IB Interview Prep - General

- generating return on invested capital, growth, and positive cash flows - firm seeks return on invested capital greater than OCC - by growing, firm creates more value (as long as returns exceeds cost of capital)

- P/E ratio, or earnnings multiple; compares relative attractiveness of stocks and and gives investors an idea of how much market is paying for stock. - Price of stock/earnings per share - higher the P/E, the more investors are paying and more earnings growth that they're expecting. - 20x + implies high growth - S&P 500 is 15-17x

- Quantitatively, P/E moved by changes in share price and earnings through numerator/denominator - Qualitatively, P/E moved by changes in market perceptaions/expectations of risk, growth, quality of earnings/margins, general investor confidence

Firm's NI x PE ratio.

- earnings before interest, taxes - operating cash flow of company - bc it doesn't include interest or taxes, its a measure of income indep. of firms' capital structure

- approximate measure of free cash flow - gives a sense of a company's ability to turn profits (BC excludes effects of capital structure (interest, taxes) and non-cash expenses (D&A) - excludes capex, WC needs, divs and principal repayments on debt. Distorts different industry (ie telecom) where you need to account for certain cash inflows/outflows to get to true FCF - INTEREST COVERAGE RATIO; EBITDA/Interest Exp = co's ability to pay interest to creditors. - DEBT COVERAGE RATIO; EBITDA/outstanding balance of LT loan = ability of co to pay LT debt.

The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).

Using the CAPM model and the following assumptions, we can compute the expected return of a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%)).

- equity value = market cap/value. stock price X shares outstanding - EV (aggregate value, total value) includes the market value of equity + net debt + pref stock + minority interest - EV reflects discounted future cash flow to all claimants; Equity Value reflects discounted future cash flows only to equity holders.

MIKE No. When using earnings or revenue related rations, numerator should match denominator: numerator - total value to investor base denominator - potential cash to same investor base.

1. invest in NPV positive projects 2. return $$ to stakeholders (stock repurchase, divs, debt repayments) not smart in cyclical industries, where "extra cash" may be needed later.

1. binomial model 2. black scholes - include current share price, exercise price, time to maturing, risk-free rate, variance of return on stock - call = option to buy; put = option to sell

Cash EPS = operating cash flow / diluted shares outstanding. Measure of financial performance that looks at cash flow on a per share basis. Good with tech co's, where they have to expense a lot of stock options. This is adjusted by cash EPS.

Nets out. debt up 2, earnings up 2.

2 down for equity value, 2 up debt. Nets out.

Firm value up by 5.