Technicals Flashcards

Question

If there isn’t guidance, how do we project CAPEX and why?

Answer 1

As a percentage of sales in line with historical levels as top line growth is typically supported by growth in the company’s asset base.

Answer 2

Non-cash current assets - non-interest bearing current liabilities. NWC measures how much cash a company needs to fund its operations in an ongoing basis.

Answer 3

DSO= AR/Sales x 365 It is the implied average number of days The firm takes to collect payment after making a sale. Companies strive for lower DSO as it represents a lower use of cash

Answer 4

Customer leverage, renegotiation or terms, worsening customer credit, poor collection systems, change in product mix

Answer 5

Inventory/COGS x 365 DIH implies the average number of days before the company can sell off its inventory. The firm will have approximately 365/DIH number of inventory turns in a year

Answer 6

Lower, because increases in inventory is a use of cash so minimising frees up cash that is tied to stock. Moreover, inventory is susceptible to theft, damages and obsolescence due to newer products or technologies.

Answer 7

COGS / Inventory

Answer 8

DPO = AP/COGS x 365 Measures the number of days it takes for the firm to make payment on its outstanding purchase. Higher, as an increase in A/P represents a source of cash. Firms want to maximise DPO so as to increase short term liquidity where cash on hand can be used for other business purposes

Answer 9

WACC = (cost of debt x (1-t) x d/total cap) + (cost of equity x e/ total cap)

Answer 10

Cost of debt is generally lower due to tax deductibility of interest expense

Answer 11

without debt in the capital structure, WACC = cost of equity. As proportion of debt in capital structure increases, WACC gradually decreases up till the optimal structure due to tax deductibility of interest expense. However beyond that point, WACC goes up again as the negative effects of an over-leveraged capital structure such as increased probability of insolvency outweighs the tax advantages of debt)

Answer 12

The CAPM is based on the premise that equity investors need to be compensated for their assumption of systemic risk in the form of a risk premium, or the amount of market return in excess of a stated risk-free rate. A company’s level of systemic risk depends on the covariance of its share price with movements in the overall market, as measured by its beta.

Answer 13

Unsystematic risk, or specific risk, is company or sector specific and can be avoided through diversification. Hence equity investors are not compensated for it in the form of a premium. General rule of thumb is that Smaller firms and the more specified their product, the higher the unsystematic risk.

Answer 14

Risk free rate + levered b(market returns-risk free rate) + country risk premium (if applicable) + size premium (if applicable) Where market rerun - risk free rate = market risk premium (Wall Street average is 5-8%)

Answer 15

S&P covers TOP 500 stocks and has a beta of 1.0 so easy to compare

Answer 16

The higher the beta, the higher the cost of equity

Answer 17

1. We find a peer group similar to our target firm and find their historical betas 2. However, they may or may not have a similar capital structure to one another or the target. 3. Thus to neutralise the effects of different capital structures, (remove the influence of leverage) the banker must unlever the beta for each company to get the asset beta ( unlevered beta) 4. Then we have to use the average unlevered beta and relever it back to our targets capital structure.

Answer 18

1. Bu= BL/(1+D/E X (1-t)) | 2. BL= Bu x (1+ D/E X (1-t))

Answer 19

Tv = (FCFn x (1+g))/ (WACC-G)

Answer 20

Implied TGR = ((TV x WACC) - FCFterminalyear)/(TV + FCFterminal year) Numerator and denominator x (1+WACC)*0.5

Answer 21

``` TV / terminal year EBITDA Numerator x (1+WACC)^0.5 ```

Answer 22

Discount factor = 1/(1+WACC)^n It is the fractional value representing the present value of one dollar received at a future date given an ashamed discount rate

Answer 23

Mid year convention results in a slightly higher valuation as it assumes cash flows through the year instead of at the end, thus the discounted value will be higher. Basically because FCF is received sooner

Answer 24

1/(1+WACC)^n-0.5

Answer 25

If we use the mid year convention for FCF projections, Under GGM, TV will also use mid year discount as the banker is discounting perpetual future FCF assumed to be received throughout the year Under EMM, TV will use end of year discount as it uses LTM trading multiples

Answer 26

EV = sum of PV of cumulative FCF + PV of TV Implied equity value = EV -(net debt + preferred stock + non-controlling interests) Share price = implied equity value / fully diluted shares outstanding

Answer 27

Pros - cash flow-based - which represents a more fundamental approach to valuation than using multiples based approach - market independent as it is more insulated from market aberrations such as bubbles and distressed periods - Self-sufficient so it can be particularly important when there are limited or no pure play public comparables to the company being valued - Flexibility as it allows for scenario analysis Cons - Sensitivity to assumptions - large dependence on terminal value - assumes constant capita structure across the projection period

Answer 28

Sales / 365 x DSO

Answer 29

It is the acquisition of a target (can be a company, division or collection of assets) using debt to finance a large portion of the purchase price To realise an acceptable return on its equity investment upon exit, typically through an IPO or sale of the target. Investors have historically sough a 20%+ annualised return and an investment exit within five years

Answer 30

Means that the interest is paid in the form of additional shares of preferred stock or whatever instrument

Answer 31

Adjusted / predicted beta is basically a statistically adjusted historical beta to reflect an expectation that the individual company’s beta will revert toward the mean over time. For example if historical beta < 1 den adjusted will be > historical but still < 1.

Answer 32

Dividends / stock price Dividends / stock price + growth rate

Answer 33

Marginal tax is the highest bracket of tax u fall into based on income Effective tax is the actual tax you paid / taxable income. Basically it is the average tax rate since ur income will likely span across several tax brackets

Answer 34

1. Realising synergies 2. Control premiums 3. Supply and demand

Answer 35

SBC issued today direct labour is allocated to COGS SBC issues to R&D Engineers is included within R&D expenses SBC for management and those involved in selling and marketing is included in SG&A and other operating expenses We need to add SBC back in cash flow from operations since it is a non-cash expense

Answer 36

Yes. Common to see in two scenarios 1. LBOs with large dividend recaps - meaning the owner has taken out a large portion of its equity which can sometimes turn the number negative 2. Can also happen if the company is losing money consistently and therefore has a declining retained earnings which is a portion of SE

Answer 37

DTL arose when you have a tax expense on the income statement but haven’t actually paid that tax in cash get. DTA arise when you pay taxes in cash but haven’t expensed them on the income statement yet

Answer 38

APIC = last APIC + stock based comp + value of stock created by option exercises

Answer 39

