ENRG Modeling Midterm 1 (Energy Accounting, Financial Statements, Discounted Cash Flows)

What is the basic formula for energy revenue?

Revenue = volume × price.

For an oil company, how is revenue typically calculated?

Barrels sold × price per barrel.

How many gallons are in one barrel of oil?

42 gallons.

For an electric vehicle company, what is a major revenue driver?

Number of vehicles sold/delivered × price per vehicle.

For a battery company, how can revenue be calculated?

kWh sold × price per kWh.

For a solar component manufacturer, how can revenue be calculated?

Watts sold × price per watt.

What is a watt?

A unit of power.

What is a kilowatt-hour (kWh)?

The amount of electricity consumed by using 1 kilowatt for 1 hour.

What is Cost of Goods Sold (COGS)?

The cost to produce the goods or services a company sells.

What is the relationship between revenue, COGS, and gross profit?

Revenue − COGS = Gross Profit.

What is DD&A?

Depletion, depreciation, and amortization.

Is DD&A a cash or non-cash expense?

Non-cash expense.

What does G&A stand for?

General and Administrative expenses.

What does R&D stand for?

Research and Development.

What is net interest expense?

Interest expense − interest income.

How is interest income estimated?

Cash × interest rate.

How is interest expense estimated?

Debt × interest rate.

How is net income calculated in the professor's model?

Gross profit − operating expenses − taxes − net interest.

What is NOPAT?

Net Operating Profit After Taxes.

How is NOPAT calculated in the professor's model?

Gross profit − operating expenses − taxes, excluding interest.

What are current assets?

Assets expected to be converted into cash within one year.

What are long-term assets?

Assets with an expected life longer than one year.

What are marketable securities?

Highly liquid investments such as money markets or short-term bonds.

What is accounts receivable?

Money owed to the company by customers who have not yet paid.

What is PP&E?

Property, Plant, and Equipment.

What is the accounting equation?

Assets = Liabilities + Equity.

What is working capital from a cash-flow perspective?

Non-cash current assets − non-debt current liabilities.

What usually makes up a large portion of working capital?

Inventory.

What is cash flow from operations before working-capital changes?

Net income + non-cash expenses.

What non-cash expenses are added back to net income in the professor's model?

DD&A + stock-based compensation + deferred taxes.

Why is depreciation added back when calculating cash flow?

It reduces accounting income but does not use cash.

What happens to cash flow when inventory increases?

Cash flow decreases.

What happens to cash flow when accounts receivable increases?

Cash flow decreases.

What happens to cash flow when accounts payable increases?

Cash flow increases.

How is cash flow from operations after working-capital changes calculated?

CFO before working-capital changes − inventory increase − A/R increase + A/P increase.

What are the three main sections of the cash flow statement?

Cash flow from operations, investing, and financing.

What is cash flow from investing?

Sales of long-term assets − purchases of long-term assets.

Why is capex a cash outflow?

The company spends cash to purchase or build long-term assets.

What is capex?

Capital expenditures on long-term assets such as equipment, wells, factories, or plants.

How is cash flow from financing calculated?

Debt issued − debt repaid + stock issued − stock repurchased − dividends.

How does issuing debt affect cash?

It increases cash.

How does repaying debt affect cash?

It decreases cash.

How does issuing stock affect cash?

It increases cash.

How does repurchasing stock affect cash?

It decreases cash.

How do dividends affect cash?

They decrease cash.

How is net change in cash calculated?

Cash flow from operations + cash flow from investing + cash flow from financing.

How is ending cash calculated?

Prior-period cash + net change in cash.

How is ending retained earnings calculated?

Prior-period retained earnings + net income − dividends.

How is ending PP&E calculated in the professor's model?

Prior-period PP&E + capex − depreciation + purchases − sales.

What should always be checked after forecasting the balance sheet?

Assets = Liabilities + Equity.

What is the purpose of a DCF valuation?

To estimate the fundamental value of a company based on expected future cash flows.

What does DCF stand for?

Discounted Cash Flow.

What is another term used for a DCF company valuation in the slides?

Net Asset Value.

How is DCF different from relative valuation?

DCF uses expected cash flows; relative valuation compares multiples to peers.

What is the value of a firm in a DCF?

The present value of cash flows to the firm.

What happens to value when the discount rate increases?

Value decreases.

What discount rate is appropriate for cash flows to the firm?

WACC.

What does WACC stand for?

Weighted Average Cost of Capital.

What is the CAPM formula for cost of equity?

Risk-free rate + Beta × market risk premium.

What are the three main CAPM inputs?

Risk-free rate, beta, and market risk premium.

What is the beta of the broad market by definition?

1

What does a beta greater than 1 generally indicate?

Higher risk and volatility than the market.

What is the WACC formula?

(E/(D+E) × cost of equity) + (D/(D+E) × pre-tax cost of debt × (1 − tax rate)).

Why is the cost of debt adjusted for taxes in WACC?

Interest expense is tax-deductible.

Should market value or book value of equity be used in WACC?

Market value of equity.

What is market value of equity also called?

Market capitalization.

What discount rate did the professor say is commonly used for oil and gas companies?

Approximately 10%.

What cash flow is discounted in a DCF?

Free cash flow to the firm.

What is the formula for free cash flow to the firm?

NOPAT (net operating profit after taxes) + non-cash expenses, minus investment in working capital, minus investment in capex.

Why is depreciation added back in free cash flow?

It is a non-cash expense.

Why is capex subtracted in free cash flow?

It is a cash expenditure.

Why are increases in working capital subtracted in free cash flow?

They require cash investment.

What can free cash flow be used for?

Pay debt, dividends, buybacks, acquisitions, capex, or build cash.

What is terminal value?

The value of cash flows occurring after the explicit forecast period.

Why is terminal value needed?

A company can operate indefinitely, but cash flows cannot be forecast individually forever.

What is the perpetuity-growth terminal value formula?

Terminal Value = FCF in the next period ÷ (WACC − growth rate).

When should a stable-growth terminal value generally be calculated?

After the company's high-growth period ends.

What condition should normally hold between terminal growth and WACC?

Growth rate should be less than WACC.

What happens when terminal growth approaches WACC?

Terminal value becomes extremely large.

Should a company's stable growth rate generally exceed long-term economic growth?

No

How do you calculate enterprise/company value in a DCF?

Present value of forecast FCFs + present value of terminal value.

How do you move from enterprise value to equity value in the professor's simplified model?

Subtract debt.

How do you calculate estimated value per share from the DCF?

Equity value ÷ diluted shares outstanding.