The Income Statement Flashcards
Total Sales Revenue
Total amount of all products sold during the period
Cost of Sales
Cost to produce those products
Gross Profit
The difference between total revenue and the cost of sales
Gross Margin
Gross Profit / Total Sales
R & D
Research & Development
S G & A
Selling, General & Administrative
expenses related to marketing, legal and corporate overhead, HR administration, investor relations, and other corporate overhead
Stock-based Compensation
Fair market value of stock and option grants given to employees
Depreciation & Amortization
Depreciation of property, plant, and equipment and intangible assets
Operating Income
Gross profit less operating expenses
EBIT
Earnings Before Interest & Taxes
EBITA
EBITA is equal to earnings plus interest, taxes and amortization
EBIT Margin
EBIT / Total Sales
EPS
Earnings Per Share
Net Income / Average Shares Outstanding during the period
Net Present Value
The NPV of a project is the sum of the present value of all cash flows associated with the project over its life.
Why use the NPV method?
The NPV method can be used to determine whether a firm should undertake a project.
Positive NPV, what is it?
NPV > 0
Will increase shareholder wealth therefore should be undertaken.
Negative NPV, what is it?
Negative NPV will decrease shareholder wealth and should be rejected.
What is the NPV formula?
see attachment
Present Value (discounted cash flow)
Present Value Definition
In economics and finance, present value, also known as present discounted value, is the value of an expected income stream determined as of the date of valuation.
WACC
Weighted Average Cost of Capital
WACC Formula Meaning
WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight and then adding the products together. In the above formula, E/V represents the proportion of equity-based financing, while D/V represents the proportion of debt-based financing.
WACC Formula
WACC = weighted average cost of capital N = number of sources of capital (securities, types of liabilities) r_i = required rate of return for security i = security MV_i = market value of all outstanding securities
TEV
Total Enterprise Value
Formula for TEV
TEV = Market Cap of Equity + Debt - Cash
Describe TEV
TEV as the net cost to acquire the business (buying its equity, paying off its debt, but keeping any cash)
Discounted Free Cash Flow Meaning
Valuing the EnterpriseIn finance, discounted cash flow analysis is a method of valuing a security, project, company, or asset using the concepts of the time value of money.
Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management and patent valuation.
Discounted Free Cash Flow Formula
Venture Capital: Pre-money value
Value of the pre-existing shares evaluated at the share price for the current funding round
Venture Capital: Post Money Value
Value of the final number of shares at the conclusion of the funding round.
Post money value = Pre-money value + The Amount Invested
Amount invested / Post-money value = fraction of shares held by new investors
Down Round
When the share price of the current investment round is below the share price of the prior round
VC Hurdle Rates
The VC hurdle rate (i.e. the VC’s required rate of return) is then calculated by dividing the required return on equity calculated using CAPM, for example, by the probability of success.
So, if the CAPM return on equity is 15% and the probability of success is 30%, the VC hurdle rate is 50%.
