Investment Banking Prep

Equity Value Definition + Formula

Market cap or market value- the value of all assets (everything a company has) to equity shareholders.

Formula= share price * # of fully diluted shares outstanding (basic shares outstanding, in the money options and warrants, in the money convertible securities)

Company Value

Cash Flow/ (Discount Rate- Cash Flow Growth Rate)

Income Statement

reports a company’s financial performance over a specific accounting period.Revenue-COGS= Gross Profit. Gross Profit- Operating Expenses= Operating Income (EBIT). EBIT- Interest Expense= Pretax income. Pretax income- taxes= net income

Balance Sheet

reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and provides a basis for comuting rates of return and evaluating capital structure.

Cash Flow Statement

summarizes the amount of cash that enters and leaves a company.

Accrual vs Cash Accounting

Accrual accounting records revenue when it’s earned and expenses when they’re incurred, regardless of when the cash transactions occur. Cash accounting records revenue when it’s received and expenses when they’re paid out.

How do the 3 financial statements link?

Net Income from Income Statement flows into Shareholder's Equity on the Balance Sheet, and into the top line of the Cash Flow Statement Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement Investing and Financing activities affect Balance Sheet items such as PP&E, Debt, and Shareholder's Equity. The Cash and Shareholder's Equity items on the Balance Sheet act as "plugs" with Cash flowing in from the final line on the Cash Flow Statement.

Free Cash Flow

what the company earns on a recurring basis, after taking into account non-cash charges, changes in operating assets and liabilities, and required CapEx. FCF= Cash flow from operations - CapEX

Unlevered Free Cash Flow

Cash available to all investors (shareholders and debtholders) before accounting for financial obligations.

How do you get from revenue to unlevered FCF?

Revenue- COGS- Operating Expenses= EBIT - Taxes= NOPAT. NOPAT-CapEx- investment in net working capital + D&

Levered Free Cash Flow

Cash available to equity investors, and the money left over after all a company’s bills are paid. LFCF= Net Income +D&A- change in working capital- CapEx- mandatory debt repayments.

How do you get from revenue to LFCF?

Revenue-COGS-OPex= EBIT- Interest (removing cash going to debt investors)=EBT. EBT- Tax= Net Income. Net Income- CapEx- investment in NWC+D&A- Mandatory debt repayments=LFCF

Net Working Capital

Measure of liquidity and ability to fund operations. Cash and other short term investments excluded in calculation. Operating Current Assets- OperatingCurrent Liabilities.

CapEx

payment for goods or services that maintain existing property and equipment, and invest in new tech and other assets for growth. CapEx= Change in PP&E + Current Depreciation

FIFO

the first unit making its way into inventory (oldest inventory) is sold first. Reflected in cogs. Any changes to the price are reflected in the ending inventory on the balance sheet.

LIFO

Items purchased last are the first to be sold. When prices of inventories rise, COGS are higher under LIFO, leading to lower taxes (due to lower reported EBIT)

Which financial statement(s) show the full impact of depreciation?

Cash flow only. Depreciation is often embedded into COGS and OpEx. You have to look at CFS to see how much depreciation is added back to see the full effect.

If you could have two financial statements, which would you want?

Balance sheet and income statement. (you can make a cash f

Enterprise Value

the value of core/operating business assets (equipment, factories, IP) to all investors. Independent of capital structure. EV= EqV + Debt+ Minority interesst+ preferred stock- cash

Equity and Enterprise Value Bridge

Equity value + total debt + preferred stock+ noncontrolling interest - cash/cash equivalents= Enterprise Value. In an interview, stick to EV= Eqv+ net debt+ NCI

Non controlling interest

Noncontrolling Interest (NCI)- When a company owns 50%+ of another company, they have to report financials for that company too. NCI is the value of the company that we don't own reported on our statement. Same thing as minority interest

valuation multiple

shorthand for company value based on cash flows/growth rates/ discount rate. a unit for comparison (x times) in relation to other companies’ multiples.

EqV/Net Income (or P/E)

Shows how much investors are willing to pay for each dollar of a company’s net income. Equity value is paried with net income because net income is what is available to equity investors.

multiple rules

EBITDA is always paired with EV, net income is always paired with EqV

Can enterprise value be negative?

Yes, when cash> debt + non controlling interest

if a company acquires another company, is it possible for their combined enterprise value to be greater than their individual ones combined?

Yes, if they hold equity investment in the same company and the total exceeds 50%, making it NCI.

Present Value Formula

Cash Flow/(1+Discount rate)^t

Free Cash Flow

what a compamny earns after paying for items it needs to run the business. Cash Flows from operations- CapEx

Steps to build a DCF

Project free cash flows, calculate the company’s discount rate (wacc), discount and sum the company’s FCF, calculate terminal value, discount the terminal value to the present value, add discounted fcf and discounted terminal value

terminal value

the value of an asset, business, or project beyond the forecasted period when future cash flows can be estimated

EPS formula+meaning

Net Income/Weighted Average Shares Outstanding. Represents profit generated by the company for each shareholder

Steps to Link the Financial Statements

project income statement and link net income to the top of cash flow statement

adjust for non cash items on the income statement

project items in CFI and CFF separately

Sum all sections to calculate net change in cash

link net income and net change in cash to balance sheet

link each non-cash adjustment to appropriate line item on balance sheet

link each CFI/CFF item to appropriate line item on balance sheet

check to see if the balance sheet balances

Accounts Payable

recorded expenses but haven’t paid cash. Usually regarding one time expenses like legal fees.

Accrued Expenses

recorded expenses but haven’t paid cash. Usually refers to recurring expenses like wages, utilities, and rent.

what does the change in working capital show?

whether a company has to spend money before it can grow or whether it generates extra money as a result of its growth

NOPAT

After tax profits if you ignore interest income/expenses, income from side activities, writedowns, and impairments. NOPAT= Operating Income *(1-Tax Rate)

Return on Equity

Net Income/ average equity. for each dollar of equity raised, how much in after-tax profits does the company generate?

Return on Assets

Net Income/average total assets. for each dollar in assets generated/created, how much in after tax profits does the company generate?

Return on Invested Capital

NOPAT/Average equity+debt. Measures how much it costs the company to grow for each dollar of equity and debt raised, how much in after tax operating income does the company generate?

Leverage Ratio

Total Debt/EBITDA. how much debt does a company have relative to its ability to pay that debt? Lower is better.

Interest Coverage Ratio

EBITDA/Net Interest Expense. How easily can a company pay the interest on its debt? Higher is better.

Dividend Payout Ratio

Dividends/Net Income. How much of the company’s after tax profits is it returning to shareholders? Higher means more being paid out.

Asset Turnover Ratio

Revenue/average total assets. how dependent is a company on its assets to generate sales? Lower= greater dependency.

Current Ratio

Current Assets/Current Liabilities. Can a company pay off short term liabilities with its current assets? Measure of liquidity, with greater than 1 is generally a good number.

Inventory Turnover Ratio

COGS/average inventory

Receivables Turnover Ratio

Revenue/Average A/R

Payables Turnover Ratio

COGS or OpEX/average A/P

Days Inventory Outstanding

365/Inventory Turnover

Days Receivables Outstanding

365/Receivables Turnover

Days Payable Oustanding

365/Payables Turnover