JP Morgan

Income Statement

records, revenues, and expenses

Cash flows

record the actual cash that has come into or out of the company; categories such as operating cash flows, financing cash flows, investing cash flows

Categories of cash flows?

operating cash flows, financing cash flows, investing cash flows

What's the difference between an income statement and a cash flows statement?

income statement: records, revenues, and expenses
cash flow: records the actual cash that has come into or out of the company
categories such as operating cash flows, financing cash flows, investing cash flows

Link between the balance sheet and income statement

-profits generated in the income statement get added to the shareholder's equity on the balance sheet as retained earnings
-also, debt on the balance sheet is used to calculate the interest expense in the income statement

EBITDA

Equity Before Interest, Taxes, Depreciation, and Amortization

Knowing a company's net income, how do you find their free cash flow?

add depreciation and amortization, subtract capital expenditures and subtract any increase in net working capital

What is the relationship between a bond's price and its yield?

Inverse relationship ? when a bond's price increases, its yield decreases and vice versa

How are bonds priced?

Bonds are priced based on the net present value of all future cash flows expected from the bond

What is the NPV?

-Net present value
-Difference between the present value of cash inflows and the present value of cash outflows over a period of time
-Used in capital budgeting to analyze the profitability of a projected investment or project

How would you value a perpetual bond?

Divide the coupon by the current interest rate

What major factors affect yield on a corporate bond?

Interest rates on comparable US treasury bonds and the company's credit risk

Which is riskier: a long-term coupon bond or a long-term zero coupon bond?

A long-term zero coupon bond is riskier. Coupon bonds pay coupons throughout the year, so you gradually collect your money

What is the long bond/where is it at?

-Fairly steady since around March
*2.95%

If interest rates fall, should you buy or sell stocks?

Bond prices rise when interest rates fall, so you should buy bonds

If interest rates rise, should you buy or sell stocks?

Bond prices lower when interest rates rise, so you should sell

How does the Fed quell fears and uncertainty within the market?

Lowering interest rates

How does the Fed fight hyperinflation fears?

Increasing taxes and decreasing government spending

What does it mean when inflation is low but bond prices are closing lower?

Traders are expecting future inflation to be higher

Why do yield curves invert?

-Typically the cost of borrowing increases as maturity increases
-shape of the yield curve gives an idea of future interest rate changes and economic activity

Difference between primary and secondary market

primary market refers to the issuance of new securities
stocks and bonds trade in the secondary market subsequent to initial offering

What is a P/E ratio?

price to earnings ratio
-ratio for valuing a company that measures its current share price relative to its per-share earnings
-market value per value/earnings per share

How can P/E ratios be different in different countries?

different ways in which earnings are recorded

Multiples that can be used to value a company

P/E, revenue, EBITDA, EBIT, book value

What is the discount rate for an all-equity firm?

use the capital asset pricing model

Why might there be multiple valuations for a single company?

there are multiple valuation methods such as WAAC and APV

Treasury Yield

the return on an investment in a US government debt obligation, influence interest rates

What is an IPO?

Initial Public Offering - "going public", company sells stock to the public, very first sale of a stock issued by the company to the public, prior to an IPO the company is considered private

Recent IPO

Spotify!!
direct listing, family plans have made users more loyal even if that decreases the per-user revenue, biggest public tech debut since Snapchat, forego traditional initial public offering opting for a direct listing, could set new standard for hot

Why did the stock price of XYZ company decrease yesterday when it announced increased quarterly earnings?

maybe the entire market was down, or the sector to which XYZ belongs was down, or the Street was expecting earnings to increase by even more

Why would a company distribute its earnings through dividends to common stockholders?

because the company is healthy and profitable, has money left over after paying debt holders and preferred stock shareholders

Why would an investor buy preferred stock?

because the investor wants to maximize the upside of equity while minimizing risk, because the dividends of preferred stock are taxed at a lower rate

When should a company issue stock rather than debt to fund its operations?

When a company believes its stock price is inflated and it can raise money by issuing stock, or if the project at hand will not generate predictable cash flows, if a company wants to change its debt-to-equity in an effort to better company's said bond rat

Is the dividend paid on common stock taxable to shareholders? Preferred stock?

common stock is taxable from a corporate level and shareholder level, dividends for preferred stock is treated as an interest expense and is tax-free at the corporate level

When should a company buy back stock?

a company should buy back stock when they believe their price to be undervalued and anticipate an increase in share prices

What kind of stocks would you issue for a startup?

since startups are more risky than well-established firms, stocks should be issued in a way that protects the downside of equity holders while giving them upside, should be issued in combination of common stock, preferred stock, and debt notes with warran

Explain how correlation speaks to riskiness

negatively correlated stocks are the least risky, non correlated stocks are neutral, positively correlated stocks are the most risky, umbrella/sunscreen idea (diversification)

Describe a typical company's capital structure

debts and equities make up a firm's capital, a typical capital structure includes long term debt, preferred and common stock, and retained earnings

Is 10 a high P/E ratio?

it's dependent on the P/E ratios of comparable companies, higher growth firms will generally have higher P/E ratios because the earnings are projected to grow more rapidly than the stock's price

What is beta?

representative of the stock's volatility as it relates to overall market volatility

Valuing a company with no revenue?

make assumptions about the company's projected revenues then calculate the net present value of all cash flows

What is preferred stock vs. common stock?

class of ownership in a corporation that has a higher claim on its assets and earnings than common stock, generally have dividend that must be paid out to preferred stock holders before paying dividends to common shareholders

How much would you pay for a company with $50M in revenue and in $5M in profit?

using the multiple valuation method technique, I would examine common stock information of comparable companies in the same industry and try to get an average industry multiple of price-to-earnings

Discount rate for an all-equity firm?

use the capital asset pricing model, capital asset pricing model calculates the required rate of return for an asset using the expected return on the market and risk-free asset and the asset's correlation or sensitivity to the market

Fixed income

bonds, bank deposits, fixed annuities, preferred stock, money market mutual funds, less risk

Equities

investing money with pure hope that you will get it back, no limit to upside potential, much more risky