Cash flow from operating activities divided by net sales. It provides insight into the company’s efficiency at turning sales into cash.

Return on Assets (ROA): Indicates how profitable a company is relative to its total assets.

Return on Equity (ROE): Measures the return generated on shareholders’ equity.

Question 56

Gross margin

Answer 56

Gross profit margin analyzes the relationship between gross sales revenue and the direct costs of sales. This comparison forms the first section of the income statement. Companies will have varying types of direct costs depending on their business. Companies that are involved in the production and manufacturing of goods will use the cost of goods sold measure while service companies may have a more generalized notation.

Overall, the gross profit margin seeks to identify how efficiently a company is producing its product. The calculation for gross profit margin is gross profit divided by total revenue. In general, it is better to have a higher gross profit margin number as it represents the total gross profit per dollar of revenue.

Question 57

Operating margin

Answer 57

Operating efficiency forms the second section of a company’s income statement and focuses on indirect costs. Companies have a wide range of indirect costs which also influence the bottom line. Some commonly reported indirect costs includes research and development, marketing campaign expenses, general and administrative expenses, and depreciation and amortization.

Operating profit margin examines the effects of these costs. Operating profit is obtained by subtracting operating expenses from gross profit. The operating profit margin is then calculated by dividing the operating profit by total revenue.

Operating profit shows a company’s ability to manage its indirect costs. Therefore, this section of the income statement shows how a company is investing in areas it expects will help to improve its brand and business growth through several channels. A company may have a high gross profit margin but a relatively low operating profit margin if its indirect expenses for things like marketing, or capital investment allocations are high.

Question 58

Net profit margin

Answer 58

Net profit margin is the third and final profit margin metric used in income statement analysis. It is calculated by analyzing the last section of the income statement and the net earnings of a company after accounting for all expenses.

Net profit margin takes into consideration the interest and taxes paid by a company. Net profit is calculated by subtracting interest and taxes from operating profit—also known as earnings before interest and taxes (EBIT). The net profit margin is then calculated by dividing net profit over total revenue.

Net profit spotlights a company’s ability to manage its interest payments and tax payments. Interest payments can take several varieties. Interest includes the interest a company pays stakeholders on debt for capital instruments. It also includes any interest earned from short-term and long-term investments.

Question 59

Considerations for margins

Answer 59

The net profit margin of a company shows how the company is managing all the expenses associated with the business. On the income statement, expenses are typically broken out by direct, indirect, and interest and taxes. Companies seek to manage expenses in each of these three areas individually.

By analyzing how the gross, operating, and net profit margins compare to each other, industry analysts can get a clear picture of a company’s operating strengths and weaknesses.

Market and business factors may affect each of the three margins differently. Systematically if direct sales expenses increase across the market, then a company will have a lower gross profit margin that reflects higher costs of sales.

Companies may go through different cycles of growth that lead to higher operational, and interest expenses. A company may be investing more in marketing campaigns or capital investments that increase operating costs for a period which can decrease operating profit margin. Companies may also raise capital through d

Question 60

Risk analysis for commercial side

Answer 60

• Foreign exchange risk

Impact on Returns: The value of foreign investments can fluctuate due to changes in exchange rates. If an investor holds assets in a currency that depreciates against their home currency, the value of their investment and the returns in their home currency will decrease. Conversely, if the foreign currency appreciates, the returns may increase.

Political and Economic Stability: Political events, economic policies, and changes in government in a foreign country can impact its currency’s stability and, consequently, the value of investments in that currency.

Political Risk: Emerging markets often face greater political instability. Changes in government, policy shifts, nationalization of resources, and political turmoil can significantly impact the investment climate.

Regulatory Risk: These markets may have less developed or unstable regulatory frameworks, leading to uncertainties in areas like property rights, taxation, and legal processes. The risk of sudden regulatory changes or inconsistent enforcement of laws can affect business operations.

Economic Instability: Emerging economies might experience high inflation, volatile currency exchange rates, and rapid changes in economic conditions. Such instability can impact investment returns and operational costs.

Infrastructure Challenges: Inadequate or underdeveloped infrastructure (like transportation, telecommunications, and energy supply) can pose logistical challenges and increase operational costs.

Market Accessibility and Liquidity Risks: Emerging markets often have less developed financial markets, which can lead to issues with market access and lower liquidity. This might make it harder to enter or exit positions without affecting market prices.

Question 61

Risk assessment for impact side

Answer 61

Environmental Factors: Assess the potential environmental risks associated with the company’s operations. This includes:

Impact on climate change (carbon footprint, greenhouse gas emissions).
Resource usage (water, energy, materials).
Waste management and pollution control.
Adaptation to climate change risks and environmental sustainability practices.

Social Factors: Evaluate how the company manages relationships with employees, suppliers, customers, and communities. Key areas include:

Labor practices (including diversity and inclusion, workers’ rights, and fair labor practices).
Supply chain management (ethical sourcing, human rights policies in the supply chain).
Customer satisfaction and safety.
Community engagement and impact.
Health and safety standards.

Governance Factors: Analyze the governance structure and practices of the company. This includes:

Board composition and diversity.
Internal controls and risk management.
Transparency and disclosure practices.
Ethical business practices and anti-corruption measures.
:
Impact of ESG factors on revenue growth, cost savings, and operational efficiency.
Legal and regulatory risks.
Reputation and brand value implications.
Potential for long-term sustainable growth.

Question 62

How to measure development impact

Answer 62

Economic Growth: Increases in GDP, improvements in trade balance, and stimulation of local economies.

Employment: Job creation, improvements in labor conditions, and workforce development.
Social Inclusion: Enhancements in gender equality, minority inclusion, and reduction of income inequality.

Environmental Sustainability: Positive environmental outcomes, such as reduced pollution and better resource management.

Health and Education: Improvements in local healthcare and education systems, and increased access to these services.

Infrastructure Development: Investments in transportation, utilities, and communications that bolster economic activities.

Technology Transfer: Introduction of new technologies or practices that can increase productivity and competitiveness.

Question 63

How to measure commercial impact

Answer 63

Return on Investment (ROI): Calculating the gain or loss generated on an investment relative to the amount of money invested.

Net Present Value (NPV): Discounting future cash flows from the investment to their present value to determine the profitability.

Internal Rate of Return (IRR): Determining the discount rate at which the NPV of an investment is zero, used to estimate the profitability of potential investments.

Payback Period: Assessing the time it takes for an investment to repay its initial cost from its cash flows.

Economic Value Added (EVA): Calculating the value created beyond the required return of the company’s shareholders.

Revenue Growth: Tracking the increase in sales generated by the investment.

Market Share: Measuring the portion of industry sales captured by the investment.

Cost-Benefit Analysis: Comparing the investment’s costs to the benefits it generates.

Job Creation: Estimating the number of jobs created by the investment.

Societal Impact: Assessing broader effects on society, which can include environmental impact, social improvements, and contributions to local communities.

Additionality: BII looks to invest where it can contribute and isn’t crowding out commercial capital (looks to invest where big corporations wouldn’t)
- Worth asking at the end if corporates are interested

Question 64

what does EBITDA tell you

Answer 64

EBITDA indicates how well the company is managing its day-to-day operations, including its core expenses such as the cost of goods sold. As such, it is a very fair indicator of a business’s current state and potential.