1. VANDERBILT INVESTMENT BANKING VANDERBILT INVESTMENT BANKING Meeting 6: Financial Accounting

2. Accounting  Why do you need to know it?

3. Three Financial Statements  Income Statement  Balance Sheet  Statement of Cash flows

4. 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”

5. 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

6. 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

7. 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 business  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 investment  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

8. Relationships  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

9. Why is this important?  Morgan Stanley Model Morgan Stanley Model

10. 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 transactions  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

11. 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 Expenditures  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)

12. Q&A/DISCUSSION