C1 Flashcards 1st half

C1: Corporate Banks

Offer cash management and debt financing. They target large corporate clients (revenue in excess of $1Bn). If a bank is lending directly to a Company, that would be the corporate bank.

C1: Investment Banks

Assist its clients in accessing the capital markets, by putting them in contact with various institutional investors. Investment Banks also help their clients execute mergers and acquisitions.

C1: Commercial Banking

Offer the same lending and cash management services as Corporate Banking, but to middle market companies (Companies with between $25MM and $2Bn in revenue). Better work life balance than CIB, but less pay.

C1: Commercial banking traditional career path

Credit Analyst > Junior Portfolio Manager, then either Senior Portfolio Manager or Relationship Manager.

C1: Analyst (hierarchy)

Entry level, immediately out of school.

C1: Associate (hierarchy)

Post MBA, or promotion after 3 years of being an Analyst.

C1: Vice President (hierarchy)

Promotion after 3 years of being an Associate.

C1: Senior Vice President/Director and Managing Director

Most never make it this far.

C1: Investment banking product groups

Mergers & Acquisitions (M&A), Leveraged Finance (LevFin), Equity Capital Markets (ECM), Debt Capital Markets (DCM), Restructuring (distressed scenarios).

C1: Investment banking industry groups

Healthcare; Technology, Media & Telecom (TMT); Financial Institutions Group (FIG); Natural Resources; Consumer & Retail; Industrials; Real Estate; Gaming and Lodging; Financial Sponsors (Private Equity).

C1: Equity investors focus

You will be focused on the growth potential of the firm, and how you expect the business to perform going forward in a base case. Equity investors are focused on upside.

C1: Fixed income investors focus

You will be focused on the risks to the Company's cash flows. Fixed income investors are not focused on upside - the only upside is they repay principal and interest. Fixed income investors are very concerned with what the Company looks like in the downside.

C1: Corporate banking entry level analyst role

Analyze the financial performance and business model of a potential borrower. Write up a report detailing risks, and a recommendation. Senior bankers will then use this to make an informed decision.

C1: Investment banking entry level analyst role

Create "pitch books" for the MD to use in his/her meeting with potential and existing clients. This includes detailed financial models, and an overview of how the bank could service the client.

C1: Financial statement analysis general framework

What changed? Why did it change? Is the change positive or negative for our place in the capital structure? Is the change sustainable?

C1: Income Statement

An overview of the revenue and expenses incurred during the time period of the financials.

C1: Income Statement (also called the P&L)

Displays all revenue generated and expenses incurred during a time period. Useful in analyzing the profitability generated by the firm.

C1: Cash Flow Statement

Cash accounting. What caused changes in the Company's cash balance during the year.

C1: Balance Sheet

Snapshot in time. What are the company's assets and liabilities at that point in time?

C1: Accrual Accounting

Revenue is recorded when the service is provided (not necessarily when cash is received). Expenses are recorded when they are incurred, and not necessarily when the Company pays the expense in cash.

C1: Revenue

Volume * Price. How many items did the Company sell, and what was the average price?

C1: Four reasons revenue changes

Volume increase/decrease? Price increase/decrease? Acquisition related? Organic (non-acquisition)?

C1: MD&A

The management team explains the drivers of their performance. This is the first place you check for answers to your questions.

C1: A question MD&A does not answer

Should be directed to the company. Do not make assumptions.

C1: Why is acquired revenue understated in the year of an acquisition?

When a Company makes an acquisition it records the revenue generated from that acquisition date, so the financials do not include revenue from before that date.

C1: Best practice when acquired revenue is understated

Ask the Company what revenue and expenses the target incurred before the acquisition date. Outside of that, annualize the impact: Revenue x (12 / months owned), e.g. Revenue x (12/8.5).

C1: Gross Profit

Revenue minus cost of goods sold (or cost of sales).

C1: Cost of goods sold

The direct cost incurred in the production of any goods or services. This includes direct labor, direct material cost, direct factory overhead.

C1: Gross Margins

Gross profit as a percent of revenue. Example: $100MM revenue and $80MM COGS gives 20% ($100-80)/100.

C1: Gross margin questions to ask

How have gross margins changed year over year? Why? Is it sustainable? How volatile have gross margins been?

C1: SG&A

Operating expenses that a business incurs that are not reflected in COGS.

C1: Selling expenses vs general and admin expenses

Selling = marketing, advertising, distribution costs etc. General and admin = rent, salaries, overhead costs.

C1: Cost Structure

The types of expenses that a company incurs. All expenses can be categorized as fixed or variable.

C1: Fixed Costs

Costs that are not impacted by the amount of revenue a Company generates. Examples: some salaries, rent, insurance, property taxes, some legal fees.

C1: Variable Costs

Costs that a company can reduce during a period of declining revenue. Examples: utility costs, shipping and freight, certain salaries, office supplies, marketing advertising and promotional.

C1: Company A (80% of SG&A fixed) vs Company B (20% fixed): which has less cash flow volatility?

Company B, as it can more easily reduce expenses during a period of declining demand. This would protect margins.

C1: Depreciation

When a company acquires equipment, it is not an expense. Instead they record the expense over a period of time, known as depreciation. Example: $100MM of equipment on a 10-year schedule = $10MM per year.

C1: Amortization

The exact same thing as depreciation, but it is linked to intangible assets on the balance sheet.

C1: D&A

A non-cash expense. It is not important when analyzing the P&L.

C1: Other Operating Expenses

Anything outside of the other expense line items, but is above the operating profit line.

C1: Threshold for other operating and non-operating expenses

If you see a large expense (more than 3% of revenue), understand what it is. Is it a recurring expense? Is it a cash expense? (The modeling deck says 5% for other operating expense.)

C1: Goodwill Impairment

Annually a Company tests its goodwill by running a DCF on those specific assets. If the DCF results in a value meaningfully lower than the asset value, they must impair it. They reduce the asset and record an expense to reduce retained earnings. It is a one time and non-cash expense.

C1: Non-operating expenses

Expenses which are not typically linked to the normal operating business.

C1: Interest Expense

A function of the Company's total debt and average borrowing costs.

C1: EBITDA

Earnings before interest, tax, depreciation and amortization.