Stock Pricing and Forecasting Cash Flows

Question 1

Who are Angel Investors

Answer 1

First round Investors for startups

generally $50k to $400k

usually get stock and a seat on the board

Question 2

What is private placement

Answer 2

Stock in a company that is not registered with the SEC

Question 3

What is a Venture Capital Fund

Answer 3

Private Partnerships that invest in startups

Question 4

what is a VC

Answer 4

Venture capitalist

Venture Capital Fund Manager

Question 5

What are some advantages of going public

Answer 5

increase liquidity

founders can harvest wealth and diversify

raise corporate cash

establish a value

Question 6

what are some disadvantages of going public

Answer 6

Increased reporting cost

increased disclosure requirements

reduces manager/owner control

could be valued “low”

Question 7

what are the basic steps of going public?

Answer 7

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

Question 8

what are some capital raising decisions

Answer 8

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

Question 9

What are Free Cash Flows

Answer 9

Cash Flows through operating activities

Question 10

What is NOPAT?

Answer 10

Net Operating Profit after taxes

Question 11

How to Calculate NOPAT

Answer 11

EBIT * (1-TaxRate)

Question 12

What are Operating Current Assets

Answer 12

Short Term Assets - Cash, Inventory, Accounts Receivable

NOT MARKET SECURITIES they are not used for “Operating”

Question 13

What are Operating Current Liabilities

Answer 13

Short Term Liabilities - Accounts Payable and Accruals

NOT MARKET SECURITIES they are not used for OPERATING

Question 14

What is NOWC

Answer 14

Net Operating Working Capital

Question 15

What is Net Operating Working Capital (NOWC)

Answer 15

Operating Current Assets - Operating Current Liabilities

Question 16

What is the NOWC Forumla

Answer 16

(cash + accounts payable + inventories) - (Accounts Payable - Accruals)

Question 17

That is Total Net Operating Capital

Answer 17

NOWC + Operating long term assets

Question 18

what are Operating Long-term Assets

Answer 18

Land, Buildings, Factories, Equipment

Question 19

What is Total Investor Supplied Captial

Answer 19

Notes Payable + Long Term Bonds + Preferred Stock + Common Equity

Question 20

What is Investor Supplied Operating Capital

Answer 20

Investors Supplied Capital - Short Term Investments

Question 21

What is the Net Investment in Operating Capital

Answer 21

This Year Capital - Last Year Capital

Question 22

What are other names for Total Net Operating Capital

Answer 22

Operating Capital or just “Capital”

Question 23

What is the Free Cash Flow Formula

Answer 23

NOPAT - Net Investment in Operating Capital

or

NOPAT - Net Investment in Fixed Assets - Investment in NOWC

Question 24

what can you use Free Cash Flow for?

Answer 24

Paying Deptholders interest
Paying off debt
Paying dividends
repurchasing stock
buying short term investments or other non operating assets

= TOTAL FCF USES

Question 25

What is ROIC

Answer 25

Return on Invested Capital

Question 26

What is the ROIC Formula

Answer 26

NOPAT / Operating Capital

Question 27

what is the Operating Profitability Ratio (OP)

Answer 27

Percent of profit per dollar of sales NOPAT / Sales

Question 28

What is the Capital requirement ratio? (CR)

Answer 28

How much operating capital is tied up in generating a dollar of sales Total Net Operating Capital / Sales

Question 29

What is Market Value Added (MVA)

Answer 29

Market Value of stock - Equity capital supplied by investors

Question 30

What is Economic Value Add (EVA)?

Answer 30

Managerial Effectiveness NOPAT - (Total Net Operating Capital)*(WACC)

Question 31

what is EVA In terms of ROIC

Answer 31

Total net operating Capital * (ROIC - WACC)

Question 32

What is the FCF Valuation Model definition?

Answer 32

PV of Expected cashflow, when discounted at the WACC

Question 33

what are the two sources of value?

Answer 33

Operations non operating assets

Question 34

What is the Value of Operations Formula?

Answer 34

Vop = (FCF1) / (1+WACC1) + (FCF2) / (1+WACC2) ... to infinity

Question 35

What are non-operating assets?

Answer 35

short term securities

Question 36

What is the Value of Operations (for perpetuity) formula?

Answer 36

FCF/WACC

Question 37

What is the intrinsic value

Answer 37

Value of operations + Value of Short Term Investments

Question 38

What is the intrinsic value model

Answer 38

Intrinsic Value - all debt - preferred stock

Question 39

what is the intrinsic stock price?

Answer 39

intrinsic value of equity / number of shares

Question 40

What is the Value of Operations Formula for constant growth?

Answer 40

FCF (at beg. of const growth) / (WACC - growth rate) Cannot be used if Growth Rate is Bigger than WACC

Question 41

What is the FCF Formula if the constant growth rate starts today

Answer 41

FCF(today)(1+growth rate) / (WACC-growth rate)

Question 42

What is a forecast horizon?

Answer 42

the last year that change is not constant

Question 43

what is the horizon value

Answer 43

the value from the first year of constant growth and beyond

Question 44

What is the total value of a company?

Answer 44

the forecast horizon + the Horizon Value

Question 45

What are the key inputs for FCF

Answer 45

Recent Sales Recent Total net operating capital Projected Sales Rate Projected Operating profitability ratio projected capital requirements ratios WACC

Question 46

What are Value Drivers

Answer 46

Things Managers can influence strategically growth rates, operating profitability, capital requirements, and Cost of Capital

Question 47

What is Value-Based Management

Answer 47

Using FCF to identify value drivers

Question 48

What things help the future value?

Answer 48

Increased ROIC (higher profitability or better capital utilization) Reduction in WACC

Question 49

What are retained earnings

Answer 49

earnings not paid to shareholders, that can be used to reinvest in the business, or keep as cash

Question 50

is Negative FCF bad?

Answer 50

it depends. temporarily, no. confirm with ROIC

Question 51

How do you you use ROIC and FCF to determine if negative FCF is bad?

Answer 51

negative FCF is okay if ROIC>WACC