Here are 10 frequently asked questions:
1. What is a financial statement & what are the four types of financial statements?
Financial statements are written reports that provide an overview of a company’s financial position over a certain period.
- Balance Sheet: It provides details about the assets, liabilities, and shareholders' equity. Equation: Assets = Liabilities + Equity
- Income Statements: An income statement is a financial statement that indicates how much revenue a firm made during a given period (usually for a year or some portion of a year). It also displays the expenditures and expenses incurred in generating the revenue.
- Cash Flow Statements: Cash Flow Statements reports the company's inflow and outflow of cash. It states whether the company had generated cash or lost cash.
- Statement of Changes in Shareholders Equity: It is a financial statement that summarizes changes in a company's shareholder equity over time.
2. What is capital budgeting?
A company's capital budgeting process determines which proposed fixed asset purchases it should approve and which to reject. The amount of money involved in a fixed asset investment might be so huge that if the venture fails, the company could go bankrupt. As a result, capital budgeting is an important requirement for major fixed asset proposals.
3. How is WACC calculated?
Weighted Average Cost of Capital(WACC) represents an average rate of returns to shareholders and uses company debts and equity.
WACC Formula = [Cost of Equity * % of Equity] + [Cost of Debt * % of Debt * (1-Tax Rate)]
4. Explain how a swap works.
A swap is a financial arrangement in which one of the two parties commits to provide a series of payments regularly in return for receiving another set of payments from the other side.
The purpose of a swap is to convert one type of payment scheme into another that is more suited to the objectives of the participants, which might be retail clients, investors, or major corporations.
5. How is a merger different from an acquisition?
Merger: It is the consolidation of two or more companies to form a joint business entity. The companies that are merged are of equal stature.
Acquisition: It is the process of one company taking control over the other. The company that acquires holds the power of freedom and decision-making of the acquired company.
6. What is EPS? How is it calculated?
Earnings Per Share(EPS) is a financial measure, calculated by dividing net earnings accessible to common shareholders by the average number of outstanding shares during a certain period.EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding
The EPS formula measures a company's ability to yield net profits for common shareholders.
7. Why do companies need a valuation? What are the three different methods of valuation?
Business Valuation is essential to grow, raise funds, financial funds, build strategies and sell or acquire a business.
Three methods for valuing a company:
- Market Valuation Method: It involves finding comparable companies, examining price/earnings ratios and other value indicators, computing an average, and applying it to the subject company. Or, relies on a sales study of similar properties and determines full cash worth by examining recent sales or offering prices of comparable businesses.
- Cost Valuation Method: It is based on the worth and assets of the business. The value of an asset is calculated by subtracting the reproduction value or replacement cost of the item from the degradation and other damages that occur to the asset.
- Income Valuation Method: The income model suggests that a property's current full cash value is equal to the current value of future cash flows it will generate throughout its remaining economic life.
8. What is financial modeling? Why is it useful?
A financial model is a means that displays prospective financial outcomes under various scenarios to assist individuals in making important financial decisions.
It is important for decision-making around mergers and acquisitions, risk minimization, fund, and requirement strategy, raising capital, selling assets, business valuation, and business growth.
9. Difference between equity and debt financing?
The long-term finance process of raising funds by selling the company's shares to the general public is referred to as equity financing. The ownership rights are given to financers.
The short-term finance process by which a corporation raises funds by selling debt instruments to investors is known as debt financing. It is an obligation to the company.
10. What is NPV? How is it calculated?
Net Present Value (NPV) is the value of all future cash flows (inflow and outflow) generated against the initial investment.
NPV = Cashflow^ n / (1+Discount Rate)^ n
“n” - periodic cash flow
It is used to assess the value of an investment, a project, or any sequence of cash flows.
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