question

Demand Elasticity

answer

[Q demand change / Q Average] / [P Change / P Average] ; if >1 then demand is elastic (demand changes more than price)

question

Price-Quantity-Revenue (revenue stays same); EX: if price declines 6%, what increase in sales is needed to maintain revenue

answer

% change in price / compliment % of price change

question

Price-Quantity-Revenue (with revenue increase): if price declines 6% what increase in sale is needed to increase revenue by 8%

answer

(% change in price + % increase in revenue) / compliment % of price change

question

Correlation: direction (+1, 0, -1); how to do it quickly

answer

+1= highly correlated; 0= no correlation; -1= negatively correlated; {look for direction first, the degree of changes)

question

Industry Models: Pure Competition

answer

many producers of a commodity

question

Oligopoly

answer

serveral large producers controlling 70-80% of the market share

question

Duopoly

answer

two producers control the market

question

Monopoly

answer

single producer

question

Monopolistic Competition

answer

many producers each with a monopoly in an individual market

question

Cartel

answer

a group of producers with an agreement to set prices

question

Monopsony

answer

one buyer (EX: US Government)

question

Profit Margin

answer

NI / gross revenue

question

Operating Leverage: If increase unit sales which company has faster margin growth {A= low fixed, high variable; B= high fixed, low variable}

answer

company B because they make more per unit sold; if sales decrease company B would also faster margin declines because of profits lost per unit and higher fixed costs

question

Proxy statements

answer

management compensation, ownership

question

Form 4

answer

Insider/affiliate ownership filing

question

Reg. 13D

answer

Ownership +5%

question

Form 144

answer

large insiders selling restricted stock

question

Executive stock option information can be found where?

answer

Proxy & 10-K Footnotes

question

Statement of Cash Flow (sections):

answer

Operating, Investing; Financing

question

Statement of CF: Operating

answer

NI, Depreciation, Deferred tax (L), Receivables, Inventory, AP, etc...

question

Statement of CF: Investing

answer

Plant, Business Acquired, etc...

question

Statement of CF: Financing

answer

Common stock issued, debt (retirement/issuance), dividends

question

Statement of CF: Asset Decrease

answer

Source of Cash; CF increase

question

Statement of CF: Asset Increase

answer

Use of Cash; CF decrease

question

Statement of CF: Liability Decrease

answer

Use of Cash; CF decrease

question

Statement of CF: Liability Increase

answer

Source of Cash; CF increase

question

ABC Corp. paid principal on maturing debt (from RE), how will this affect Statement of CF

answer

Liability decrease; CF decrease

question

Company XYZ misses Earning on low revenue, what two B.S. items are most useful: AR, Inventory, AP, RE

answer

AR and Inventory: they missed because of sales (revenue) so you need to look into the accounts that show this. If they were to miss on higher costs then would probably want to look into AP (among other things)

question

Aggressive accounting (6 to memorize):

answer

report lower expenses; capitalize vs. expense costs; operating vs. capital lease; overvalue assets, underestimate liabilities; use high (8%+) discount rate to calc. pension fund liabilities

question

Operating Lease

answer

lease right to use only (only have an operating expense); payment through SG&A as operating expense; no effect on B.S.; lower operating income but more aggressive from net income (in early years) since interest is deducted as well

question

Capital Lease

answer

lease to own- record as asset & liability; claim depreciation and incure interest expense (imputed interest); because the imputed interest is not an operating expense it creates higher operating income but record more total expenses sooner so this is less aggressive; operating CF reflects imputed interest;

question

Must be reported as capital lease if:

answer

1) lease for 75% of useful life OR 2) planned transfer of ownership OR 3) option to purchase at bargain price OR 4) PV of lease payments is > 90% of future market value

question

Accelerated depreciation: report tax with accel. and report GAAP with straight-line

answer

lower earnings for tax purpose; increase deferred tax liability (GAAP)

question

Capitalization of Interest:

answer

FASB Statement 34- requires firms to capitalize interest incurred during construction of assets; any interest incured during construction is added to the cost of the asset; interest would not be deducted from NI (or op. income) and earnings will be not be affected until depreciation begins

question

Capitalize Expenses: if firm capitalizes software expense then what happens to EBITDA and capitalized costs?

