Cambridge econ comp

accruals

record revenues and expenses when eared, not when cash is received/paid

matching

match expenses to the revenues they help generate in the same period

prudence

anticipate losse, don’t overstate income or assets

consistency

use consistent accounting methods over time to allow for comparison

income statement

shows revenue, costs and net profit over a period of time

balance sheet

snapshot of assets, liabilities and equity in a point of time

cash flow statement

tracks cash from operating, investing and financial activities

what are operating activities

they represent the core, day-to-day activities a business performs to generate revenue, including manufacturing, selling, marketing, and general admin

what are investing activities

transactions related to long-term assets and investments, including buying and selling property, plant, and equipment,

what are financing activities

include issuing and repaying debt, issuing and repaying equity (like shares), paying dividends, and capital lease payments. 

depreciation

the allocation of the cost of a non current asset over its useful life

straight line depreciation

equal depreciation each year

reducing balance depreciation

higher depreciation in early years, decreases over time (% of the asset value)

impact of depreciation

reduces asset value on the balance sheet and reduces profit on the income statement

impairment

a permanent reduction in the value of an asset below its carrying amoutn, eg if the asset becomes damaged or obsolete

impact of impairment

one time expense that lowers asset value and net profit

current assets

assets that a company expects to convert into cash or use up within one year, eg inventory

non current assets

a company's long-term investments that are not expected to be converted into cash, eg equipment

curent liabilities

dart that is due within a year

non current liabilities

debt that is due after a year

what is equity

ownership in a company: share capital + retained earnings ; assets - liabilities

capital expenditure

purchase of machinery, buildings. non current assets

revenue expenditure

wages, repairs, utility bills. expensed in income statement

how to calculate profitability

gross profit margin, net profit margin

why do profitability ratios show

how efficinetly profit is made

efficiency ratios

asset turnover (Revenue / Average total assets) , inventory turnover (cost of sales / average inventory)

high vs low asset turnover ratio

high ratio = more efficient. more revenue is generated per £1. low ratio = underutilised assets or operational inefficiencies

high vs low inventory turnover ratio

high = efficient, products sellin fats. low = overstocking, slow moving products or obsolescence

what do efficiency ratios show

how well assets are used

liquidity ratios

current ratio = CA/CL ; Acid test = (CA-Inv)/CL

what do liquidity ratios show

ability to pay short term debts

FIFO

Oldest inventory sold first, lower cost of sales, higher profit

LIFO

newest inventory sold first, higher cost of sales, lower profit

inventory write down

reducing inventory value when NRV<Cost. NRV = selling price - selling costs. increases the cost of sales and reduces profit

why write down inventory

ensures assets are not overstated on the balance sheet . part of prudence concept

intrinsic valuation

estimates the true value of. business based on its fundamentals (eg cash flows, growth, risk). Used when cash flow projections are reliable or when there are few comparable eg DCF

relative valuation

compares a company’s value to similar firms using market multiples. used when market-based benchmarks are preferred eg CCA or precendent transactions

Discounted Cash Flow Analysis purpose

intrinsic valuation - to estimate a company’s value based on the present value of its expected future unlettered free cash flows (UFCFs)

UFCF calculation

EBIT x (1-tax rate) + depreciation & Amortization - CapEx - Change in Working Capital (Cash flow before debt payments - available to all investors)

Projection period

5-10 years of UFCF projections

Terminal value - perpetuity growth method

TV = Final year UFCF x (1+ g)/(WACC - g)

Terminal value - exit multiple method

TV = final year metric x exit multiple (eg EV/EBITDA)

Discount rate (WACC)

Weighted Average cost of capital reflects blended cost of debt and equity: WACC = (E/V) X Re + (D/V) +Rd x (1-Tc)

Present Value

Each Year-s UFCF and terminal value are discounted back to today using WACC

Comparable Company Analysis purpose

to value a firm based on how similar companies are priced by the market

how to carry out a CCA

1. select comparable companies

2. gather financial data eg revenue, EBITDA, net income, debt

3. calculate valuation multiples: P/E (price per share/earnings per share); EV/EBITDA ( Market Cap + Debt - Cash)/EBITDA ; EV/Sales etc

4. Apply median or mean multiple to subject company metrics to estimate value

Enterprise Value

Market Cap + Total Debt - Cash . Total Value of the business

Equity Value

EV - Net debt ; Value available to shareholders

EV/EBITDA

Capital structure - neutral valuation multiple

P/E ratio

Share Price/EPS ; Show how much investors are paying per £1 of earnings

Acquisition premium

(Offer price - pre deal share price)/ pre deal share price x 100 ; extra amount paid to acquire a company

strengths of DCF

Details, includes time value of money

weakness of DCF

Sensitive to assumptions, hard to apply to early stage

typical use of DCF

long term forecasting, intrinsic value estimation

strengths of CCA

Market based, quick to perform

weaknesses of CCA

Market inefficiencies can distort values, hard to find good comps

typical use of CCA

IPO pricing, market benchmarking

strengths of precedent transactions

reflects real prices paid in M & A

weakness of precedent transactions

dat my be outdated or not fully comparable

typical use of precedent transactions

acquisition valuation

what is a derivative

a financial contract whose value is based on the value of an underlying asset. eg stocks, bonds, commodities, currency, interest rate, market index

why use derivaives

hedging - reduce risk from price changes ; speculation - attempt to profit from expected movements in prices arbitrage - profit fro price differences in related markets

types of derivatives

forward - agreement to buy/sell at a fixed pice on a future date; future - standardised forward contract traded on an exchange ; option - gives right to buy/sell an asset at a certain price before a dat; swap - exchange of cash flows

what does beta measure

the volatility a stick compared to the market

how is a leveraged buy out funded

with debt

what is EV/EBITDA used for

to value firms without capital structure bias (considering debt)

What is the primary sector

farming, fishing etc

phillips curve

relationship between inflation and unemployment

in what period is there high inflation and high unemployment

stagflation

what is market cap

share price x shares outstanding

NRV

expected selling price - costs

what is the terminal value

future cash beyond forecast

what is the WACC

discount rate in DCF

what is the equity value

share price x shares

characteristic of monopolistic competition

Price>marginal cost

characteristics of effect competition

productive and allocative efficiency, demand = MR, homogenous goods

how to find RGDP from the nominal GDP and deflator

nominal / deflator

what are arguments for trade protectionism

to promote domestic industry, to protect the employment rte, to promote tariff revenue

what is traded in the exchange

bonds, stocks, futures

how to work out holding period return

percentage change between total return and initial input