Culverhouse Investment
Management Group
New Member Orientation – Fall 2014
Day 2 – Financial Statements and Time
Value of Money
FINANCE VOCAB
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Financial Health
• Current Ratio = Current Assets/Current
Liabilities
• Debt/Equity = Total Debt/Stockholder’s equity
• Coverage = EBIT/Interest
• Profit Margin = Net Income/Sales
• FCF Conversion = FCF/Net Income
• Return on Equity = Net Income/Stockholder’s
Equity
3
Financial Statements/Model
• Vocab:
–
–
–
–
–
–
–
–
COGS- Cost of Goods Sold
Gross Profit= Revenue – COGS
SG&A- Selling, General & Administrative Costs
R& D- Research and Development
OPEX- Operating Expenses (Sum of expenses)
EBIT- Earnings Before Interest and Taxes
NOPAT- Net Operating Profit After Tax
CAPEX- capital expenditures
• Note: Some companies label things differently.
FINANCIAL STATEMENTS
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Accounting Overview
Two Types of Accounting:
• Cash and Accrual
– You use cash, businesses use accrual
– Importance of timing differences
• Value investors have a deep understanding of
accounting principles
– Accountants lie
– Good investors can tell when
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Financial Statements
• Income Statement
– Summarizes revenue and expenses over a period of time
– Reports the profit performance of a business
• Balance Sheet
– Assets = Liabilities + Stockholder’s Equity
– Reports the balances of the above accounts at a point in
time
– Shows the financial condition of the business
• Cash Flow Statement
– Reports cash inflows and outflows over a period of time
– Shows changes in investments and financial structure
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How They Connect
Income Statement
Revenue
Statement of Cash
Flows
Net Income
Balance Sheet
Cash
Assets
Δ cash
Cash
=
Liabilities
Equity
Net Income
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INCOME STATEMENT
• MAIN PURPOSE
– Profit and loss (P&L)
– How revenue is
transformed to net
income
– Represents a period of
time
• January 1st-March 31st
2013
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Income Statement
Balance Sheet
• Snapshot of a company’s financial position at
a given time. For example: Dec. 31, 2013
• Assets = Liabilities + Shareholders Equity
– This is always true
• These terms will vary given sector of a
company
BALANCE SHEET
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STATEMENT OF CASH FLOWS
• Accounts for actual cash
movement of company
• Operating – continuing
operations of company
• Investing- long term
assets & liabilities
• Financing- inflow from
investors, outflow as
dividends
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Questions?
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TIME VALUE OF MONEY
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Time Value of Money
• Key foundation of finance
• $1 today > $1 tomorrow
• How do we determine what we would pay
today for $1 guaranteed to us in the future?
• Answer: Discount Rate
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Discount Rate
• Accounts for the opportunity cost of not
having that dollar working for you today
• Ex. the interest if it was in a savings account
• Usually the hardest input to find/define when
solving for PV/FV
• Conceptually, discount rate = the rate of
return (interest) required by investors
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TV of Money Example
• For entering freshmen, CIMG offers $400 at
graduation for an up-front payment from
students who choose to invest
• How much would you pay on your first day of
school for the promise of $400 from CIMG
when you cross the stage at graduation?
– Write that number down, we will use it later
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TV of Money Example
• For the class of 2018, CIMG offers $400 at
graduation for an up-front payment of $300
by all students who choose to invest
• We can calculate the discount rate implied by
CIMG’s offer
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Calculations
• Two ways to find the implied discount rate
a) $300 =
$400
1+x 4
a) Solve for x
b) Financial calculator (TI BA-II Plus)
a) N=4, PV=-$300, PMT=0, FV=$400
• Answer: 7.46%
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What Does it Mean?
• Investors who opt in believe that the annual
return of 7.46% offered by CIMG is fair
• If this is the only way to raise capital, then
CIMG’s cost of capital is 7.46%
• Does it make sense for CIMG to be offering
these returns to freshmen?
– Should freshmen invest in this deal?
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Considerations
• Think back to when you picked your
acceptable initial investment with CIMG
• What factors went into your decision?
– Amount of money in your bank account
– Ability to sell $400 note to other students
– Probability that CIMG will be able to pay in 4 years
– Potential returns from other available investments
• What risks is CIMG taking in this deal?
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Practice
• Take a few minutes to calculate the discount
rate implied if CIMG agreed to take the initial
investment you wrote down
• A lower(higher) initial investment leads to a
higher(lower) discount rate / rate of return
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Conclusion
• Next lecture date: 11/4
– Same time, same place
• Between now and then…
– Research NIM and WACC on Investopedia
– Continue reading Berkshire Hathaway letters
• Move to http://www.valuewalk.com/ after that
• Please address any feedback to Matt Lambert
at cimg.cba@gmail.com
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Questions?
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Appendix: Calculator Terms
• Financial calculator
– Future value (FV)
– Present value (PV)
– Payment (PMT) – cash inflows/outflows
– Interest (Discount) Rate (I/Y)
– Number of periods (N)
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