answer

EBITDA is higher; capitalized costs are higher (through depreciation expense)

question

Revenue Recognition: Completion Method

answer

revenue is recognized as costs are incurred (as percentage of the completed product)

question

Revenue Recognition: Completed Contract Method

answer

revenue and costs are not recognized until the contract is completed

question

Accnting for Stock Investment: Cost Method

answer

used when ownership is <20%; carried at original cost basis; gains/losses realized when shares sold; can be written down if experience permanent decline (OTTI)

question

Accnting for Stock Investment: Equity Method

answer

if ownership is between 20-50%; considered and affiliate company; owner records its proportionate share; debit invesment in sub. / credit investment income

question

Accnting for Stock Investment: Consolidated Financial Statement

answer

if ownership >50%; invesment account replaced with 100% of A&L of subsidiary; accounted for under purchase accounting method; goodwill is created if acquisition price > fair value of assets acquired

question

Goodwill (and Intangibles) with indefinite lives:

answer

FASB 142- G&I will not be amortized; will be tested (annually) for impairment by comparing fair value to book value (if fair value is less then impairment loss is recognized

question

Intangible with finite useful lives:

answer

are amortized over their useful life (without any arbitrary ceiling)

question

Pension plan assets and liabilities (with change in interest rate)

answer

interest rates decrease: assets will increase in value (because usually fixed income), this is offset by higher pension fund liabilities (higher PV of fund oblgations with smaller discount rate);

question

Cash dividends Declared and Paid:

answer

Declared: RE decrease, current liabilities increase (working capital decrease, current ratio decrease); Paid: current assets decrease (cash), current liabilities decrease (working capital stays same, current ratio increase if >0)

question

Stock Dividends

answer

if 25% par value is reduced, RE does not change (same as stock splits)

question

International Currency Questions

answer

-headquarter (reported figures); cost location change; revenue location change

question

FIFO

answer

first-in-first-out; first cost matched with first units sold; prices rise then costs will not reflect it right away; aggressive because CoGS will appear lower

question

LIFO

answer

last-in-last-out; last costs matched with first units sold; prices rise then costs will be higher (reflect new costs)

question

Channel Stuffing

answer

producers send retailers more products then they are able to sell (artificially increases AR); look for AR growth to exceed sales growth & DSO

question

Current Ratio:

answer

current assets / current liabilities

question

Quick Ratio:

answer

cash + cash equivalents + AR (no inventory) / current liabilities

question

Day Sales Outstanding:

answer

(AR / total credit sales) x number of days (90 or 365)

question

Operating Profit Margin:

answer

operating profit / sales (or revenue); if sales increase more than costs margin increases

question

Total Debt to Equity:

answer

total debt / total equity

question

Basic EPS:

answer

earnings available to common / average number of shares outstanding; don't forget to deduct preferred dividends to get earning available to common

question

Acquisition: how many new shares?

answer

get equity value (target shares x price/share) and divide by the stock price of the acquirer

question

Return on Common Equity

answer

earnings available to common / avg common equity; OR [(NI-preferred div) / avg. common equity]

question

Quality of Earnings (factors most important)

answer

internal (operational) rather than external issues; EX: lowering bad debt expense (improved collection of AR), etc...

question

(Trailing, Leading, Normalized, Relative) PE Ratios

answer

trailing= TTM, leading=upcoming period (yr); normalized= for cyclical company; relative use to compare vs. an index

question

Events that affect P/E Ratio (memorize 4):

answer

1) litigation, 2) projected growth rate; 3) capital structure; 4)cost of capital (beta influences of cost of equity, cost of debt may be factor as well)

question

Dividend Yield:

answer

Dividend / Price

question

Dividend Payout Ratio:

answer

Dividend / EPS

question

Earnings Yield:

answer

EPS / Price

question

P/E Shortcuts:

answer

DP / DY = P / E; DY / DP = E / P; Dividend Yield = DP * EY

question

Price to Sales Ratio (when used)

answer

P/S- used for companies with negative or inconsistent earnings; valuation metric could be used for firms in financial difficulty or start-ups; not influenced by different methods of accounting; not as volitle as earnings

question

PEG Ratio

answer

PE / Annual Growth Rate- looks to future performance; value company based on growth potential; if >1 then company is overvalued

question

Target Price using PEG Ratio: Company XYZ has PEG of 1.24, its EPS is $0.56 and is projected to be $0.65 next year, what is the PT?

