Capital Markets

Question 1

What is a capital market?

Answer 1

The capital market is a part of the financial market and refers to the portion of the market responsible for raising capital for companies through the issuing of shares, issuing of new debt or through other long term investments.

Question 2

Three capital markets:

Answer 2

Stock market, Bond Market, FOREX market

Question 3

Parts of the capital market:

Answer 3

Primary market where new shares or ipos are introduced there individuals can get shares or equity directly from the company. Secondary market where individuals sell shares or bonds to each other since they are no longer available directly from the company itself.

Question 4

Benefits of the capital Market;

Answer 4

facilitates the movement of funds from different investors, bonds and equity offer a higher return

Question 5

What is net present value:

Answer 5

This is a term that defines the cash flow of a company. IT is based on the difference between capital flowing into the company and how much capital is coming out. Says if the investment is projected to be profitable.

Question 6

What cost is higher debt or equity:

Answer 6

The cost of equity is always higher than the cost of debt. This is for a variety of reasons first people take a higher risk purchasing a stock rather than a bond and demand a higher return.

Question 7

When should a company buy back stock:

Answer 7

Excess cash flow
Buybacks improve value
Stock is undervalued

Question 8

What is underwriting:

Answer 8

IS when a lender verifies income and assets to approve a loan. IT gives a guarantee that the risk is fitting for the loan. Helps with risk minimization if a company is trying to give a loan to a faulty or burdened company

Question 9

Investment vs Commercial banking:

Answer 9

Investment banks help companies raise finance through underwriting, issuing debt or equity. They also can assist companies in Mergers and Acquisitions
Commercial bankers issue loans and other basic financial products like credit cards to the general public

Question 10

What does WACC mean:

Answer 10

WACC stands for weighted average cost of capital. It is used to illustrate how much it costs a company to raise funds.

Question 11

Monetary vs Fiscal policy:

Answer 11

Monetary policy refers to the central bank’s policy regarding the amount of money, credit, interest rate and other financial assets available. Fiscal policy refers more to taxation and government spending.

Question 12

How do listed companies price their issues:

Answer 12

Listed companies go to an investment bank where they decide how much capital the company wants to raise and sets the price of their issues based on this.

Question 13

What is capital budgeting:

Answer 13

The planning process where an organization’s long term investments such as new machinery, replacement of machinery, new products, ect are worth funding through capitalization structures.

Question 14

Working capital:

Answer 14

difference from a firm’s current assets(inventory, debtors, cash, tradable securities) and current liabilities (short term debts, creditors, bills and expenses).

Question 15

NPV:

Answer 15

Looks to find the total value of an investment, used to find profitability. It mainly looks at the cash flow value of a company
Calculated: takes the present value of cash flow and subtract it from the intital investment
Advantages: Considers time value of money, Easily calculated, considers all cash flows
Disadvantages: Focuses on short term projects, can compare different sizes of projects

Question 16

BCR

Answer 16

Benefit Cost Ratio: profitability indicator used in cost benefit analysis to determine viability of cash flows
calculated: Divide the cost benefit by the cost

Question 17

PBP

Answer 17

payback period. Found by taking the initial investment/Cash flow per year

Question 18

ARR

Answer 18

Anual reccuring revenue. measures subscription based revenue, does not consider time value of money

Question 19

IRR

Answer 19

Internal rate of return. used to measure profitability of potential investments, take the differnce between current or future values and original value and divide it by original value

Question 20

MIRR

Answer 20

modification of IRR, it assumes that positive cash flow is reinvested at the cost of capital a problem with the IRR

Question 21

PI

Answer 21

Profitability index, Divide present value of future expected cash flow by initial investment amount. Greater than 1 is ideal

Question 22

Zero Coupon bond

Answer 22

Where the face value is repaid at the time of maturity, investors buy at a discounted price

Question 23

Deep Discount Bond

Answer 23

A bond issued at a discount compared to its par value

Question 24

Convertable Bond

Answer 24

After a prolonged period a person may convert the bond to stock

Question 25

How to value a company: 3 ways

Answer 25

Asset valuation: sum all assets including tangible and intangible using the book or market value
Earning valuation: using the earnings to determine current value
Discounted cash flow valuation: Takes companies projected cash flow and discounts it to present day values. Use this to calculate the preston value of the company and how much the assets are expected to make in the future

Question 26

What are the market trends as of now?

