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Final Exam Flashcards

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1
Q

General Economic Trends

A

-A gradual increase from 2000-2008
-Recession hits in 2008-2010
-Steady increase until covid in 2020 where it drops slightly
-An increase during 2021 but now it is starting to drop again

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2
Q

Thoroughbred market economic trends

A

-A steady decrease from 2007-2010 during the financial recession
-Slow increase in 2011
-Drops slightly back down in 2012
-It increased again in 2013 and stayed relatively constant
-In 2018 there was another slightly increase
-drastic decrease in 2020 due to covid
-drastic increase in 2021 after covid

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3
Q

2022 Yearling Sales

A

-at the top end of the market the recent economic downturn and inflation has not negatively affected thoroughbred sales
-increase in available purses partially driving the market

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4
Q

Uber rich investors

A

-buy collectors items
-defy market trends and only play in the very top of the market

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5
Q

Wealthy investors

A

-play in the upper market but don’t compete with the uber rich
-are impacted by market trends and overall economic conditions

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6
Q

Stud fee multiples and stock market trends relationship

A

stud fee multiples generally mirror stock market trends

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7
Q

Wanna Be’s-Everybody Else investors

A

-play in a tight investment window based on their investment goals
-hoping to hit a home run
-most volatile part of the market and first to tank when economy slows
-includes commercial limited partnerships

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8
Q

In increasing order: portfolio management (risk/reward)

A

-bonds
-high yield stocks (dividend paying)
-real estate
-growth stocks
-private equity
-speculative investments

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9
Q

In increasing order: Thoroughbred portfolio management (risk/reward)

A

-broodmares
-stallion shares
-pinhooks
-racehorses
-yearlings
-weanlings

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10
Q

Diversification

A

spreading the risk of the portfolios into varying categories
-investing in different types to spread the risk

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11
Q

Asset allocation

A

% of overall invested capital in various categories

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12
Q

Counterintuitive timing

A

own various types of assets that appreciate/depreciate in opposite directions with changes in economic conditions

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13
Q

What happens to stocks during recession?

A

stocks will get lower allocation in favor of safer investments

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14
Q

What happens to stocks during economic recovery?

A

boom stocks will get larger allocations as will speculative investments

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15
Q

When is the best time to buy stocks?

A

just after a market correction (buy cheap, sell high)

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16
Q

Leverage

A

use of borrowed funds to increase the return on invested capital

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17
Q

Return on investment

A

[(net profit from sale of investment) - (cost of investment)] / (cost of investment)

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18
Q

Discounted cash flow method

A

-discounted future cash flows to value as of today
-can use IRR and NPV

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19
Q

Financial modeling concepts

A

-creating a series of cash flows by year
-separate assumptions from cash flows
-use proper metrics depending on what problem you are trying to solve

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20
Q

Internal rate of return

A

-can be looking backwards or forwards
-discount rate where the NPV of future cash flows = 0 d

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21
Q

Net present value

A

-discounting all future cash flows to todays date
-accounts for the time value of money (a dollar earned in the future wont be worth as much as one earned today)

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22
Q

Payback period

A

number of years (or months) that the net cash flows from the acquisition are 0
-all costs including purchase and expenses fully recovered
-particularly useful in stallion analysis

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23
Q

When are mares bred?

A

Feb. 15th to July 15th

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24
Q

When are foals born?

A

January-June following year (stud fees paid)

