Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

My Cards > Technical - General > Flashcards

Technical - General Flashcards

1
Q

Whats the difference between IRR and WACC?

A

WACC:
(often used in DCF)
(is an input variable when calculating UFCFs)

IRR: The discount rate at which the Net Present Value of all cash flows from a project is equal to 0
(Often used by Private Equity Firms / Financial Sponsors in an LBO)
(is an output variable when PV or NPV is set)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Walk me through each statement

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does each statement measure

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Where does Net Income go beyond the I/S

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Which statement is most important

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What accounts for the change in PP&E?

A

Depreciation, CapEx, Proceeds from any sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the impact if Depreciation changes

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are types of various analysis?

A 
Valuation: 
(DCF)
(Public Comparables)
(Precedent Transactions)
(LBO Model)
(Football Field)
(WACC)

M&A:
(Accretion/Dilution)
(Merger/Model)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the treasury stock method?

A

A way to calculate new shares created from options or warrants that are dilutive to the share price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How do you compute the pro forma EPS?

A

Net incomeS + after-tax incremental adjustments / shares out + new shares issued

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Why would you use P/E Multiple? Whats the point / benefit? What does it tell us?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How would you value an internet company?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How would you value a traditional asset heavy company?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Tell me about Enterprise value and Equity value. And why are they different? Can you give me a few examples?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Tell me about a deal you’ve found interesting

A

GE Split off of Aviation, Healthcare

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What does it mean when treasury yields go up? Down?

A

They are not like stocks. A bonds yield and price are inversely related.
Lower yield means treasuries are in demand. They’re a safe asset. Higher means the opposite.

The cost of equity is cheaper when interest rates are low

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the relationship between the yield curve and inflation?

A

Well, the yield depends on whats going on in the markets

  • credit risk of the issuer
  • the outlook on markets and inflation rates
  • and the interest rate set by central banks
18
Q

What happens when Tax rates rise?

A

The cost of debt is cheaper (interest exp is tax deductible)

19
Q

When happens to your WACC when Interest rates rise?

A

Cost of debt: Rises because you are paying for on interest

Cost of Equity: Rises

20
Q

What is free cash flow? How do we get there?

A
21
Q

Whats effecting the financial markets?

A

Inflation, Supply disruptions, new variants, climate change

22
Q

How does a merger model work? (the steps)

A

1) Determine Purchase Price
2) Determine Purchase Method
3) Project Financial Profiles & statements of buyer
4) Combine buyer & sellers income statements
5) Calculate Goodwill and allocate purchase price
6) Combine BS and adjust for acquisition effects
7) adjust IS and adjust for acquisition effects
8) Calculate Acre/Dil. & create sensitivity tables

23
Q

How would you combine the balance sheet of a merge?

A

Add all assets - the amount paid
+ all liabilities
+ Buyers SE only

adjust for Goodwill

24
Q

What are acquisition effects?

A

Foregone cash on interest (cash * interest rate)
New Interes expense if paying w/ debt (debt used * interest rate)
Shares outstanding (Old buyers shares + newly issued shares)
Synergies
D&A (Must reflect new expense via DTL or DTA)
Accretion/dilution

25
Q

Which is better to use when buying? Cash, Debt, or Equity.

A

Cash: Easiest & cheapest, you miss out on foregone cash from interest, but is generally the cheapest

Debt: less cheap than cash, and you pay interest on it, but the interest expense is tax deductible

Equity: more risky, as it is never promised, the share price may plummet after announcing, and creates a dilutive effect

26
Q

Whats the rule for using 100% stock in an acquisition

A

TL;DR - Sellers PE&raquo_space;»» Buyers PE = DILUTIVE !

If P/E multiple of BUYER is MORE = accretive
if P/E multiple of SELLER is MORE = dilutive

Think of it as : P/E = Equity Value / Net Income

Buyer EV(Price) = $100
Buyer Net income (Earning) = $10
PE = 10x

If you FLIP the P/E = 10/100 = $0.10
If you bought it, you’d be getting $0.10 in earnings for each DOLLAR or 10%

Sellers P/E: 80/10 = 8x
Sellers E/P = $0.125 for every dollar OR 12.5%

YOUD GET MORE FOR YOUR MONEY BECAUSE WITH THE SELLER BC ITS PE MULTIPLE IS LOWER.

