Financial Edge - Debt and Equity

Question 1

How will a startup company mostly be financed?

Answer 1

Equity - unstable cash flows means that it is difficult to consistently repay debt

Question 2

Characteristics of preferred stock?

Answer 2

• Most of the time, doesn’t have voting rights
• Has fixed dividends (that could be PIK)
• Treated as debt in valuation

Question 3

What is additional paid in capital?

Answer 3

Subscription price less par value

Par value was set to a low amount at company inception

If they now issue stock, price paid will be much closer to market value, and hence the additional money above par value will go into APIC

Question 4

What is treasury stock?

Answer 4

Value of shares repurchased by the company

Question 5

What is other comprehensive income?

Answer 5

Waiting to hit the income statement

Usually non-cash

Usually to do with investments

Question 6

What is non-controlling interests?

Answer 6

Equity owned by third parties in subsidiaries of parent company

Question 7

Which share number for market capitalisation?

Answer 7

Diluted shares outstanding

Question 8

What is treasury stock?

Answer 8

Stock repurchased by the company

Question 9

When company issues stock, which line item in equity part of balance sheet is likely to increase the most?

Answer 9

Usually APIC, as the common stock only goes up by the amount of new shares * par value, and par value is usually much lower than the market value of the shares

Question 10

What are free float shares?

Answer 10

Excludes untreated shares such as restricted shares, those held by families and governments

Question 11

What is the formula for free float market capitalisation?

Answer 11

Share price * (shares outstanding - shares not traded)

Question 12

Formula for how retained earnings changes year over year?

Answer 12

Beginning Retained earnings
Addition Net Income
Subtract common dividends AND preference dividend (if they are classed as dividends, if classed as interest will have already been deducted)
Ending retained earnings

Question 13

How can owners of preference shares be paid?

Answer 13

Either through dividends or interest

Question 14

What is commercial paper?

Answer 14

Short term debt securities issued by companies

Question 15

What are some examples of borrowings that you can get directly from banks and finance companies?

Answer 15

Revolving credit facility
Overdraft
Term loans
Capital / finance leases

Question 16

In net debt, what sort of thing will be considered cash?

Answer 16

Cash equivalents, commercial paper, short-term deposits money market instruments

Question 17

In net debt, what sort of thing will be considered debt?

Answer 17

Overdraft, notes payable, short term debt, commercial paper, RCF, current portion of LT debt, bonds, bank loans, loan notes, debentures, long term debt, convertible debt (bond proportion only), capital/finance leases, preference shares (if treated as debt)

Question 18

How does PIK interest work?

Answer 18

Interest is accrued or ‘rolled up’ onto the balance of the loan

Question 19

Why are leverage ratios important?

Answer 19

Allow you to see if the company has too much debt or not

Question 20

What are the most common leverage ratios?

Answer 20

Debt / Equity, Total debt / EBITDA, Net debt / EBITDA

Question 21

What does net debt / EBITDA show?

Answer 21

Ability to service debt

Question 22

What is interest coverage ratio?

Answer 22

EBITDA / Interest expense

Question 23

What does interest coverage ratio show?

Answer 23

Ability to service interest