answer

Determine growth rate: [EPS(1)/EPS(0) - 1]; Determine PE: PEG X Growth Rate; Determine Price (PT): PE * EPS(1)

question

CAGR (w/ simple calculator):

answer

calc % change in values and find their average; CAGR will be a little lower than this figure

question

Dividend Discount Model:

answer

P(0)= d(t)/(1+r)^t; No growth: P= d /k; Constant Growth: P= d(1) / (k-g) OR K= [d(1) / p] +g

question

Gordon Growth Model:

answer

use to find intrinsic value; find g= ROE x plowback (which is compliment of payout ratio); P(0)= (D(0)x[1+g])/(k-g)

question

FCFF

answer

cash flow to equity and debt holders; use unlevered net income; [EBITx(1-tax)]+depreciation,amortization-capex+decrease in working capital

question

FCFE

answer

cash flow to just equity; NI+depreciation,amortization-capex+decrease in working capital

question

FCFF vs. FCFE (what is the difference)

answer

FCFF will add back (interest - tax shield); so FCFE= FCFF- (interest - tax shield)

question

To find target stock price with EPS, CapEx, Dep., growth, working capital

answer

FCFE/(RoR-G)

question

Enterprise Value:

answer

market cap. (common & preferred) + market value of debt - cash and equivalents + capital leases + minority interest

question

EV / EBITDA (memorize 2 uses)

answer

metric for corporate profitability that neutralizes difference in capital structure; used to evaluate the overall value of the company, rather than just the equity value of the company

question

EV / Sales (memorize 2 uses)

answer

used to evaluate companies with low profit margins (incl. start-ups with no earnings or negative EBITDA); used to evaluate a company's use of capital to generate sales

question

Industry: Price / Book Value

answer

financial services

question

Industry: Price / Cash Flow

answer

REITS (or P/FFO)

question

Industry: Normalized, Relative P/E

answer

cyclical companies

question

Industry: Price / Sales Ratio

answer

retail, similar leverage

question

Industry: Earning Yield

answer

companies with negative earnings (if high start-up costs, use EV / Sales)

question

Industry: EV / EBITDA

answer

basic (heavy) industry companies

question

Industry: EV / Sales

answer

retail, different leverage; OR negative EBITDA and high start-up costs

question

Industry: PEG Ratio

answer

companies with high PE ratios (high growth)

question

Cost of Equity

answer

Dividend Discount or CAPM= R(f) + B[R(m)-R(f)]; R(m) can mean expected RoR

question

Cost of Debt (post tax)

answer

Pre-tax Cost of Debt x (1-Tax)

question

Sum of the Parts (memorize 3 steps):

answer

1) project segments income into future (with specific growth rate), 2) apply appropriate multiplier to estimate future value, 3) discount future value to PV with RoR

question

In rising rate environment, what happens to DCF, WACC, PV of pension liabilities, Risk-free rate

answer

DCF= decline; WACC= increase; PV of pension liabilities= decline; Risk-free rate= increase

question

Asset Turnover

answer

Sales / Average Assets; if high then assets are outdated; if low then they are tying up capital

question

Receivable Turnover

answer

Sales / Average Receivables

question

Inventory Turnover

answer

CoGS / Average Inventory (sometimes numerator is Sales)

question

Payables Turnover

answer

CoGS / Average Payables; if receivable turnover is down and payables turnover stays the same then the company is improving cash conversion cycle

question

Working Capital Ratio:

answer

NWC (CA-CL) / Sales; shows how much working capital is need per sale

question

Equity Turnover:

answer

Sales / Average Equity

question

EBIT Margin:

answer

EBIT (NOI or Operating Income) / Sales

question

EBITDA Margin:

answer

EBITDA / Sales

question

Gross Profit Margin:

answer

Gross Profit (Sales-CoGS) / Sales

question

Net Profit Margin:

answer

NI / Sales

question

Pre-Tax Margin:

answer

EBT / Sales

question

Operating Profit Margin:

