Financial Edge - Debt and Equity Flashcards
How will a startup company mostly be financed?
Equity - unstable cash flows means that it is difficult to consistently repay debt
Characteristics of preferred stock?
- Most of the time, doesn’t have voting rights
- Has fixed dividends (that could be PIK)
- Treated as debt in valuation
What is additional paid in capital?
Subscription price less par value
Par value was set to a low amount at company inception
If they now issue stock, price paid will be much closer to market value, and hence the additional money above par value will go into APIC
What is treasury stock?
Value of shares repurchased by the company
What is other comprehensive income?
Waiting to hit the income statement
Usually non-cash
Usually to do with investments
What is non-controlling interests?
Equity owned by third parties in subsidiaries of parent company
Which share number for market capitalisation?
Diluted shares outstanding
What is treasury stock?
Stock repurchased by the company
When company issues stock, which line item in equity part of balance sheet is likely to increase the most?
Usually APIC, as the common stock only goes up by the amount of new shares * par value, and par value is usually much lower than the market value of the shares
What are free float shares?
Excludes untreated shares such as restricted shares, those held by families and governments
What is the formula for free float market capitalisation?
Share price * (shares outstanding - shares not traded)
Formula for how retained earnings changes year over year?
Beginning Retained earnings
Addition Net Income
Subtract common dividends AND preference dividend (if they are classed as dividends, if classed as interest will have already been deducted)
Ending retained earnings
How can owners of preference shares be paid?
Either through dividends or interest
What is commercial paper?
Short term debt securities issued by companies
What are some examples of borrowings that you can get directly from banks and finance companies?
Revolving credit facility
Overdraft
Term loans
Capital / finance leases
In net debt, what sort of thing will be considered cash?
Cash equivalents, commercial paper, short-term deposits money market instruments
In net debt, what sort of thing will be considered debt?
Overdraft, notes payable, short term debt, commercial paper, RCF, current portion of LT debt, bonds, bank loans, loan notes, debentures, long term debt, convertible debt (bond proportion only), capital/finance leases, preference shares (if treated as debt)
How does PIK interest work?
Interest is accrued or ‘rolled up’ onto the balance of the loan
Why are leverage ratios important?
Allow you to see if the company has too much debt or not
What are the most common leverage ratios?
Debt / Equity, Total debt / EBITDA, Net debt / EBITDA
What does net debt / EBITDA show?
Ability to service debt
What is interest coverage ratio?
EBITDA / Interest expense
What does interest coverage ratio show?
Ability to service interest
