Introduction & Revisiting the basics

Question 1

Valuation model

Answer 1

Formula that turns financial inputs into estimates of company’s value

Question 2

EBIT/DA

Answer 2

Revenue - OP/p. Expenses - Depreciation - Amortization

Question 3

FCF

Answer 3

Op. CF - Capital Expenditures

Question 4

Flow to Equity

Answer 4

Net income - Non-cash expenditures - Capital Expenditures - Change in Working Capital - Net Borrowing

Question 5

Operating Activities

Answer 5

Providing customers with goods and services, generating cash
Primary means through which owners hope to profit from their investment

Question 6

Investing Activities

Answer 6

Purchases and sales of resources that provide productive capacity
Involve resource (cash) commitments expected to provide long-term benefits

Question 7

Financing Activities

Answer 7

Acquiring the financial resources (= cash) for operating and investing
Internal versus external financing

Question 8

On what do the company’s financial position and performance depend?

Answer 8

strategy, business model, external environment (risk, resources, relationships) / BM and Strategy depended on the environment

Question 9

Business model

Answer 9

Describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts.

Question 10

Value drivers

Answer 10

Growth, Risk, Profitability

Question 11

Where do the value drivers appear in the valuation model?

Question 12

Porter’s five forces

Answer 12

Bargaining power of suppliers/buyers, threat of new entrants/substitutes, Industry rivalry

Question 13

Porter’s model of generic strategies for competitive advantage

Answer 13

Cost Leadership, Cost Focus, Differentiation Leadership, Differentiation Focus

Question 14

Externalities

Answer 14

In economics, an externality is a side effect of business activity that affects other parties who did not choose to incur that effect.

This means that the private costs or benefits do not equal the social costs or benefits.

Externalities can be both positive (beneficial) and negative (harmful).
Positive externality: Company actions benefit a third party that does not pay for the benefit. For instance, the company sponsors a public park.
Negative externality: Company actions harm a third party that does not get compensated by the company for the harm. For instance, the company emits greenhouse gases that contribute to climate change.

Externalities can lead to market inefficiencies, with market prices not reflecting the costs and benefits to society.

Question 15

Value added statement

Answer 15

Allocates the value created by the firm to stakeholders such as employees, equity and debt providers, and the state.

Question 16

Entity Value

Answer 16

(aka enterprise value, unlevered value):
The aggregate value of the whole business, i.e., the sum of both shareholders’ claims (equity) and lenders’ claims (liabilities) on the firm’s payoffs

Question 17

Equity Value

Answer 17

(aka shareholder value, levered value)
The value of only the shareholders’ claims on the firm’s profits/cash flows; represented by market capitalization (= market value of equity)

Question 18

What are levers for increasing equity value?

Answer 18

Cost management, Revenue growth, M&A (synergies), Brand Building, Innovation and R&D, Market share expansion ect.

Question 19

What do the balance sheet and the income statement show

Answer 19

BS- value, IS-performance

Question 20

Tax shield

Answer 20

benefit to shareholders from tax savings due to the
tax deductibility of interest expense
Formula: interest expense * tax rate

Question 21

Change in equity value

Answer 21

Accounting value: Profit/Loss - Net Dividends
Market Value (price): Dividends + Δ market capitalization
Fundamental value: t1 - t0

Question 22

Change in entity value

Answer 22

Accounting value: Operating profit or loss- (net) dividend - Δ book value of debt
Market Value: Dividend +Δ market capitalization + Δ market value of debt
Fundamental value: t1 - t0

Question 23

Key accounting summary measures

Answer 23

P/L: Bottom line of the income statement
Book value (of shareholders’ equity) Residual on the balance sheet

Question 24

P/E ratio

Answer 24

stock price/earnings

Question 25

P/B ratio

Answer 25

stock price/ book value

Question 26

A complete set of IFRS financial statements comprises:

Answer 26

(a) a statement of financial position (balance sheet) as at the end of the period; (b) a statement of profit or loss and other comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; and (e) notes, comprising a summary of significant accounting policies and other explanatory information.

Question 27

Statement of cash flows - presents what - ability to (4) - how many categories - two more things - what are and where to find non-cash generating activities

Answer 27

The cash flow statement presents the financial position of a company and contains information regarding the ability of a company to generate a positive cash flow, the ability of the company to cover liabilities, to pay dividends and to maintain liquidity, the possible divergences between earnings and cash flows, the impacts of cash generating and non-cash generating investment and financing transactions The changes in cash are separated into the following categories: Operating cash flow Cash flow from investing activities Cash flow from financing activities Non-cash generating changes in the financial funds based on exchange rate changes or other changes in values are presented separately below the actual cash flow statement

Question 28

Segment reporting - definition - purpose - procedure - relevant standard - exemplary segments

Answer 28

Applies to capital market-oriented firms Relevant standard: IFRS 8 (Operating Segments) Definition: A segment can be defined as a subunit that can be isolated of an accounting entity with multiple sectors Purpose: Disclosure of information that helps users to evaluate the nature and financial effects of the business activities the firm engages in as well as the economic environments in which it operates (IFRS 8.1) Procedure: Management approach (in terms of the internal organization and disclosure structure in order to increase the decision usefulness of the information), except if the quantitative threshold of 10% of combined assets of an operating segment is reached (IFRS 8.13) Exemplary segments: product group, line of business, function, geographic division,…

Question 29

Two key summary measures of performance

Answer 29

- Liquidity (CF) Captures value distribution (not a good measure of value creation, especially over short periods) - Profitability (Earnings) Change in the firm‘s shareholders‘ equity during the period (the net of income and expense) – not considering transactions with the shareholders Captures value creation (albeit with error)

Question 30

Accrual accounting

Answer 30

Records the impact of a business event as it occurs, regardless of whether the transaction affects cash.

Question 31

Cash basis accounting

Answer 31

Records only cash transactions. Cash receipts are treated as revenues, and cash payments are handled as expenses (limitation: ignores underlying economic activities)

Question 32

IAS1

Answer 32

Presentation of Financial Statements requires that an entity prepares its financial statements, with the exception of cash flow information, using accrual accounting.

Question 33

Clean surplus relation:

Answer 33

net income = change in equity + net dividend Change in equity can be thought of as reinvested income or retained earnings. CSR is violated when other comprehensive income (OCI) is used (e.g. unrecognized gain/loss on Available for Sale (AfS) financial assets; Revaluation of PPE (IAS 16) and Intangibles (IAS 38)

Question 34

Net dividend

Answer 34

cash dividends + stock repurchases - equity issuance

Question 35

How to derive the indirect CF statement?

Answer 35

Net income + Non-cash expense (Depreciation Impairment Provisions) – increase in accounts receivable + decrease in inventories + increase in accounts payable + Interest paid Cash from operations – Investment in PP&E Cash from investment + Issuing shares + Acquiring long-term loan – Payback long-term loan – Dividend paid – Interest paid Cash from financing Change in cash account Cash and cash equivalents in 20X1

Question 36

How to derive the statement of changes in equity?

Answer 36

Beginning equity Net income cash dividends Other transactions with owners (share issuance) Ending equity

Question 37

How to derive the income statement?

Answer 37

Sales Cost of goods sold (COGS) Material expenses Wage expenses Depreciation PP&E Gross profit Research and development expenses Selling expenses (Marketing) Other operating expense (Impairment loss) Other operating expense (Provision) EBIT (operating profit) EBT Income taxes Net income (Profit or Loss)