FINANCECAPCI Flashcards
What is the value of a company?
Value of Assets = Debt + Equity
What is the Value of Debt?
Value of debt = the book value of debt (or… if its market value if the debt is traded)
What are the four most commonly used valuation techniques?
- Discounted Cash Flow Analysis
- Multiples Method
- Market Valuation
- Comparable Transactions Method
==> this is valuation of equity.
What are the four basic financial statements?
- Balance Sheet
- Income Statement
- Cash flow statement
- Retained Earnings statement
What is the equation of the balance sheet?
Assets = Liabilities + Shareholder’s equity
What are the three ways in which a company can obtain the economic resources necessary to operate its business?
- Obtain debt (debt)
- Seek new investors (equity)
- Operations (profit)
When is something an asset vs. expense?
Asset;
- Future value or economic benefit to the company.
Expense;
- Relate only to the current period.
What does the statement of retained earnings show?
Essentially the amount of profit that is re-invested into the company and hence not used to pay back debt or distribute to shareholders as dividend.
Why is the cash flow statement important?
Liquidity.
Profit / Net income is not necessarily meaning positive cash flows.
How is the cash flow statement divided?
- Cash flow from operating activates (income statement included here)
- Cash flow from investing activities (balance sheet included here with investments, accounts payable, accounts receivable and other asset and liability accounts)
- Cash flows from financing activities (retained earnings also included)
How does the technique of “market valuation” work?
The value of publicly traded firms is easy to calculate.
==>
Company’s stock price * Number of shares
P * Q
(Market capitalization)

What is an acquisition premium?
The premium price paid per stock / per share of equity while acquiring a company.
A premium is paid due to demand/supply factors.
Acquisition Premiums are decided by the perception of synergies resulting from the purchase or meger.
What are the two different DCF method ways?
The most thorough valuation model.
TWO WAYS;
- Adjusted present value method (APV)
- Weighted average cost of capital method (WACC)
What is NPV?
Net present value of cash flows at a given discount rate
Time value of money = A dollar today is worth more than a dollar tomorrow.
Why is a dollar today worth more than a dollar tomorrow?
- You can invest that dollar at a risk-free interest rate (US government bonds)
- Inflation diminishes value
What is the difference between opportunity cost and discount rate?
Opportunity cost = a measure of the opportunity lost
Discount rate = a measure of the risk
What is CAPM?
Capital Asset Pricing Model
==> Calculating the appropriate discount rate)
Re = Rf + Beta*(Rm –Rf)
Re = discount rate
Beta = the relative volatility of the given investment with respect to market.
Rf = risk-free rate (treasury bill)
Rm = market return
Rm – Rf = excess market return
In CAPM, how volatile is the investment if Beta = 0.5?
Half as volatile as the market
In CAPM, how volatile is the investment if Beta = 1.2?
More volatile than the market
How can you easily explain beta in CAPM?
Volatility of the investment with respect to the market.
Hence, if the crypto market goes up or down 20 % tomorrow, but Bitcoin is expected to go up or down only 10 %, then Beta < 1.
How do you find a company’s beta?
If publicly traded, check “Value Line” or “Yahoo! Finance” etc.
If not publicly traded, find a company with similar balance sheet and income statement that is publicly traded.
EQUITY BETA – not asset beta
What if you have only been given the Asset Beta? (CAPM)
Equity Beta can be calculated as
Beta equity = Beta Asset * (D + E) / E
Due to…

What is EBIT?
Earnings Before Interest and Taxes
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation and Amortization
















