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