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25
Key things to look at when investing in broodmares
-produce record -pedigree -race record -confirmation -goal is to buy mares that throw correct, athletic foals and has a pedigree that can improve over time
26
If buying a maiden mare what is most important?
conformation and size along with race record
27
Fixed cost
costs don't change -board -farrier
28
Variable costs
change -stud fee -commissions
29
Stud fee mutliples
-generally go between 3-4.5 -change with the market
30
Model building
-cash basis pre-tax -build assumptions separately from formulas -model created to answer a specific question
31
Established stallions
lower risk, lower upside appreciation -bc proven track record and stud fee is basically set
32
New sires
high risk/reward, payback period is key
33
Stallion syndicates
-40-60 share syndicates are now common -8-12 breeding rights to farm (1 each jockey/trainer customary)
34
Key things to look for when investing in stallions
-race record -pedigree -stallion farm -conformation/looks -reputation of other syndicate members
35
Syndicate
co-ownership group that own the stallion
36
Shares
ownership units defined by syndicate agreement
37
Breeding rights
right to breed one mare per year to the stallion
38
Syndicate manager
usually belong to the farm
39
Season
mare contracts between mare owner and shareholder or farm
40
Season pools
farm contracts sold on behalf of shareholder and breeding rights holders and total collected funds distributed
41
Extras
mare contracts above and beyond all season allocated to shareholders and breeding rights holders
42
What is the key thing during new stallion recruitment
financial offer
43
Full book strategies
syndicate manager's job to get a full book of highest quality mares possible to the stallion
44
Key things to put on a term sheet?
-purchase price/payment terms -racing career -fertility insurance policy available at 3% one time charge -seller option to retain up to 50%% ownership in stud career -10 syndicate manager breeding rights to farm -additional lifetime breeding rights transferable to jockey and trainer
45
What is the best way to project future cash flow of a stallion?
NPV
46
Potential racehorse investments
-breed to race -buying yearlings to race at 2 and beyond -buying 2 year olds out of training sale -private purchases all ages -claiming at the racetrack 2 and up -buy share in racing syndicate
47
Considerations of potential investments
-residual value at end of career -owner/trainer buying from -investment goal and risk/reward
48
Raising own racehorses
-takes the longest -invests the most money
49
2 year old in training sales
-save on expenses by not incurring training, vet, etc. to that point
50
Claiming off track
-much better record to go off of than yearlings -can't do a physical inspection -need strategy
51
Racing Partnerships
-can invest in a group and spread the risk -don't make any of the decisions yourself
52
Pinhooking
-quick return on investment -need a sharp eye -x-rays and scopes critical
53
What to use for a racehorse model
IRR -NPV not useful with purchase of a racehorse (too unpredictable)
54
Portfolio creation
-consider risk tolerance of investor -layout all investment possibilities and projected risk/return metrics -allocate investment opputunities to properly diversify -change profile to fit risk tolerance -liquidity needs/investment timeframe -exit strategy
55
Total portfolio
sum of all individual assets (broodmare, stallion share, racehorse)
56
Sole proprietor
-no paperwork required -taxation as Schedule C on personal tax return
57
Co-Ownership
-co-ownership agreement -each party pays its own expenses -schedule C -common stallions
58
General partnership in common
all partners have decision-making power -separate sets of accounting books
59
Limited partnership
-general partner has legal authority to make all decisions on behalf of the limited partners
60
Corporation
-by laws -board of directors -officers appointed operations -taxation at the corporate level
61
Limited liability company
-tax items flow thru to individuals -can be taxed as a partnership or as a sole proprietorship
62
Commercial horse farm investment fixed costs
ongoing fixed costs of maintenance -management and stall salaries and benefits -insurance -utilities -interest in debt
63
Commercial variable costs
-costs of hay -straw -feed -labor -tack -supplies
64
Breakeven graph
-top line at start = variable costs -middle constant line = fixed costs -increasing bottom line at start = revenue
65
Most profitable lines of business
-stallion business -auction sales consignment for clients
66
Other lines of business
-boarding/training/sale prep for client horses -vet business
67
Farm accounting capitol items
-horses -equipment -barns -fencing
68
Farm accounting liabilities
loans and other payables are liabilities on the balance sheet
69
Staffing issues
-availability of skilled and unskilled workers -competition among farms -competitions for other businesses that need labor and can pay a higher hourly wage
70
What are the 2 key taxation rules?
-hobby loss provision -passive vs. active income determination
71
Hobby loss provision
-need to treat as separate business -need to manage the business for profit -record of profits in some years even if loses exceed overall -no losses are deductible at any time
72
Passive vs. Active income determination
-want to try to prove active -passive losses can only be deducted against other passive income such as rental property until entity is dissolved -must be able to prove to the IRS "material participation"
73
Investment strategies
conservative long-term approach, conservative short term approach, aggressive short term approach
74
Conservative long term approach
-buy proven broodmares with still several producing years left -buy proven stallions
75
Conservative short term approach
-claim racehorses at the track or buy privately -don't want to hold onto for too long -quick turn around on potential income
76
Aggressive short term approach
-buy 2 years olds at auction or privately -pinhooking yearlings to 2 year olds or weanlings to yearlings
77
Aggressive long term approach
-buy yearlings to keep and race -buy stallion shares in new first year stallions
78
Asset accounting
-investment asset purchases (horses, stallion shares, partnership investments) are considered "fixed assets"
79
International racing vs. US
-International = more on turf, do not use race day medication including use of lasix, no winter time races
80
International breeding vs. US
-pedigrees more oriented towards turf and distance -few major stud farms -racing switches to jumpers during the winter, flat racing the rest of the year
81
Types of major decisions
-acquisition -internal expansion -downsizing/divesture -investment
82
Acquisition criteria
-Attractive (proper ROI, long term profit contribution, proper risk/ratio reward) -available -affordable -advisable
83
In breeding
-common ancestors in the first 4 generations -sex balanced breeding has common ancestors on sire and dam
84
Out cross
-no common ancestors in first 4 generations
85
Pre potency
breeding strength to strength to reinforce positive traits
86
Nicks
analysis of past similar crosses and success rates
87
Pedigree strategies
-attempt to breed out the undesirable traits and reinforce best traits -breed like to like -breed an outcross sire or dam to an in-bred sire or dam -in-line to strong female families
88
Choosing a stallion for your mare
-matching size and conformation -decide on breeding for speed or stamina -breed for soundness -research similar past matings for success
89
Thoroughbred marketing tools
-company websites -industry advertising/sponsorship -interviews with key thoroughbred publications and industry experts -keynote speakers at racetrack symposium -position your business via the competition

Thoroughbred Investments (1 decks)

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