Stock Pricing and Forecasting Cash Flows Flashcards
Who are Angel Investors
First round Investors for startups
generally $50k to $400k
usually get stock and a seat on the board
What is private placement
Stock in a company that is not registered with the SEC
What is a Venture Capital Fund
Private Partnerships that invest in startups
what is a VC
Venture capitalist
Venture Capital Fund Manager
What are some advantages of going public
increase liquidity
founders can harvest wealth and diversify
raise corporate cash
establish a value
what are some disadvantages of going public
Increased reporting cost
increased disclosure requirements
reduces manager/owner control
could be valued “low”
what are the basic steps of going public?
select an investment bank to lead
file and S-1 with prospectus to SEC
Roadshow to go get investors “book building”
go public and sell shares to the investors
what are some capital raising decisions
how much to be raised
what type of securities - common stock, preferred stock, bonds
Competitive (highest bidder) or negotiable bidding
which investment bank to use
What are Free Cash Flows
Cash Flows through operating activities
What is NOPAT?
Net Operating Profit after taxes
How to Calculate NOPAT
EBIT * (1-TaxRate)
What are Operating Current Assets
Short Term Assets - Cash, Inventory, Accounts Receivable
NOT MARKET SECURITIES they are not used for “Operating”
What are Operating Current Liabilities
Short Term Liabilities - Accounts Payable and Accruals
NOT MARKET SECURITIES they are not used for OPERATING
What is NOWC
Net Operating Working Capital
What is Net Operating Working Capital (NOWC)
Operating Current Assets - Operating Current Liabilities
What is the NOWC Forumla
(cash + accounts payable + inventories) - (Accounts Payable - Accruals)
That is Total Net Operating Capital
NOWC + Operating long term assets
what are Operating Long-term Assets
Land, Buildings, Factories, Equipment
What is Total Investor Supplied Captial
Notes Payable + Long Term Bonds + Preferred Stock + Common Equity
What is Investor Supplied Operating Capital
Investors Supplied Capital - Short Term Investments
What is the Net Investment in Operating Capital
This Year Capital - Last Year Capital
What are other names for Total Net Operating Capital
Operating Capital or just “Capital”
What is the Free Cash Flow Formula
NOPAT - Net Investment in Operating Capital
or
NOPAT - Net Investment in Fixed Assets - Investment in NOWC
what can you use Free Cash Flow for?
Paying Deptholders interest
Paying off debt
Paying dividends
repurchasing stock
buying short term investments or other non operating assets
= TOTAL FCF USES
What is ROIC
Return on Invested Capital
What is the ROIC Formula
NOPAT / Operating Capital
what is the Operating Profitability Ratio (OP)
Percent of profit per dollar of sales
NOPAT / Sales
What is the Capital requirement ratio? (CR)
How much operating capital is tied up in generating a dollar of sales
Total Net Operating Capital / Sales
What is Market Value Added (MVA)
Market Value of stock - Equity capital supplied by investors
What is Economic Value Add (EVA)?
Managerial Effectiveness
NOPAT - (Total Net Operating Capital)*(WACC)
what is EVA In terms of ROIC
Total net operating Capital * (ROIC - WACC)
What is the FCF Valuation Model definition?
PV of Expected cashflow, when discounted at the WACC
what are the two sources of value?
Operations
non operating assets
What is the Value of Operations Formula?
Vop = (FCF1) / (1+WACC1) + (FCF2) / (1+WACC2) … to infinity
What are non-operating assets?
short term securities
What is the Value of Operations (for perpetuity) formula?
FCF/WACC
What is the intrinsic value
Value of operations + Value of Short Term Investments
What is the intrinsic value model
Intrinsic Value - all debt - preferred stock
what is the intrinsic stock price?
intrinsic value of equity / number of shares
What is the Value of Operations Formula for constant growth?
FCF (at beg. of const growth) / (WACC - growth rate)
Cannot be used if Growth Rate is Bigger than WACC
What is the FCF Formula if the constant growth rate starts today
FCF(today)(1+growth rate) / (WACC-growth rate)
What is a forecast horizon?
the last year that change is not constant
what is the horizon value
the value from the first year of constant growth and beyond
What is the total value of a company?
the forecast horizon + the Horizon Value
What are the key inputs for FCF
Recent Sales
Recent Total net operating capital
Projected Sales Rate
Projected Operating profitability ratio
projected capital requirements ratios
WACC
What are Value Drivers
Things Managers can influence strategically
growth rates, operating profitability, capital requirements, and Cost of Capital
What is Value-Based Management
Using FCF to identify value drivers
What things help the future value?
Increased ROIC (higher profitability or better capital utilization)
Reduction in WACC
What are retained earnings
earnings not paid to shareholders, that can be used to reinvest in the business, or keep as cash
is Negative FCF bad?
it depends. temporarily, no.
confirm with ROIC
How do you you use ROIC and FCF to determine if negative FCF is bad?
negative FCF is okay if ROIC>WACC