``` Restructuring charges Goodwill impairment Asset Write downs Bad debt expenses Legal expenses Disaster expenses Change in accounting procedures ``` However this one off adjustments need to affect operating income. If it’s below the line u don’t add it back to EBITDA / EBIT calculation Also note that D&A and SBC are added back to get EBITDA but are not one - off. Happened every year just a non cash adjustment

Answer 40

When u incur negative pretax Income, u generate NOLs that can be used to reduce taxable income in the next periods. If a company has 100 pretax income and initial NOL of 175: Apply 100 of NOL to offset taxable income so 0 paid in true cash taxes. DTA item decreases by tax rate * 100. On IS nth changes as taxes are still recorded. However, on CFS the DTA decreasing by 40 increases cash flow by 40 so operating cash flow is up by 100 BS side balances cos cash is up DTA is down balanced by Net income increase

Answer 41

When a company owns > 50% of another company’s shares, they are required to consolidate their financials and report as their own. However, in reality they do not own 100% of the other company so they need to split up the net income and equity based on the % they own and use a minority interest line item to balance this out

Answer 42

Start with basic shares outstanding, add in the dilutive effect if stock options, warrants, convertible debt, preferred stock, etc.

Answer 43

If we have 100 shares outstanding at 10 dollar per share and 10 options outstanding at 5 dollars per option, we exercise the options to create 10 new shares. However we need to pay 5x10=50 to the company for these options and they will then use this new 50 to buy back 5 more shares. The fully diluted share count is thus 105 and fully diluted equity value is 1050

Answer 44

1. No. Shares outstanding and share count cannot be negative 2. Yes. Happens when the firm has a karate cash balance or Low market cap or both. - we see this with companies on the brink of bankruptcy - or banks with large cash balances but banks don’t use EV so this doesn’t matter much

Answer 45

PS pays out a fixed dividend and holders have a higher Claim to a company’s assets than equity investors do. As a result it is seen as more similar to debt than common stock.

Answer 46

If it is in the money, we count them as additional dilution to equity value. If not, we add the face value to the debt value

Answer 47

First find out the number of convertible bonds: 1mil device by 1000 = 10,000 bonds Next find out how many shares this translates to: 1000/50 = 20 shares for each bond Thus 20 x 10,000 = 200,000 new shares. Fully diluted shares outstanding = 1mil + 200k = 1.2mil

Answer 48

Equity value is the market value while SE is the book value. Equity value can never by negative whereas SE can be any value. Healthy companies will see equity value >>> SE

Answer 49

A MBS is a security made up of a pool of underlying mortgages. Banks sell off their mortgage loans to IBs which then packages multiple loans into a MBS. Banks do this to remove the loans from their books while also having the opportunity to make a quick profit off the spread if possible. IBs than split this MBS into tranches reflecting maturity and risk profile of the borrowers. Essentially the risk is transferred from the banks to the investors (usually hedge funds). CDOs on the other hand are made up of underlying debt obligations which also include MBS. This means CDOs are two layers away from the individual mortgages whereas MBS is one layer between the individual mortgage and the MBS. CLOs are similar to MBS but made up of loans so also one layer Thing to note here is that these sort of collateralised securities often take the riskier and lower rated portions of securities to bundle up into a new security. Also CDOs tranches were designed to retain value if losses kept below high single digits and be 100% wiped out if loses went beyond Low double digits

Answer 50

Use the way CDOs manufactured to lose all its value in Low double digits to show that comparing these irresponsible and often fraudulent securities that were made out of securities which were engineered to lose all their value in adverse circumstances to the default risk on conventionally risky loans is a textbook apples to oranges comparison

Technicals Flashcards

(74 cards)