VANDERBILT INVESTMENT BANKING Meeting 6: Financial Accounting


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VANDERBILT INVESTMENT BANKING Meeting 6: Financial Accounting

  1. 1. VANDERBILT INVESTMENT BANKING Meeting 6: Financial Accounting
  2. 2. Accounting <ul><li>Why do you need to know it? </li></ul>
  3. 3. Three Financial Statements <ul><li>Income Statement </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Statement of Cash flows </li></ul>
  4. 4. Income Statement <ul><li>Depicts a business entity’s financial performance due to operations as well as other activities rendering gains or losses </li></ul><ul><ul><li>Revenue: the dollar amount of sales during a specific period </li></ul></ul><ul><ul><li>COGS: reflects the cost of the product or good that a company sells to generate revenue </li></ul></ul><ul><ul><li>Gross Profit: Revenue - Expenses </li></ul></ul><ul><ul><li>Operating Expenses: Salaries, advertising, rent, utilities, etc. </li></ul></ul><ul><ul><li>Operating Income (EBIT): Gross Profit – Operating Expenses </li></ul></ul><ul><ul><li>Interest: Money paid out to creditors for bonds/loans given to the company </li></ul></ul><ul><ul><li>Taxes: Money paid out to the government </li></ul></ul><ul><ul><li>Net Income: A company’s total earnings, also known as “the bottom line” </li></ul></ul>
  5. 5. Balance Sheet <ul><li>A company's financial statement. It reports the company's assets, liabilities and net worth at a specific time </li></ul><ul><ul><li>Current Assets: assets that can be converted within a year </li></ul></ul><ul><ul><ul><li>Cash </li></ul></ul></ul><ul><ul><ul><li>Accounts Receivable </li></ul></ul></ul><ul><ul><ul><li>Short-term Investments </li></ul></ul></ul><ul><ul><ul><li>Inventory </li></ul></ul></ul><ul><ul><li>Long-term Investments: Bonds, stocks, etc. </li></ul></ul><ul><ul><li>Property, Plant, & Equipment </li></ul></ul><ul><ul><ul><li>Land </li></ul></ul></ul><ul><ul><ul><li>Buildings & Equipment </li></ul></ul></ul><ul><ul><ul><li>- Accumulated Depreciation </li></ul></ul></ul><ul><ul><li>Intangible Assets: amortization, etc. </li></ul></ul><ul><ul><li>Total Assets </li></ul></ul>
  6. 6. Balance Sheet <ul><ul><li>Current Liabilities: debts due within one year </li></ul></ul><ul><ul><ul><li>Accounts Payable </li></ul></ul></ul><ul><ul><ul><li>Notes Payable </li></ul></ul></ul><ul><ul><ul><li>Accruals (accrued interest) </li></ul></ul></ul><ul><ul><ul><li>Unearned revenue </li></ul></ul></ul><ul><ul><ul><li>Current portion of Long term debt </li></ul></ul></ul><ul><ul><li>Long-term Liabilities: debts due more than a year (ex. long term bonds) </li></ul></ul><ul><ul><li>Stockholder’s Equity </li></ul></ul><ul><ul><ul><li>Common Stock </li></ul></ul></ul><ul><ul><ul><li>Retained Earnings </li></ul></ul></ul><ul><ul><ul><li>Paid-in Capital </li></ul></ul></ul><ul><ul><li>Total Liabilities & Stockholder’s Equity </li></ul></ul><ul><ul><li>NOTE: Total Assets = Total Liabilities + Stockholder’s Equity </li></ul></ul>
  7. 7. Statement of Cash Flows <ul><li>A summary of a company's cash flow over a given period of time </li></ul><ul><ul><li>Operating Cash Flow: This is the cash generated in the course of a company running its business </li></ul></ul><ul><ul><ul><li>Net Income </li></ul></ul></ul><ul><ul><ul><li>Depreciation + Amortization </li></ul></ul></ul><ul><ul><ul><li>Change in Working Capital (current assets – current liabilities) </li></ul></ul></ul><ul><ul><ul><li>Net Operating Cash Flow: Net Income + Depreciation/Amortization – (+Change in WC) </li></ul></ul></ul><ul><ul><li>Cash