BIWS 400 Questions with Correct Answers| New Update 100% Verified by Experts
What does the "Discount Rate" mean? The Discount Rate represents your opportunity cost
or "targeted annualized return." In other words, if you don't invest in this company, how much
could you earn over the long term by investing in other, similar companies?
The Discount Rate represents the potential returns and the risk of other, similar opportunities.
If the Discount Rate is higher, both the potential returns and the risk are higher; the opposite is
true if the Discount Rate is lower.
What is WACC and how do you calculate it? WACC stands for the weighted average cost of
capital, and is the most common discount rate used to value companies.
WACC = (WoE x CoE) + (WoE x CoD)(1 - Tax Rate) .
What is the cost of equity formula? Expected return for investors.
The formula for the Cost of Equity is the CAPM formula:
Risk Free Rate + Beta * Equity (or Market) Premium.
What's the Risk-Free Rate? 10-year treasury bond yield
What does the yield curve inversion mean? The yield curve is "inverted" when the two-year
yield rises above the 10-year.
This is a recession warning - it means that investors are more bullish about the long-term than
the short term.
A company generates $100 of cash flow today, and its cash flow is expected to grow at 5% per
year for the long term. You could earn 10% per year by investing in other, similar companies.
How much would you pay for this company? 100 / (0.1-.05) = 2,000.
,What is the difference between present value and net present value Present value: equals
future cash flows discounted at the appropriate rate.
Net present value means that you take the PV of the future cash flows and subtract the upfront
asking price. If NPV is positive, the company is worth more then its current price
What does the internal rate of return mean? How do you calculate it? The IRR is the
discount rate at which the NPV = 0.
You can think of it as the effective compounded rate of return on an investment.
Does discount rate affect IRR? No.
The whole point of the IRR is you can compare it to the discount rate to see if it's worth it.
The factors that affect the IRR are cash flows, growth, purchase price, exit price, etc.
How do you use the IRR, Discount Rate, and Present Value to make investment decisions?
Normally, you calculate the IRR and compare it to the discount rate. If the IRR is higher,
invest.
Also, you could compare the present value of future cash flows to the upfront price to see if it's
higher.
How do the financial statements link together? Net income from the IS flows is the top line
of the CFS.
,Then you adjust this NI figure for non-cash adjustments and operational BS items to get CFO.
Then include CFI and CFF to get net change in cash.
Cash at the bottom of the CFS flows into cash on the BS, and net income flows into CSE.
Everything else on the CFS flows into their corresponding BS items. For ex, CapEx and depr go
into PPE.
What's the most important financial statement? Cash flow statement - tells you how much a
cash is generating, and almost all valuation is based on cash flow.
How might the financial statements of a company in the U.K. or Germany be different from
those of a company based in the U.S.? Germany would use IFRS while the US would use
GAAP.
The IS and BS tend to be the same, but sometimes IFRS starts the CFS with something other
then NI.
Also, under IFRS, the operating lease expense is split into interest and depreciation elements,
where as it's just a simple lease expense under GAAP.
How do you know when a revenue or expense line item should appear on the Income
Statement? 1. it corresponds 100% to the period shown
2. it affects Net Income to Common Shareholders
A company collects cash payments from customers for a monthly subscription service one year
in advance. Why do companies do this, and what is the cash flow impact? Because of the
time value of money, it's better to collect cash today rather than several months or a year into
the future.
The impact is that it boosts cash flow. On the balance sheet, you get an increase in cash and
corresponding increase in deferred revenue liability.
, As the product/service get's delivered the revenue is recognized and deferred revenue declines.
Why is Accounts Receivable (AR) an Asset but Deferred Revenue (DR) a Liability? AR is an
Asset because it provides a future benefit to the company - the receipt of additional cash from
customers in the future. DR is a Liability because it represents future obligations for the
company. The company has already collected the cash associated with the sale, so it must
spend money in the future to deliver the product or service. AR and DR are opposites: AR has
not yet been collected in cash but has been delivered, whereas DR has been collected in cash
but has not yet been delivered.
What are "Deferred Taxes," and how do they affect the statements? Deferred taxes are
cases where the taxes shown on your book don't represent the actual cash taxes paid to the
government.
They typically arise due to IS expenses that are not actually cash tax deductible, such as SBC and
asset-write downs.
These items only become deductible when stock options are exercised, or the asset is sold at a
loss.
So, these items create NEGATIVE deferred taxes because the company paid more in cash taxes
than the IS shows.
A junior accountant in your department asks about how to fund the company's operations via
external sources and how they impact the financial statements. What do you say? Debt and
equity.
Debt is initially cheaper for most companies, so its the preferred method (up to a reasonable
level).
