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33 Cards in this Set
- Front
- Back
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What is the difference between ib and commercial bank? |
Commercial banks are involved in retail safety deposits and commercial loans to businesses or private individuals. Investment banks provide a company with guidance during IPOs, M&A deals,restructuring. They are involved in trading securities both with theirs and their clients money. They manage assets and build investment portfolios for their clients. |
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What was the glass-steagle act and why was it enacted? |
The glass steagle act prevented the existence of universal banks. As these banks having the advantage of commercial deposit money would invest their clients money in the stock market which can be risky(they would be tempted to buy high risk high reward securities) but not for them because they didnt use their own money. |
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What 5 factors should we consider before taking a company public? |
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What determines the dividends paid out to shareholders and the company value? |
Cash flow generation and future cash flows. |
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Whats the difference between revenue and operating cash flow? |
Revenues-(expenditures+investments)=operating cash flow. |
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How to increase operating cash flow which leads to higher company value and dividends paid out? |
1. Increase revenues 2. Increase profitability |
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How to calculate NOPAT IN unlevered cash flow calculation? |
Note that we will have to add back D&A(depreciation&amortization) to Nopat as D&A are both non cash expenses and we have to calculate cash flow. We add them first because they are taxable. |
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After calculating Nopat how do we get unlevered cash flow? |
Delta working capital: accounts recievables, inventories, trade payables. Capex: capital expendenditures on replacing or acquiring PP&E(property, plant, equipment) Operating assets: All assets whose output is directly utilised in a business's core activities. |
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Why do we need to introduce a discount factor in our cash flow calculations? |
Two companies in 10 years can have the same amount of future cash flows. But company A has more in first 5 while B has more in last 5. Company A is more valuable because of time value of money. Our normal unlevered cash flow won't account for this factor and thats why we introduce a discount factor. |
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What is the weighted average cost of capital formula which is the discount factor? |
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Define cost of debt. |
The average interest rate a company pays on its debt financing(bonds). |
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Formula for cost of debt? |
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What is cost of equity? |
The cost of equity of a firm represents the rate of return the market demands in exchange for owning the asset and bearing the risk of ownership. |
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What is the formula for cost of equity? |
rf: Risk free rate of return(10 yr govt. Bond) B: beta. Anything above 1 means more volatile than market while less means less volatile than market) rm: Market risk premium( Difference btw expected return on a market portfolio and the risk free rate) |
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What is terminal value and how do you calculate it? |
Terminal value: Represents the value of all future cash flow adter yr 5 for mature companies or yr 10 for young companies. Fcf : future cash flow g: long term growth rate of all future cash flows after the explicit period |
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Which formula gives you the present value of a cash flow using wacc? |
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How to obtain enterprise value of the firm and also the equity value? |
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List 5 worst financial modelling practices. |
1. Do not embed constants in formulas. 2.Do not spread the model across multiple workbooks. 3. Dont overcomplicate the formulas. 4. Use checks. 5. Dont use macros and vba too much other than for formatting. |
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List 4 efficient financial modelling practices. |
1. Build a flexible model that uses cell links instead of hard inputs. 2. Use uniform structure like having the one year's data under the same column in all sheets. 3. Be error free using checks. 4. Include units(currency etc) in the headers. |
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What are the six types of financial models? |
Credit analysis: To check borrowers ability to repay Equity investments: To find investment oppurtunities. M&A: Similar to above but also calculate synergies. Lbo: specific m&a deal. Lenders will provide funds because the target has a solid underlying business which is expected to return a stable stream of cash flows. Main focus is on cash flows. Project finance: Details of cash inflow and outflow in a new project. Startup: break even analysis and market potential. |
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What 5 factors are important when forecasting items for the long term term? |
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What 3 statements does a complete financial model have? |
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When forecasting revenues what two approaches can be used? |
We will have to use the top down approach for revenues because bottom up requires too much detail which is impossible for a period more than 18 months. |
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What 3 factors should we consider for a top down approach to forecasting revenues? |
Use analyst reseach to your advantage. |
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How is cogs and opex forecasted? |
Both are forecasted as a percentage of revenue based on historic data. |
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How is D&A and interest expenses forecasted? |
1. Make a new schedule called fixed asset roll forward. 2. Debt schedule |
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What is the days technique to calculate working capital? |
Then after calculating dso dio and dpo Trade receivables= (dso*revenues)/ 360 Inventory=( dio*cogs)/360 So on... |
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Other assets and liabilities are modelled as? |
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How to forecast pp&e? |
Capex as a percentage ofrevenue D&A as percentage of beginning pp&e. |
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How to forecast debt? |
For debt repayments we can also use a standard interest rate that a company pays out on an average. |
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How is equity forecasted? |
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How to forecast cash? |
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What are 6 stages in valuation? |
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