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In the Ginny’s Restaurant case, why is investing $3 million better than investing $4 million?

Because the $3 million investment has a higher NPV ($1,151,000) compared to the $4 million investment ($1,094,000), maximizing shareholder wealth.

What does a positive NPV indicate about a project?

A positive NPV means the project is expected to generate more value than it costs, thus increasing the firm’s value and should be accepted.

In the Ginny’s case, why shouldn’t Virginia borrow to invest more than $3 million?

because the project’s returns are insufficient to cover the additional borrowing costs, and the highest NPV is achieved at $3 million.

What is the key takeaway from the Ginny’s Restaurant analysis?

Choose the investment size that maximizes NPV, not necessarily the largest possible investment. Positive NPV projects add value to the firm.

How does Virginia’s current wealth of ~$4.86 million relate to her consumption ability?

It represents her present value of wealth; investing in positive NPV projects allows her to consume more in the future (e.g., $5.12 million in a year).

What is the key difference between causation and correlation?

Causation means one variable directly causes a change in another. Correlation only measures how two variables move together, but does not prove cause and effect.

What is Spearman’s rank correlation used for in event studies?

To measure the strength and direction of association between ranked variables (e.g., firm reactions to events) when data is not linear. It shows correlation, not causation.

What are CAR and BHAR?

CAR = Cumulative Abnormal Returns (sums monthly abnormal returns). BHAR = Buy-and-Hold Abnormal Returns (measures compound returns over time). BHAR is preferred for long-term studies.

What is the difference between scenario analysis and sensitivity analysis?

Sensitivity analysis changes one variable to see its impact. Scenario analysis creates multiple future scenarios (best/worst/normal) by changing several variables at once.

How are debt and equity similar and different?

Both are used to raise capital. Debt is a loan with fixed repayments; equity is ownership with variable returns. Debt has priority in repayment; equity has voting rights but higher risk.

What is the difference between pre-money and post-money valuation?

Pre-money valuation is the company’s value before investment. Post-money = Pre-money + Investment amount.

What is an LBO (Leveraged Buyout)?

Acquisition using significant borrowed money to finance the purchase, often taking a public company private. High debt levels amplify equity returns.

What is carried interest?

The share of profits (typically 20%) paid to the general partner of a PE fund after returning capital to LPs and achieving a hurdle rate.

What is the J-Curve Effect in private equity?

Early negative returns due to setup fees and investments, followed by positive returns as portfolio companies grow and exit.

What is the Venture Capital method?

A valuation approach for startups using expected future exit value discounted back at a high rate to determine pre/post-money valuation and ownership share.

What are the Four Cs of Credit?

Capacity (ability to repay), Capital (owner’s equity), Collateral (assets securing the loan), Character (borrower’s trustworthiness).

What is the Cash Conversion Cycle?

The time between paying for supplies and receiving cash from customers. Includes inventory, receivables, and payables periods.

What is Porter’s Five Forces?

Framework analyzing industry competition: Threat of new entrants, Threat of substitutes, Bargaining power of buyers, Bargaining power of suppliers, Competitive rivalry.

: What ratios are used in credit analysis?

Efficiency ratios, profitability ratios, liquidity ratios, and leverage ratios.

What is absolute vs. relative valuation?

Absolute valuation finds intrinsic value (e.g., DCF). Relative valuation compares multiples (e.g., P/E, EV/EBITDA) to similar companies.

What is the Dividend Discount Model (DDM)?

Values a stock as the present value of all future dividends. Only useful for dividend-paying companies.

What is the Free Cash Flow to Equity (FCFE) model?

Values equity by discounting cash flows available to equity holders after all expenses and debt payments.

What is the Residual Income Model (RIM)?

Values equity as book value plus present value of future residual income (earnings above required return).

What is the logic of a 3-statement model?

It integrates Income Statement, Balance Sheet, and Cash Flow Statement to show how operational performance affects financial position and cash flows over time.

How is net income linked across statements?

Net income flows from Income Statement to Retained Earnings on Balance Sheet and is the starting point for Cash Flow from Operations.

How do depreciation and amortization affect all three statements?

On Income Statement: reduces net income. On Cash Flow Statement: added back in CFO. On Balance Sheet: reduces PP&E (net of accumulated depreciation).

What is the role of the cash flow statement in balancing the model?

It explains changes in cash, which ties to the cash balance on the balance sheet, ensuring the model balances.

What is a “revolver” in a 3-statement model?

A revolving credit facility that acts as a plug to ensure cash balances don’t go negative. It adjusts automatically based on cash needs.

How do you forecast working capital in a 3-statement model?

Using ratios (e.g., days sales outstanding, days inventory outstanding) to project receivables, inventory, and payables based on revenue and COGS forecasts.

What is data validation in Excel?

A tool to restrict data entry to certain values, ensuring accuracy and consistency in financial models.

What is absolute cell referencing?

Using $ to lock a cell reference (e.g., $A$1) so it doesn’t change when copied. Essential for consistent assumptions in models.

Why name ranges in Excel?

To assign a name to a cell or range (e.g., “Revenue”) for easier formula readability and model maintenance.

What is custom formatting?

Changing how numbers display (e.g., as thousands or percentages) without altering the actual value, improving readability.

How can blockchain reduce corporate fraud?

Through transparent, immutable ledgers, smart contracts, and real-time validation, making fraud and manipulation easily detectable.

What is an accrual?

Recording revenues and expenses when earned/incurred, not when cash changes hands.

What is impairment?

A permanent reduction in the value of an asset below its carrying amount on the balance sheet.

What is the LIFO reserve?

The difference between inventory valued under LIFO and FIFO, reflecting the impact of inflation on inventory costs.

What is underinvestment?

When a company rejects positive NPV projects, often due to high debt or misaligned incentives.

What is overinvestment?

When managers invest in negative NPV projects to grow the company or increase control, often wasting resources.