Accounting, Valuation & M&A Fundamentals

Vocabulary flashcards summarizing key accounting principles, valuation methods, and M&A concepts covered in the lecture notes.

Income Statement

Reports revenues and expenses over a period to show profit or loss under accrual accounting.

Balance Sheet

Snapshot of financial position at a point in time; Assets = Liabilities + Equity.

Cash Flow Statement

Shows cash inflows and outflows from operating, investing, and financing activities during a period.

Accrual Accounting

Records revenues and expenses when earned or incurred, not when cash changes hands.

Cash Accounting

Recognizes revenues and expenses only when cash is received or paid.

Matching Principle

Accrual rule that expenses are recognized in the same period as the revenues they help generate.

Revenue Recognition

Revenue is recorded when it is earned and realizable, regardless of cash receipt.

EBITDA

Earnings before interest, taxes, depreciation, and amortization; proxy for core operating profitability.

Net Working Capital (NWC)

Current assets minus current liabilities; measures short-term liquidity and affects cash flow.

Depreciation & Amortization

Non-cash expenses that allocate the cost of tangible (depreciation) and intangible (amortization) assets over time.

Capital Expenditure (CapEx)

Cash outlay to acquire, upgrade, or maintain long-term assets.

Cash Flow from Operations (CFO)

Cash generated by core business activities after working-capital adjustments.

Cash Flow from Investing (CFI)

Cash used for or generated by investments in long-lived assets, acquisitions, or securities.

Cash Flow from Financing (CFF)

Cash flows related to raising or repaying debt and equity and paying dividends.

Unlevered Free Cash Flow (UFCF)

Cash flow available to all capital providers before interest payments.

Levered Free Cash Flow (LFCF)

Cash flow remaining after interest and mandatory debt service; available to equity holders.

Enterprise Value (EV)

Total value of a business to all claimholders: equity + debt − cash.

Equity Value

Portion of enterprise value attributable to shareholders.

Weighted Average Cost of Capital (WACC)

Average required return on debt and equity, used to discount unlevered cash flows.

Cost of Equity

Return required by equity investors, often estimated by CAPM: Rf + β( market risk premium ).

Cost of Debt

Effective interest rate on borrowings, adjusted for the tax shield.

Beta

Measure of a stock's volatility relative to the overall market; input to CAPM.

Asset Beta (Unlevered Beta)

Beta that reflects only business risk, excluding financial leverage.

Equity Beta (Levered Beta)

Beta that reflects both business risk and the impact of a company’s debt.

Operating Leverage

Degree to which fixed costs dominate a firm's cost structure, magnifying profit volatility.

Financial Leverage

Use of debt financing, which increases equity return volatility.

Comparable Company Analysis

Valuation based on trading multiples of peer public companies.

Precedent Transactions

Valuation based on multiples paid in recent comparable M&A deals.

Discounted Cash Flow (DCF)

Intrinsic valuation that discounts projected free cash flows and terminal value to present.

Terminal Value

Present value of cash flows beyond the explicit forecast period in a DCF.

Gordon Growth Model

Terminal value method that capitalizes final cash flow at a perpetual growth rate.

Exit Multiple Method

Terminal value approach applying a market multiple (e.g., EV/EBITDA) to the final forecast year.

EV/EBITDA Multiple

Capital-structure-neutral ratio comparing enterprise value to EBITDA.

EV/Revenue Multiple

Ratio of enterprise value to sales; useful for early-stage or unprofitable firms.

Price/Earnings (P/E) Ratio

Share price divided by earnings per share; equity-focused multiple affected by capital structure.

EV/EBIT Multiple

Enterprise value divided by EBIT; includes depreciation and amortization impact.

Leveraged Buyout (LBO)

Acquisition funded largely with debt, targeting high equity returns via leverage.

Debt Schedule

Model detailing debt balances, interest expense, and repayments over time.

MOIC (Multiple on Invested Capital)

Exit equity proceeds divided by initial equity investment in a deal.

Internal Rate of Return (IRR)

Discount rate that sets the net present value of cash flows to zero; measures deal return.

Merger Model

Financial model evaluating the pro-forma impact of an acquisition, especially EPS changes.

Accretion/Dilution Analysis

Determines whether a transaction increases (accretive) or decreases (dilutive) the acquirer’s EPS.

Synergies

Incremental revenue or cost savings realized by combining two companies.

Purchase Price Allocation (PPA)

Allocating acquisition price to tangible assets, identifiable intangibles, and goodwill.

Goodwill

Intangible asset recorded when purchase price exceeds fair value of net identifiable assets.

Working Capital Peg

Target NWC level negotiated in a deal; deviations adjust the purchase price at closing.

Deferred Revenue

Liability for cash received before goods or services are delivered; recognized as revenue later.

Accounts Receivable

Current asset representing sales made on credit that are awaiting collection.

Prepaid Expenses

Current asset for cash paid in advance of expense recognition.

Retained Earnings

Cumulative net income minus dividends; component of shareholders' equity.

Interest Tax Shield

Tax saving that arises because interest expense is tax-deductible.

Liquidity

A company's ability to meet short-term obligations as they come due.

Solvency

A firm's capacity to meet its long-term obligations and remain a going concern.

Financial Flexibility

Ability to adapt financing and investment decisions when conditions change.

Capital Structure

Mix of debt and equity a company uses to finance its operations and growth.