Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BIWS > Module 1 Material > Flashcards

Module 1 Material Flashcards

1
Q

Financial Modelling lets you?

A

Quantify your views of a company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are some use cases of financial modelling?

A

-Stock Market Investing
-Advising on M&A
-Acquiring companies in leveraged buyouts
-Raising Capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the 6 steps of financial modelling?

A
  1. Decide on the purpose of your analysis
  2. Do some background research
  3. Identify key drivers
  4. Gather data for other companies (if applicable)
  5. Build your analysis
  6. Present your conclusions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the aspects of Step 1 (Pick Your Purpose) ?

A

Stock Pitch: Valuation tends to be most important

Metrics and Ratios: Financial statement projections

Merger/Acquisition: Valuation, but also a merger

Buy Entire Company: Leveraged buyout model is critical

Commonalities: Need revenue, expenses, and future cash flows

Time Spent: 5 minutes, hopefully

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the aspects of Step 2 (Do some background research) ?

A

Start With: Company’s interim and annual reports

Then: Investor presentations, outside industry research

If You Can: “Equity research” on a company, issued by banks

Bonus Points” Interview management or do “channel checks”

Private Co’s: Need to get info directly from them

Time Spent: Might be 1 hour, or might be days/weeks+

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the aspects of Step 3 (Identify Key Drivers) ?

A

Retailer: #of stores, sales pert store, costs per product sold

Food & Beverage: Units sold, average price, cost per unit

SaaS Company: Monthly fee, # customers, cancellation rate

Hotel: # hotels, # rooms, occupancy rate, room rate, cost per hotel

Pharma Co: # patients, price per patient, R&D and sales

Time Spent: 30-60 minutes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the aspects of Step 4 (Gather Data on Other Companies) ?

A

Tricky: Varies A LOT based on the anlaysis and required precision

Extreme Case: “Fairness Opinion” in investment banking

Other Extreme: Quick analysis to see if a buyout works

Valuation: Tends to be VERY data-intensive - need similar co’s

M&A: Less so, but need info on multiple companies

Time Spent: 1 hours up to days or weeks, depending on context

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the aspects of Step 5 (Build the Analysis) ?

A

Always: Revenue and expenses for your company

Always: Full or partial “financial statements”

Sometimes: Valuation - need lots of outside data + adjustments

Sometimes: Acquisitions - more about scenarios with your data

Rarely: Extreme precision down to individual employees

Time Spent: 30 minutes up to …. 3 months? Yes, sometimes!

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the aspects of Step 6 (Present Conclusions) ?

A

What: Buy the company? Fund the project? Sell the Stock?

Why: Supporting reasons, backed by numbers

How: What’s the best structure/ timing?

Format: PowerPoint slides, Word document, oral presentation

Audience: Senior bankers, PM, Partners, interviewers, or clients

Time Spent: Several hours up to 1 week+

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the basic principle of Time Value of Money?

A

Money TODAY is worth more than money TOMORROW

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How to Analyze Any Investment TVM

A

Key Question: Would you earn more with an investment than you would earn with similar opportunities elsewhere? or less?

*must always discount future money into “Present Value” when you are analyzing it

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How to Make Investment Decisions (2 methods)

A

How to decided where to put your money?

Method 1: Intrinsic Value vs. Asking Price
-Invest when Asking Price<Intrinsic Value

Method 2: Potential Returns vs. Opportunity Cost
-Invest when Potential Returns>Opportunity Cost

*Methods are different, but equivalent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Examples of how to make investment decisions (3)

A

Stock Pitches-But a stock, but only if asking price is below intrinsic value

IB Client Recommendation: Think company is work 50 mil, but say should target between 40-45 mil price in a sell-side process to be more conservative

PE Investment Recommendations: Your firms targeted returns are X%, but buying/selling company will produce X%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the opportunity cost in finance?

A

discount rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does a higher or lower discount rate mean to investors?

A

Higher rate - higher risk, but higher potential returns

Lower Rate - lower risk but lower earning potential

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What does discount rate mean to companies?

A

Represents the Cost of Funding their operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Discount Rate for Real Companies: Investor Perspective, Company Perspective

A

Investor Perspective- Where should I allocate my money?

Company Perspective- How should we fund our operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are the main options for companies?

A

Equity and Debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Equity (Companies perspective) Funding

A

Company sells stock to investors; each investor gets a small percentage of the company, but no guranted cash payments .

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Debt (Company perspective) Funding

A

Company borrows money from lenders; lenders do not own anything but do receive cash interest payments + entire principle back

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What has the highest potential returns, but the riskiest for investors?

A

Stock Market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What funding is almost always more expensive for companies?

A

Equity (stock)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

For lenders what is less risky with lower potential returns?

A

Debt is less risky, but has lower potential returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What funding is usually always cheaper (at first) for companies?

A

Debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Riskier industries (like biotech) have a what discount rate?

A

Higher

26
Q

How would you determine the cost of equity (discount rate for stock)?