Answer 26

The month of October was extremely successful for the markets. I believe the Dow finished its best month since 1967. This is due to reduced inflation fears or a possible false bottom as the markets have fallen so much this year. This is despite the bear market for the majority of 2022 as feds have been increasing interest rates due to inflation fears and other market factors.

Question 27

What is the purpose of Capital Market consultants:

Answer 27

Consultants help businesses think about their business practices and models, manage risk and improve efficiency.

Question 28

What do you need to be successful in capital Markets:

Answer 28

More than just base knowledge and skills. This is important but soft skills such as leadership, communication skills and critical analysis.

Question 29

How are cash flows calculated:

Answer 29

Multiple ways: Take the inflows - the outflows. Take the net income from the income statement and adjust EBITA (earnings before intrest and taxes)

Question 30

Advantages and disadvantages of an IPO:

Answer 30

Advantages; Fundraising, publicity, less cost of capital as they can now get lower interest rates from banks
Disadvantages: additional regulations, market pressures, loss of control

Question 31

A company makes a $140 cash purchase of equipment on January 1. How does this impact the three statements this year and next year?

Answer 31

Assume the fiscal year ends dec 31st. A purchase of equipment is considered a capital expenditure.

Question 32

When would you use a PEG multiple?

Answer 32

It is a stocks P/E ratio divided by growth rate. When one is trying to find a stocks true value

Question 33

Explain a yield curve as you would to your grandma.:

Answer 33

A yield curve is a graph that plots interest rates of bonds that have equal credit quality but differing maturity dates

Question 34

What does the capital markets division of an investment bank do?

Answer 34

Help companies raise capital and find financing through a various number of methods such as underwriting, or the issuing of debt and equity.

Question 35

Walk me through an income statement, cash flow statement and balance sheet:

Answer 35

The income statement is a statement that illustrates the profitability of the company. It begins with the revenue line and after subtracting various expenses arrives at net income. The income statement covers a specified period like quarter or year.

Unlike the income statement, the balance sheet does not account for the entire period and rather is a snapshot of the company at a specific point in time such as the end of the quarter or year. The balance sheet shows the company’s resources (assets) and funding for those resources (liabilities and stockholder’s equity). Assets must always equal the sum of liabilities and equity.

Lastly, the statement of cash flows is a snapshot into all of a company’s cash inflows and outflows. It typically begins with net income and is then adjusted for various non-cash expenses and non-cash income to arrive at cash from operating. Cash from investing and financing are then added to cash flow from operations to arrive at net change in cash for the year.”

Question 36

When should a company issue debt instead of equity:

Answer 36

If the company does not want to dilute shares when a stock is underperforming and debt ccan be less expensive when a company is growing at a high rate

Question 37

One of your most favorite stock picks:

Answer 37

Relatively safe: Google, GOOG. Google is a tech giant and if you ask anyone there will not be a time in the next 20 years where we will not use google or google being at the forefront of technology. They also have sold off nicely from their ATH earlier this year. This doesn’t mean they can go lower but such a large tech giant down 50% over the year indicates a decent deal. Furthermore google has a lot planned through its partnerships with HD and PYPL showing a growth of tech into other fields.

Risky: SOFI: SOFI started as a online digital wallet however has progressed into a fintech company with a digital wallet such as PYPL. I believe that the future encompasses digital banking and SOFI is in a great position to capitalize on this. They recently acquired Golden Pacific Banking Corp which provides a good base for a banking charter. They also have enough differences from major competition like paypal though their ability to offer checking and savings accounts and have lower rates than traditional banks. They are also profitable which is a good step and sign for the growth company. Furthermore it is trading cheap at only 5x p/s which is also good value when compared to other stocks in the industry

Question 38

One stock to short:

Answer 38

Mccormick; MKC, A spice and seasonings company that thrived during the pandemic do to more people cooking at home. However now the company is trading at an extremely high P/E ratio illustrating how over priced the stock is. IT is strading at almost 2x higher than its competition such as conagra brands which trade at only an 14 P/E.