VANDERBILT INVESTMENT BANKING Meeting 6: Financial Accounting

1. VANDERBILT INVESTMENT BANKINGMeeting 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

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