Technicals

Question 1

1) What economic indicators do you think have the greatest impact on
the stock/bond markets?

Answer 1

Fed Funds rate,CPI, Unemployment, GDP, Labour costs,

Question 2

How do you calculate free cash flow

Answer 2

Net Income
\+ Depreciation expenses
\+ Amortization of goodwill
\+ Year-over-year changes in deferred taxes
– Year-over-year change in net working capital (current assets – current liabilities)
= Cash Flow from Operations
– Net Capital Expenditures
= Free Cash Flow

Question 3

Is it possible for a company to show positive cash flows but be in grave trouble`

Answer 3

sure. depends where cash flow is coming from.
1.
unsustainable improvements in working capital (a company is selling off inventory and delaying payables),

2. another example involves lack of revenues going forward in the pipeline.

Question 4

How is it possible for a company to show positive net income but go bankrupt?

Answer 4

deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans.

anything that causes a liquidity crunch

Question 5

Switching from lifo to fifo

Answer 5

In a rising cost environment, LIFO to FIFO shows lower earnings, higher costs, lower taxes

Question 6

link between balance sheet and income statement

Answer 6

profits from IS added to balance sheet as retained earnings

Interest expense on IS is charged on debt recorded on BS

D&A is capitalized expense from IS that reduced PPE on BS

Question 7

how does a decrease in financial leverage affect cost of equity

Answer 7

decreases in financial leverage lower the beta and therefore lowers the cost of equity. lower premium demanded

Question 8

misstated depreciation, should be 10mm higher

Answer 8

start with IS, increase Depending. expense by 10mm

assuming a 40 % tax rate, net income is lower by 6mm because of the tax shield

cash increases by 4 million (-6million net income + 10mm depreciation)

ppe decreases by 10mm, total assets went down by 6 mm

decrease of 6mm on net income side balances the equity side of the BS