Accounting for Investment Banking by kjf39881


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Meeting 6: Financial Accounting

 Why do you need to know it?
Three Financial Statements

 Income Statement
 Balance Sheet
 Statement of Cash flows
   Income Statement
 Depicts a business entity’s financial performance due to operations
  as well as other activities rendering gains or losses
    Revenue: the dollar amount of sales during a specific period
      COGS: reflects the cost of the product or good that a company sells to generate revenue
      Gross Profit: Revenue - Expenses
      Operating Expenses: Salaries, advertising, rent, utilities, etc.
      Operating Income (EBIT): Gross Profit – Operating Expenses
      Interest: Money paid out to creditors for bonds/loans given to the company
      Taxes: Money paid out to the government
      Net Income: A company’s total earnings, also known as “the bottom line”
    Balance Sheet
 A company's financial statement. It reports the company's assets, liabilities
  and net worth at a specific time
     Current Assets: assets that can be converted within a year
            Cash
            Accounts Receivable
            Short-term Investments
            Inventory
     Long-term Investments: Bonds, stocks, etc.
     Property, Plant, & Equipment
          Land
          Buildings & Equipment
          - Accumulated Depreciation
     Intangible Assets: amortization, etc.
     Total Assets
Balance Sheet
 Current Liabilities: debts due within one year
        Accounts Payable
        Notes Payable
        Accruals (accrued interest)
        Unearned revenue
        Current portion of Long term debt
 Long-term Liabilities: debts due more than a year (ex. long term bonds)
 Stockholder’s Equity
      Common Stock
      Retained Earnings
      Paid-in Capital
 Total Liabilities & Stockholder’s Equity

 NOTE: Total Assets = Total Liabilities + Stockholder’s Equity
     Statement of Cash Flows
   A summary of a company's cash flow over a given period of time
      Operating Cash Flow: This is the cash generated in the course of a company running its
            Net Income
            Depreciation + Amortization
            Change in Working Capital (current assets – current liabilities)
            Net Operating Cash Flow: Net Income + Depreciation/Amortization – (+Change in WC)
      Cash Flow from Investment Activities: Cash generated/lost from long-term capital
            Purchase/Sale in Plant, Property, & Equipment
            Acquisition/Divestiture of Subsidiaries or other Businesses
            Purchase/Sale of Long-term Investments
            Net Cash Flow from Investments: Sum of all Items
      Cash Flow from Financing
            Issuance/Purchase of Equity Securities
            Issuance/Purchase of Debt Securities
            Dividends
            Net Financing Cash Flows: Sum of Issuances - Dividends
 How do the various statements relate to each other?
    Income Statement  Balance Sheet
          Depreciation/Amortization
          Interest
          Retained Earnings
          Taxes
    Income Statement  Cash Flows
        Net Income
        Depreciation/Amortization
    Balance Sheet  Cash Flows
          Depreciation/Amortization
          Change in Working Capital
          Capital Expenditures and PP&E
          Cash and Purchase/Sale Investments
          Cash and Purchase/Sale Equity & Debt Securities
Why is this important?

 Morgan Stanley Model
  Possible Technical Questions
 Four ways to value a company
    Discounted Cash Flow: Discount Cash Flows for a period of time
    Comparable Multiples: Compare valuation multiples of several companies
    Comparable Transaction: Compare valuation from other comparable
    Leveraged Buyout: Value company based on how long it for the investor to
     profitably exit their investment in a company
 What is EBITDA?
    “Cash flow” of the Company, Earnings before Interest, Taxes, but add
     Depreciation and Amortization
 How do you get a Discount Rate?
      WACC – Weighted Average Cost of Capital
      (%Equity)*(Return on Equity) + (%Debt)*(Return on Debt)*(1-Tax rate)
      Return on Equity = Risk-free Rate + Beta * (Market Return – Risk Free rate)
      Return on Debt = Interest rate company has to pay for taking out debt
  Other Technical Questions
 What is Beta?
    A measure of a security's or portfolio's volatility, or systematic risk, in
     comparison to the market as a whole
 What is Free Cash Flow?
    Measure of how much cash a company has after paying expenses for ongoing
     activities and growth
    Net Income + Amortization/Depreciation – Taxes – (+Changes in WC) – Capital
 What is Terminal Value?
    Value of an investment at the end of a period
    Terminal Value = Free Cash Flow of last year * (1 + Growth rate), divide that
     by (Discount Rate – Growth Rate)

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