What does the "Discount Rate" mean? The Discount Rate represents your opportunity cost
or "targeted annualized return." In other words, if you don't invest in this company, how much
could you earn over the long term by investing in other, similar companies?
The Discount Rate represents the potential returns and the risk of other, similar opportunities.
If the Discount Rate is higher, both the potential returns and the risk are higher; the opposite is
true if the Discount Rate is lower.
What is WACC and how do you calculate it? WACC stands for the weighted average cost of
capital, and is the most common discount rate used to value companies.
WACC = (WoE x CoE) + (WoE x CoD)(1 - Tax Rate) .
What is the cost of equity formula? Expected return for investors.
The formula for the Cost of Equity is the CAPM formula:
Risk Free Rate + Beta * Equity (or Market) Premium.
What's the Risk-Free Rate? 10-year treasury bond yield
What does the yield curve inversion mean? The yield curve is "inverted" when the two-year
yield rises above the 10-year.
This is a recession warning - it means that investors are more bullish about the long-term than
the short term.
A company generates $100 of cash flow today, and its cash flow is expected to grow at 5% per
year for the long term. You could earn 10% per year by investing in other, similar companies.
How much would you pay for this company? 100 / (0.1-.05) = 2,000.
,What is the difference between present value and net present value Present value: equals
future cash flows discounted at the appropriate rate.
Net present value means that you take the PV of the future cash flows and subtract the upfront
asking price. If NPV is positive, the company is worth more then its current price
What does the internal rate of return mean? How do you calculate it? The IRR is the
discount rate at which the NPV = 0.
You can think of it as the effective compounded rate of return on an investment.
Does discount rate affect IRR? No.
The whole point of the IRR is you can compare it to the discount rate to see if it's worth it.
The factors that affect the IRR are cash flows, growth, purchase price, exit price, etc.
How do you use the IRR, Discount Rate, and Present Value to make investment decisions?
Normally, you calculate the IRR and compare it to the discount rate. If the IRR is higher,
invest.
Also, you could compare the present value of future cash flows to the upfront price to see if it's
higher.
How do the financial statements link together? Net income from the IS flows is the top line
of the CFS.
,Then you adjust this NI figure for non-cash adjustments and operational BS items to get CFO.
Then include CFI and CFF to get net change in cash.
Cash at the bottom of the CFS flows into cash on the BS, and net income flows into CSE.
Everything else on the CFS flows into their corresponding BS items. For ex, CapEx and depr go
into PPE.
What's the most important financial statement? Cash flow statement - tells you how much a
cash is generating, and almost all valuation is based on cash flow.
How might the financial statements of a company in the U.K. or Germany be different from
those of a company based in the U.S.? Germany would use IFRS while the US would use
GAAP.
The IS and BS tend to be the same, but sometimes IFRS starts the CFS with something other
then NI.
Also, under IFRS, the operating lease expense is split into interest and depreciation elements,
where as it's just a simple lease expense under GAAP.
How do you know when a revenue or expense line item should appear on the Income
Statement? 1. it corresponds 100% to the period shown
2. it affects Net Income to Common Shareholders
A company collects cash payments from customers for a monthly subscription service one year
in advance. Why do companies do this, and what is the cash flow impact? Because of the
time value of money, it's better to collect cash today rather than several months or a year into
the future.
The impact is that it boosts cash flow. On the balance sheet, you get an increase in cash and
corresponding increase in deferred revenue liability.
, As the product/service get's delivered the revenue is recognized and deferred revenue declines.
Why is Accounts Receivable (AR) an Asset but Deferred Revenue (DR) a Liability? AR is an
Asset because it provides a future benefit to the company - the receipt of additional cash from
customers in the future. DR is a Liability because it represents future obligations for the
company. The company has already collected the cash associated with the sale, so it must
spend money in the future to deliver the product or service. AR and DR are opposites: AR has
not yet been collected in cash but has been delivered, whereas DR has been collected in cash
but has not yet been delivered.
What are "Deferred Taxes," and how do they affect the statements? Deferred taxes are
cases where the taxes shown on your book don't represent the actual cash taxes paid to the
government.
They typically arise due to IS expenses that are not actually cash tax deductible, such as SBC and
asset-write downs.
These items only become deductible when stock options are exercised, or the asset is sold at a
loss.
So, these items create NEGATIVE deferred taxes because the company paid more in cash taxes
than the IS shows.
A junior accountant in your department asks about how to fund the company's operations via
external sources and how they impact the financial statements. What do you say? Debt and
equity.
Debt is initially cheaper for most companies, so its the preferred method (up to a reasonable
level).