Flow from Investment Activities: Cash generated/lost from long-term capital investment </li></ul></ul><ul><ul><ul><li>Purchase/Sale in Plant, Property, & Equipment </li></ul></ul></ul><ul><ul><ul><li>Acquisition/Divestiture of Subsidiaries or other Businesses </li></ul></ul></ul><ul><ul><ul><li>Purchase/Sale of Long-term Investments </li></ul></ul></ul><ul><ul><ul><li>Net Cash Flow from Investments: Sum of all Items </li></ul></ul></ul><ul><ul><li>Cash Flow from Financing </li></ul></ul><ul><ul><ul><li>Issuance/Purchase of Equity Securities </li></ul></ul></ul><ul><ul><ul><li>Issuance/Purchase of Debt Securities </li></ul></ul></ul><ul><ul><ul><li>Dividends </li></ul></ul></ul><ul><ul><ul><li>Net Financing Cash Flows: Sum of Issuances - Dividends </li></ul></ul></ul>
  8. 8. Relationships <ul><li>How do the various statements relate to each other? </li></ul><ul><ul><li>Income Statement  Balance Sheet </li></ul></ul><ul><ul><ul><li>Depreciation/Amortization </li></ul></ul></ul><ul><ul><ul><li>Interest </li></ul></ul></ul><ul><ul><ul><li>Retained Earnings </li></ul></ul></ul><ul><ul><ul><li>Taxes </li></ul></ul></ul><ul><ul><li>Income Statement  Cash Flows </li></ul></ul><ul><ul><ul><li>Net Income </li></ul></ul></ul><ul><ul><ul><li>Depreciation/Amortization </li></ul></ul></ul><ul><ul><li>Balance Sheet  Cash Flows </li></ul></ul><ul><ul><ul><li>Depreciation/Amortization </li></ul></ul></ul><ul><ul><ul><li>Change in Working Capital </li></ul></ul></ul><ul><ul><ul><li>Capital Expenditures and PP&E </li></ul></ul></ul><ul><ul><ul><li>Cash and Purchase/Sale Investments </li></ul></ul></ul><ul><ul><ul><li>Cash and Purchase/Sale Equity & Debt Securities </li></ul></ul></ul>
  9. 9. Why is this important? <ul><li>Morgan Stanley Model </li></ul>
  10. 10. Possible Technical Questions <ul><li>Four ways to value a company </li></ul><ul><ul><li>Discounted Cash Flow: Discount Cash Flows for a period of time </li></ul></ul><ul><ul><li>Comparable Multiples: Compare valuation multiples of several companies </li></ul></ul><ul><ul><li>Comparable Transaction: Compare valuation from other comparable transactions </li></ul></ul><ul><ul><li>Leveraged Buyout: Value company based on how long it for the investor to profitably exit their investment in a company </li></ul></ul><ul><li>What is EBITDA? </li></ul><ul><ul><li>“ Cash flow” of the Company, Earnings before Interest, Taxes, but add Depreciation and Amortization </li></ul></ul><ul><li>How do you get a Discount Rate? </li></ul><ul><ul><li>WACC – Weighted Average Cost of Capital </li></ul></ul><ul><ul><li>(%Equity)*(Return on Equity) + (%Debt)*(Return on Debt)*(1-Tax rate) </li></ul></ul><ul><ul><li>Return on Equity = Risk-free Rate + Beta * (Market Return – Risk Free rate) </li></ul></ul><ul><ul><li>Return on Debt = Interest rate company has to pay for taking out debt </li></ul></ul>
  11. 11. Other Technical Questions <ul><li>What is Beta? </li></ul><ul><ul><li>A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole </li></ul></ul><ul><li>What is Free Cash Flow? </li></ul><ul><ul><li>Measure of how much cash a company has after paying expenses for ongoing activities and growth </li></ul></ul><ul><ul><li>Net Income + Amortization/Depreciation – Taxes – (+Changes in WC) – Capital Expenditures </li></ul></ul><ul><li>What is Terminal Value? </li></ul><ul><ul><li>Value of an investment at the end of a period </li></ul></ul><ul><ul><li>Terminal Value = Free Cash Flow of last year * (1 + Growth rate), divide that by (Discount Rate – Growth Rate) </li></ul></ul>
  12. 12. Q&A/DISCUSSION