answer

Operating Profit (GP - Selling - Admin -Other) / Sales

question

ROA

answer

NI / Average Assets

question

ROE

answer

NI Available to Common (NI - Preferred) / Average Common Equity

question

Day Sales Outstanding:

answer

Accnt Receivable / (Credit Sales / 360)

question

Debt-to-capital

answer

Debt / Total Capital

question

Financial Leverage

answer

Debt / Equity

question

Debt-to-EBITDA

answer

Debt / EBITDA

question

Interest Coverage Ratio:

answer

EBIT / Interest Expense

question

Sector Valuation: cyclical

answer

relative or normalized PE ratio

question

Sector Valuation: High tech growth

answer

PEG

question

Sector Valuation: High tech with no earnings

answer

price / sales OR EV / sales; allows to make assumptions on future margins

question

Sector Valuation: heavy infrastructure

answer

EV / EBITDA; accounts for different cap. structure and depreciation methods

question

Sector Valuation: REIT

answer

price / cash flow or price / FFO; no capex, value comes from equit earnings

question

Sector Valuation: Retail (leverage is equal)

answer

Price / Sales

question

Sector Valuation: Retail (leverage is not equal)

answer

EV / Sales

question

ROIC

answer

NOI - taxes / invested capital; invested capital = TA - noninterest bearing CL + excess cash (found in footnote)

question

ROIC-WACC Spread

answer

ROIC / WACC; if >1 then creating value; Equity Value / Invested Capital = ROIC / WACC

question

Equity Value

answer

? FCFE / (1+Cost of Equity)?

question

Terminal Value

answer

CF / (k-g)

question

Dividend Growth Model, discount rate with capital raise

answer

K = D(1) / P(1-F) + g; where F equal flotation fees % to raise capital

question

NOI

answer

net operating income: EBIT; remember that operating expenses include Depreciation and Amortization

question

Transaction Value

answer

Offer value + net debt

question

Creating Goodwill in M&A

answer

Offer value - net tangible assets; where net tangible assets= TA - goodwill - L - intangibles

question

Main factor affecting SUPPLY elasticity:

answer

time available to change production; in other words, how quickly producers can change production to increase or decrease the supply

question

If P/E are close then...

answer

cannot determine who is over/under valued

question

Projecting the growth rate for an industry: do use & do NOT use

answer

do use: forward looking, suppliers and customers; do NOT use historical, CAGR, 10-K

question

restructuring charges: where found...

answer

operating expense and footnote in 10-K

question

leading economic indicators (1):

answer

changes in wholesale price of raw materials

question

coincidental economic indicators (1):

answer

industrial production

question

lagging economic indicators (2):

answer

average duration of unemployment; C&I loans outstanding

question

factors that affect the pharmaceutical industry (2)

answer

R&D Spending; M&A (consolidation)

question

debt issued and increase in revenue covers issuance costs plus the required rate of return, how will EPS change.

answer

the EPS will stay the same because you are basically returning your discount rate

question

Capital Lease (b.s. changes)

answer

fixed assets go up by: (value of capital lease - depreciation); will have higher debt-to-equity because of higher liabilities; book short-term portion of lease as CL - increase in CL causes Current Ratio decline

question

tax-loss carryforward (affect on earnings)

answer

NI and earnings available to common will reduce by: (1-tax rate) x [tax loss carryforward]

question

Calculate Common Shares:

answer

Common stock - treasury shares

question

Common Equity (using Shareholder Information):

answer

[common stock] + [additional paid-in-capital] - [treasury stock] + [RE] (do not include preferred stock)

question

fully diluted EPS

answer

(EBIT - interest - tax) / (common shares + converted preferred shares); do not include preferred dividends when calculating NI

question

Enterprise Value (listed out terms):

answer

([common shares x mkt value] + [mkt value preferred])+(debt-LT&ST)-(cash & cash equivalents: t-bills)+ (minority interest) + (capital leases)

question

Capital Lease over life of the lease:

answer

declining expense pattern; interest expense declines which has a net positive impact on operating CF; NI increases (as well as taxable income);

question

Not in continuing operations:

answer

gain/loss on business segment divestiture; extraordinary items

Demand Elasticity: Price Change & Quantity Change for Revenue Increase

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