A

Might measure based on past stock market performance of this company or similar ones.

27
Q

How would you determine the cost of debt (discount rate for debt)?

A

Might look at the interest rate the company is paying on its debt, or the rates that similar companies are paying

28
Q

“Net” Present Value takes…

A

the Present Value of Cash Flows and subtracts the initial investment

29
Q

If you invest $100 today and get back $120 (PV) what is the NPV?

A

$20

30
Q

The NPV function is excel calculates?

A

Calculates the present value not the NPV

31
Q

For Method #1 (Intrinsic Value vs Asking Price) how do we get each of those?

A

Asking Price: Easy - what’s the price of a house/bond/stock?

Intrinsic Value: Calculate the Present Value of all future “money” (cash flows), using the Discount Rate

32
Q

Is Asking Price < Intrinsic Value?

A

Invest! Positive NPV

33
Q

Is Asking Price > Intrinsic Value?

A

Don’t Invest (Negative NPV)

34
Q

In the Apartment Example (Korea) what might change our investment decision?

A

Apartment Sale Value Falls

Apartment Stays Vacant for a Time

Our Opportunity Costs Changes

Asking Price Changes

35
Q

What does IRR stand for ?

A

Internal rate of return (another type of discount rate, similar to WACC)

36
Q

Difference between WACC and IRR?

A

You KNOW WACC, but you SOLVE for IRR

37
Q

What is IRR?

A

The discount rate at which the NPV is ZERO

38
Q

What do you need to calculate the Present Value? (high level)

A

series of cash flows and discount rate

39
Q

What do you need to calculate the IRR? (high level)

A

Upfront investment cost and series of cash flows

40
Q

What formulas can you use to calculate IRR?

A

IRR or XIRR functions…

Upfront investment (and additional contributions) must be negative, and cash flows earned must be positive.

If nothing happens in a year MUST ENTER “$0” !!!!!!!!!

41
Q

WACC is the discount rate you are…

A

targeting or expecting (the opportunity cost)

42
Q

IRR is what you will…

A

actually receive (the potential returns)

43
Q

IRR is like the ….

A

effective, compounded interest rate on an investment

44
Q

In method #2 (returns vs opportunity cost) you know…

A

-the cash flows and the asking price of an investment

-what you could earn elsewhere (discount rate)

IRR>WACC (Invest!)

IRR<WACC (Stay away<)

45
Q

Company Value =

A

(Cash Flow)/(Discount rate-Cash Flow Growth Rate)

*Where the Cash Flow Growth Rate Must Be < Discount Rate

Cash Flow Higher - Company worth more to you
Cash Flow Lower - Company worth less to you

Discount Rate Higher: Company worth less (Better options elsewhere!)
Discount Rate Lower: Company worth more (worse options elsewhere!)

46
Q

If Cash Flow Higher - Company worth ….

A

more to you

47
Q

If Cash Flow Lower - Company worth ….

A

less to you

48
Q

If Discount Rate Higher: Company worth…

A

less (Better options elsewhere!)

49
Q

If Discount Rate Lower: Company worth …

A

more (Worse options elsewhere!)

50
Q

If Cash flow growth rate higher, then company worth…

A

more (you can pay more if there is more growth

51
Q

If Cash flow growth rate lower, then company worth…

A

less

52
Q

What is so hard about company value formula?

(Cash Flow)/(Discount rate-Cash Flow Growth Rate)

A
  1. Formula does not always work - company must have reached “stability” first
  2. It’s tough top come up with reasonable numbers for everything in that formula
53
Q

No company discloses XX or XX so instead you must XX

A

-Cash Flow
-Discount Rate

-comb through company’s public filings and analyze similar companies to estimate both of these

requires a lot of manual adjustments as you decide whether to include or exclude different items

54
Q

Most companies have not yet “stabilized” so their metrics XX and it is your job to XX

A

-will be shifting around for years

-come up with reasonable revenue and expense forecasts

*ideally use units sold, per-unit expenses (TIL rate) ect…
*make sure cash flows follow reasonable trends…

55
Q

What does “Company Value” in formula mean? 2 common metrics for measuring.

A

-Value to ALL investors, just equity investors, or…?

-Does it include everything the company has, or just the Assets related to its core business?

-Equity Value and Enterprise Value

56
Q

In the case of a Leveraged Buyout what is company value entail?

A

If you buy and sell companies, it is more about the IRR (potential returns) vs the targeted returns

57
Q

In the case of a M&A what is company value entail?

A

IRR (potential returns) vs the targeted returns, but you also care more about “accounting” metrics such as Earnings per Share (EPS)

58
Q

In the case of a Equity Capital what is company value entail?

A

Investors care more about eh IRR vs. potential returns; company cares about minimizing dilution.

59
Q

In the case of a Debt Issuances what is company value entail?

A

“Metrics and Ratios” that indicate the company’s ability to repay Debt become more important.

60
Q
A

BIWS (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions