Reorganizing financials and cash flows for valuation

Question 1

Why is it important to neutralize accounting standard differences?

Answer 1

If you were to analyze 2 companies that only differ in accounting policies, you would get different valuation although they are actually the same.

Question 2

What is the desired level of net working capital?

a) A lower level
b) A higher level
c) It is indifferent
d) There is no desired level

Answer 2

a) A lower level

The rational is that you need less invested money to perform your business. ROI will also be lower.

Supermarket chains are examples of businesses with low net working capital. They do not have trade receivables, because the customers always pay upfront.

Question 3

What does a negative net debt imply?

a) You have more liabilities than cash
b) You have an equal amount of liabilities and cash
c) You have more cash than liabilities
d) You don’t have minorities

Answer 3

(c) You have more cash than liabilities

Net debt = interest bearing debt - cash

Question 4

How is ‘interests in associates’ classified?

a) Working capital
b) Surplus asset
c) Financial asset
d) Net debt

Answer 4

(b) Surplus asset

Question 5

Why is EBITDA likely the most important metric in investment banking?

Answer 5

It reflects profitability of daily operations before the impact of a past-looking non-monetary costs (D&A).

Question 6

Which of the following determines ‘Change in equity’?

a) Equity (y2)-Equity (y1)
b) Equity (y1)-Equity (y2)
c) Equity (y1)-Equity (y2)-Net income
d) Equity (y2)-Equity (y1)-Net income

Answer 6

d) Equity (y2)-Equity (y1)-Net income

Question 7

Which of the following items is not included in the computation of FCFE?

a) Net income
b) CAPEX
c) Capital employed
d) Change in non cash working capital

Answer 7

(c) Capital employed

FCFE = Net income + D&A +/- Change in non cash working capital - CAPEX +/- change in surplus items +/- change in gross financial debt