27
Q

What are the costs for using Cash, Debt, Stock?

A

Cash: Interest rate/RF * (1- Buyers tax rate)

Debt: Rate on debt * (1- Buyers tax rate)

Stock: Recipricol of buyers P/E multiple, i.e. Net Income / Equity Value

Yield of Seller: Recipricol of seller P/E multiple (the P/E multiple at purchase price for the deal)

28
Q

How do you calculate the weighted ‘cost’ for the buyer?

A

WACOA or look at the yield of the seller and the costs for the buyer

29
Q

How do you handle a company that isnt synergistic after the merge?

A

Write down assets and create impairment charges

Reduces:
Pre-tax income, net income, and goodwill

30
Q

Why would a company want to purcchase another?

A

Better ROI / Higher EPS (appeals to shareholders)

Undervalued

Gain in market share

31
Q

Walk me through a merger model

A

Looks at:
1) Financial profile of the two using purchase price form of payment, and determines the possible effect on the pro-forma EPS

Start by

1) Make assumptions about the acquisition & the form of payment
2) Determine valuations and shares outstanding of both buyer and seller, and project the income statements for each
3) Combine the IS: Revenue, Operating expenses, and adjust for foregone interest on cash, interest paid on debt, in COMBINED PRE-TAX income line; then apply the buyers tax rate to get combined NI, and then divide by the new share count to determine EPS

Discuss Goodwill & combining sheets if asked

32
Q

Why would an acquisition be dilutive?

A

If the additional net income received by seller is not enough to offset the buyers Cost of Acquisition

(foregone cash on interest, additional interest paid on debt, and effects of issuing more shares)

32
Q

Why would an acquisition be dilutive?

A

If the additional net income received by seller is not enough to offset the buyers Cost of Acquisition

(foregone cash on interest, additional interest paid on debt, and effects of issuing more shares)

  • THIS WOULD ONLY WORK IF THEY HAVE THE SAME TAX RATE, no D&A effects, No transaction fees, no synergies, and if you use the current price rather than the purchase price, etc.
33
Q

Company A: higher P/E

Company B: Lower P/E

Is this accretive or dilutive?

A

Depends on if its an all-stock deal.
If its ALL STOCK, then the deal with be accretive because the buyer gets more in earning for every $1 used to acquire 88

34
Q

How much a company is able to borrow/ take out in debt? How do you find out?

A

Look at precendent transations and public comps -> Debt/ EBITDA ratio

35
Q

Company A buy Company B using 100% debt

A PE: 15x
B P/E: 10x

A

Sellers Yield: 1/10 or 10%

AFTER TAX COST OF DEBT MUST BE greater than 10%

To get exact figure:
10%/ (1-.40) = 16.7% approx

36
Q

Comp A, PE: 10x < — always higher than Comp B

Is debt or using equity more accretive?

A

Buyers cost of debt: .05 * (1-.40) = 3%
Cost of equity: 10%

9%

37
Q

A: EntV 100, Market cap 80, EBITDA of 10, Net income of 4
B: EntV 40, Market cap of 40, EBITDA of 8, Net Income of 2

A

PE = 8/4

A: Ent: 100/10 = 10 , P/E = 80/4 = 20x
B: 40/8 = 5 ; P/E = 20x

38
Q

Company A requires company B with 100% cash. What do you do? What are the combined PE and EBITDA multiples?

A

1) ADD the Market Caps =120, add 20 more
-Adjust for Cash, Debt, and Stock used
2)

39
Q

How do P/E multiples change with different purchase methods (cash, stock, equity)

A

Enterprise Value is not affected because its cap structure agnostic

Cost of equity increases paying with stock
and Cost of debt increases when paying with debt

40
Q

What affects P/E ratio in general?

A

Exploring company growth: Reinvestment = INCREASES

Paying dividends = INCREASES

Increased debt / risk = FALLS

41
Q

How do you get to from EBITDA, EBIT, Net income to FCF?

A

My Cards (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions