Accounting - Knowledge

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1. Why don't you depreciate land?

   Not measured yet
   • Depreciation is the systematic allocation of an asset's cost over its finite useful life, and it applies only to assets that wear out or are used up over a bounded period●●●●○
   • Land is an exception to the depreciation principle: it does not wear out, get consumed, or lose its ability to generate economic benefit, so its useful life is indefinite●●●●●
   • Because land has no finite useful life, there is no period over which to allocate its cost, so land is not depreciated●●●●○
   • Land stays on the balance sheet at historical cost indefinitely●●○○○
   • Anything built on land, such as buildings or parking lots, has a finite life and is depreciated, even though the land underneath is not●●●○○

2. Can companies amortize goodwill?

   Not measured yet
   • Goodwill is the excess of the purchase price over the fair value of an acquisition's identifiable net assets●●○○○
   • Goodwill represents the value of things like brand, workforce, and synergies that cannot be separately identified●●●○○
   • Under US GAAP, public companies do not amortize goodwill●●●○○
   • Goodwill is treated as having an indefinite life, the same logic that makes land non-depreciable●●●●●
   • Instead of amortizing, public companies must test goodwill for impairment, at least annually, with no option to amortize instead●●●○○
   • The impairment test checks whether the fair value of the reporting unit exceeds its carrying value●●●○○
   • A shortfall in the impairment test triggers a write-down through an impairment charge●●●○○
   • Privately held companies may elect to amortize goodwill rather than impair it●●●○○
   • For tax purposes, goodwill acquired in an asset purchase is amortized straight-line over 15 years under Section 197●●●○○

3. Walk me through the 3 financial statements & how they generally work

   Not measured yet
   • The three statements are the income statement, the balance sheet, and the cash flow statement, collectively capturing profitability, resources, and liquidity●○○○○
   • The income statement covers a period such as a quarter or a year, flowing revenue down through costs and expenses to net income●●○○○
   • The balance sheet is a point-in-time snapshot showing assets like cash, inventory, and PP&E, funded by liabilities and shareholder equity●○○○○
   • Assets = Liabilities + Equity must always tie●●●○○
   • The cash flow statement covers the same period as the income statement and starts with net income, adding back non-cash charges like depreciation and adjusting for working capital changes to get cash from operations●●●●○
   • The investing section subtracts capital expenditures and asset purchases; the financing section shows debt raises or repayments, buybacks, and dividends●●●○○
   • The cash flow statement ends with the net change in cash, which added to beginning cash gives ending cash — the balance sheet's cash line●●●●○
   • Free cash flow — roughly operating cash flow minus capex — is a derived valuation metric, not the cash flow statement's ending line●●●○○
   • Net income flows into retained earnings on the balance sheet●●●●○

4. How do the three statements link together?

   Not measured yet
   • Net income from the income statement flows into retained earnings within shareholder equity on the balance sheet, so income statement profit raises balance sheet equity●●●○○
   • Net income is the first line item of the cash flow statement's operating section, so it drives the cash flow statement's starting figure●●●●●
   • Changes in short-term balance sheet items like receivables, inventory, and payables appear as working capital adjustments in the operating section of the cash flow statement●●●○○
   • Investing section flows change asset balances like PP&E — capex builds it up while depreciation wears it down●●○○○
   • Financing section flows change debt and equity balances through issuance, repayment, dividends, and buybacks●●○○○
   • The change in cash plus beginning cash equals ending cash on the cash flow statement●●○○○
   • The cash flow statement's ending cash is the cash line reported on the balance sheet●●●●○
   • A model whose links are correct ties out — the balance sheet balances — so a non-balancing balance sheet signals a broken link●●○○○

5. How does a $10 increase in Stock-Based Compensation (SBC) affect the 3 financial statements (assume 40% tax rate)?

   Not measured yet
   • SBC is a non-cash expense: it is paid in shares rather than cash, so it hits the income statement without any cash outflow●●●○○
   • The offset to the SBC expense is an increase in additional paid-in capital●●●●○
   • On the income statement, operating expenses rise $10 and pre-tax income falls $10●○○○○
   • At a 40% tax rate, the $10 drop in pre-tax income cuts taxes by $4 and net income by $6●●●○○
   • On the cash flow statement, the $6 lower net income is combined with a $10 non-cash add-back for the full SBC expense, so cash rises a net $4●●○○○
   • On the balance sheet asset side, cash is up $4●●●○○
   • On the liabilities and equity side, retained earnings falls $6●●●○○
   • On the liabilities and equity side, the $10 SBC grant adds $10 to paid-in capital, so equity rises a net $4●●●○○
   • Assets up $4 equals equity up $4, so the balance sheet balances●●●○○

6. How does principal repayment affect the 3 statements?

   Not measured yet
   • Principal repayment is paying back the borrowed amount of a loan, distinct from interest, which is the cost of borrowing.●●●●○
   • The income statement is unaffected because repaying principal is not an expense — only interest hits the P&L.●●●●○
   • On the cash flow statement, the repayment is a cash outflow in financing activities.●●○○○
   • That financing outflow reduces the net change in cash and lowers the ending cash balance.●●●○○
   • On the balance sheet, cash — an asset — falls by the amount repaid, and the debt liability falls by that same amount.●●●○○
   • The balance sheet still balances and equity is untouched.●●○○○
   • Net effect: only the CFS and BS are affected, with the cash decrease exactly equaling the liability decrease.●●●○○

7. What is trapped cash?

   Not measured yet
   • Trapped cash is foreign earnings an international company keeps offshore to avoid repatriation taxes●●●●○
   • Under a worldwide tax system, home-country tax is deferred until the cash is brought back●●●○○
   • Repatriating trapped cash would trigger the US corporate tax rate on those earnings●●●●○
   • The cash sits on the balance sheet but cannot fund domestic operations, dividends, or buybacks●●○○○
   • In valuation, reported cash overstates usable cash, so analysts exclude or discount trapped cash when computing net debt●●●○○
   • The 2017 US shift to a territorial tax system largely eliminated this problem, though the term persists for cash locked offshore elsewhere●●●●●
   • Trapped cash is a valuation and capital-allocation problem for the parent●○○○○
   • Trapped cash does not mean the foreign subsidiary itself is distressed●●●○○

8. What are intercompany investments and investment securities? How do they show up on the 3 statements?

   Not measured yet
   • Intercompany investments are stakes one company holds in another, either as equity ownership or as debt securities.●○○○○
   • The accounting treatment for an intercompany investment depends on the ownership level and the intent behind holding it.●●●○○
   • Below 20% ownership the stake is passive and sits on the balance sheet as an investment in securities, with no consolidation and no equity-method income.●●●●●
   • Between 20% and 50% ownership the parent has significant influence over the investee, so the equity method applies rather than fair-value accounting.●●●●○
   • Under the equity method, the investor's share of the target's net income flows into the investor's own net income and increases the investment balance.●●●○○
   • Under the equity method, dividends received reduce the investment balance rather than adding to income.●●●○○
   • Above 50% ownership the parent controls the target and consolidates it line by line, with the unowned portion presented as noncontrolling interest within stockholders' equity.●●●○○
   • Investment securities are typically the under-20% passive holdings, classified by intent: trading securities for short-term price moves, available-for-sale securities for possible future sale, and held-to-maturity securities intended to be held to the end and carried at historical cost.●●●●○
   • Unrealized gains and losses on trading securities flow through the income statement, while unrealized gains and losses on available-for-sale securities bypass the income statement and sit in equity via OCI until realized; for held-to-maturity securities the coupon or dividend is recognized as revenue on the income statement.●●●○○

9. If a company incurs $100 in PIK interest, how does it affect 3 statements (assuming 40% tax rate)

   Not measured yet
   • PIK interest is an expense that accrues onto the debt balance instead of being paid in cash during the period, so it is recognized now but settled later.●●●○○
   • The income statement shows the full $100 as interest expense, and at a 40% tax rate net income falls by $60.●●●○○
   • The $100 of interest expense reduces taxes by $40.●●●○○
   • On the cash flow statement you start from the -$60 net income and add back the $100 of accrued PIK as a non-cash adjustment.●●●●○
   • Cash is up $40 at the bottom of the cash flow statement.●●●○○
   • On the balance sheet, cash rises $40.●●●●○
   • The debt balance increases $100 from the PIK accrual to principal.●●●○○
   • Equity falls $60 through retained earnings.●●●○○
   • The balance sheet balances because assets rise $40 while liabilities rise $100 and equity falls $60.●○○○○

10. What is OID (original issue discount) in debt?

    Not measured yet
    • Original issue discount means the debt is issued below its face value, with the discount being the gap between the issue price and par.●●○○○
    • Original investors pay less up front than the par amount they are repaid at maturity.●●●○○
    • Investors might pay $90 for a bond and receive the full $100 at maturity.●●●○○
    • The $10 gap is the original investors' compensation for taking on credit risk early.●●●●○
    • The issuer initially records the debt on the balance sheet at the discounted issue price, not par.●●●●●
    • Over the life of the loan the discount is accreted back up toward par.●●●○○
    • That accretion is recognized as additional interest expense even though no cash is paid on that piece.●●●●○
    • On the cash flow statement the accretion is added back as a non-cash adjustment.●●●○○
    • OID is common in high-yield and convertible debt, letting the issuer attract early investors without committing to a high cash coupon up front.●○○○○

11. How to estimate share price (given current + projected growht rate) & calculate share count (given basic outstanding, issued and repurchased + share price)

    Not measured yet
    • To estimate the projected share price, compound the current market price by the expected growth rate: projected price = current price × (1 + g).●●○○○
    • The growth rate is assumed to apply uniformly, so a $50 stock with 10% expected growth projects to $55.●●●●○
    • The projected share price and the adjusted share count are two separate calculations.●●○○○
    • The share count starts from basic shares outstanding — the shares already issued and existing today.●○○○○
    • Shares issued during the period are added to the count; the number added equals the dollar amount issued divided by the share price.●○○○○
    • Repurchased shares are subtracted from the count; the number subtracted equals the dollar amount spent on buybacks divided by the share price.●○○○○
    • Repurchased shares are retired at the market price.●●●○○
    • The adjusted share count = basic shares outstanding + shares issued − shares repurchased.●●○○○
    • The adjusted share count is the denominator used downstream for per-share metrics such as EPS or equity value per share.●●●○○

12. How do you calculate EPS with P/E?

    Not measured yet
    • The P/E ratio relates a company's market price per share to its earnings per share.●○○○○
    • The P/E formula is P/E = share price ÷ EPS.●●●●○
    • P/E and EPS are inverses of each other.●●●●○
    • To get EPS from a P/E, you divide the share price by the P/E multiple.●○○○○
    • For example, a $50 stock trading at 20x P/E implies EPS of $50 ÷ 20 = $2.50.●●●○○
    • Given any two of price, EPS, or the P/E multiple, the third is fixed by the same identity.●●●○○

13. What is difference between defined contribution & benefit retirement plans?

    Not measured yet
    • A defined contribution plan is one where the employer contributes a fixed amount periodically.●●○○○
    • For a defined contribution plan, the recorded expense is simply that stated contribution.●●○○○
    • A 401(k) match is the classic example of a defined contribution plan.●●●○○
    • In a defined contribution plan the employee bears the investment risk.●○○○○
    • In a defined contribution plan, retirement value depends on how the account performs.●●○○○
    • A defined benefit plan is the opposite: the employer promises a specific retirement benefit.●○○○○
    • The defined benefit expense estimate uses actuarial assumptions like discount rate, mortality, and expected returns.●●○○○
    • Under defined benefit accounting, if the estimate is higher it creates a deferred tax asset; if lower, a deferred tax liability.●●●○○
    • Funded status is a separate balance-sheet item: if the obligation exceeds plan assets the plan is underfunded and shows a net liability, and if assets exceed the obligation the plan shows a net asset.●○○○○

14. What are some ways to inflate earnings?

    Not measured yet
    • Inflating earnings means raising reported net income without any real underlying improvement in the business●○○○○
    • One way is switching from LIFO to FIFO: in rising prices, FIFO draws on older, cheaper inventory layers than LIFO would●●●●○
    • Because those older inventory layers are cheaper, the switch lowers reported COGS●●●●○
    • Lower reported COGS from the LIFO-to-FIFO switch raises net income●●●○○
    • Another way is refusing to write down impaired assets when carrying value exceeds recoverable value●●●○○
    • Another way is deferring R&D or CapEx — skipping the spending boosts this period's earnings at the expense of future periods●●●○○
    • Another way is capitalizing normal operating expenses, moving them to the balance sheet and depreciating them slowly instead of expensing now●●●○○
    • Another way is aggressive revenue recognition: booking revenue before it is earned●●○○○
    • Aggressive revenue recognition includes channel stuffing, bill-and-hold, or optimistic percentage-of-completion estimates on long-term contracts●●●●○

15. Capitalized vs Expensed

    Not measured yet
    • Capitalizing means recording a cost as a long-term asset on the balance sheet because it benefits multiple periods●●○○○
    • Expensing means the cost is fully used in the current period and hits the income statement immediately●●●●○
    • Capitalized costs are spread over their useful life through depreciation; expensed costs hit earnings all at once●●●●○
    • A capitalized cost raises current net income, while expensing the same cost immediately lowers it●●●●○
    • Capitalizing a $1 million asset with a ten-year life records $100,000 of depreciation per year instead of a full $1 million earnings charge●●●○○
    • If you capitalize a $1 million piece of equipment, nothing hits earnings today; if you expense it, the full $1 million hits earnings in the current period●●●●○
    • The practical difference between capitalizing and expensing is timing●●●○○
    • The judgment call that decides which treatment to use is whether the benefit extends beyond the current period; an asset with a useful life over a year that will produce future economic benefit gets capitalized●●○○○
    • Routine costs consumed now — salaries, rent, ordinary maintenance — get expensed●●○○○

16. What happens when share price = up by 10%?

    Not measured yet
    • The balance sheet records assets and liabilities at historical cost, not at current market value●●●○○
    • A 10% share price increase is a market-value event that occurs in the stock market; the company's own financial statements contain no market-value remeasurement trigger for it●●●○○
    • The company receives no cash and records no gain from a share price increase, because the price change happens in trades between shareholders rather than between the company and an investor●●●●○
    • Nothing on the balance sheet changes — assets, liabilities, and book equity all stay at their historical values●●●○○
    • The income statement is unaffected, because the price gain went to shareholders trading shares, not to the company as revenue or cash●●●○○
    • Only market-based measures move: market cap rises 10%, and ratios like P/E and market-to-book shift while book value stays the same●●○○○
    • Book equity differs from market cap, so a 10% rise in market cap does not by itself imply any change in reported shareholders' equity●●●○○
    • The exception: if the company itself transacts at the market price — issuing shares, buying back stock, or using stock in a deal — the price enters the accounting●●●●○
    • When the company does transact at the market price, the effect is limited to the transaction itself (cash received or paid, shares issued or repurchased), not a remeasurement of existing assets or liabilities to market●●●○○

17. Retention ratio vs Dividend Ratio

    Not measured yet
    • The retention ratio is the share of net income a company keeps in the business.●○○○○
    • The dividend ratio — usually called the payout ratio — is the share of net income paid out as dividends.●○○○○
    • Retention ratio is calculated as net income minus dividends, divided by net income.●●●●○
    • The dividend ratio, usually called the payout ratio, is dividends divided by net income.●●●○○
    • If a company earns $100 and pays $30 in dividends, it retains $70, so the retention ratio is 70%.●●●○○
    • In that same example, the payout ratio is 30%.●●●○○
    • Because every dollar of net income is either paid out or kept, the two ratios always sum to 100%.●●●○○
    • The payout ratio tells you how much cash the company returns to shareholders and how sustainable the dividend is.●●○○○
    • The retention ratio feeds directly into growth: a company's sustainable growth rate is its retention ratio times its return on equity.●●●●○

18. When adjusting for non-recurring expenses, are litigation expenses always adjusted?

    Not measured yet
    • Adjusting for non-recurring expenses means removing one-time charges to arrive at normalized, recurring earnings - i.e., what the company generates in a typical year●●○○○
    • Litigation expenses are not automatically adjusted out; whether a given expense qualifies as non-recurring is a judgment call, and litigation is a classic gray area●○○○○
    • For many companies, litigation genuinely is a recurring cost of doing business rather than a one-off charge●●●●○
    • The test to apply is frequency and linkage to the core business: a charge that shows up every year is effectively operating even if lumpy●●●○○
    • Pharma companies face litigation constantly, so analysts often choose to leave litigation expenses in rather than adjust for them●●●●●
    • Adding back an expense that actually recurs overstates normalized earnings - it overstates what the company really earns in a normal year and flatters the company●●●●○

19. What is the cash conversion cycle? What are the 3 parts of it? What do they mean?

    Not measured yet
    • The cash conversion cycle measures how long it takes a company to go from purchasing inventory to collecting cash from selling it, i.e. how many days cash is tied up in the operating cycle●●●○○
    • Days Inventory Held = Inventory / COGS●●●○○
    • Days Inventory Held is the part of the cycle measuring how long inventory sits before it is sold, i.e. how long it takes inventory to be turned into cash●●○○○
    • Days Sales Outstanding = Accounts Receivable / Revenue●●●○○
    • Days Sales Outstanding is the part of the cycle measuring how long it takes the company to collect cash from customers after making a sale●●○○○
    • Days Payable Outstanding = Accounts Payable / COGS●●●○○
    • Days Payable Outstanding is the part of the cycle measuring how long the company takes to pay its own suppliers●●○○○
    • The cycle is made up of exactly three parts combined as DIH + DSO - DPO: the company buys inventory, waits for it to sell, waits for customers to pay, but meanwhile delays paying its own suppliers, which offsets part of that time●●●●○
    • A shorter cycle is better●○○○○

20. What ratios do you look at to assess working capital efficiency?

    Not measured yet
    • Working capital efficiency is how quickly a company moves cash through its operating cycle●●○○○
    • Days Inventory Held is Inventory divided by COGS and measures how fast inventory turns into sales●●●●○
    • Days Sales Outstanding is Accounts Receivable divided by Revenue and measures how quickly the company collects from customers●●●○○
    • Days Payable Outstanding is Accounts Payable divided by COGS and measures how long the company takes to pay suppliers●●●○○
    • The three ratios roll up into the cash conversion cycle, DIH plus DSO minus DPO●●●●●
    • The cash conversion cycle is the net number of days cash is tied up●●●●○
    • Higher DSO or DIH ties up cash longer, while higher DPO helps●●●●○
    • Higher DPO helps because suppliers effectively provide free financing●●●○○

21. What are the working capital line items (8) ?

    Not measured yet
    • Working capital line items are the current assets and current liabilities that turn over in the operating cycle, excluding cash and debt/financing items.●●●○○
    • There are exactly eight working capital line items in total.●●○○○
    • The four working capital asset items are Accounts Receivable, Inventory, Prepaid Expenses, and Other Current Assets.●●●●○
    • The four working capital liability items are Accounts Payable, Deferred Revenue, Accrued Expenses, and Other Current Liabilities.●●●●○
    • Cash is excluded from the working capital asset line items, so it is not one of the eight.●●●○○
    • Debt is excluded from the working capital liability line items, so short-term borrowings and similar financing items are not among the eight.●●●○○
    • Accounts Receivable and Inventory are the two operating-asset line items explicitly named as working capital assets, distinct from Prepaid Expenses and Other Current Assets.●●○○○
    • Accounts Payable and Deferred Revenue are the two operating-liability line items explicitly named as working capital liabilities, distinct from Accrued Expenses and Other Current Liabilities.●●○○○

22. **What is ROA & ROE? If 50/50 D-to-E and 10% ROA, what is the ROE?

    Not measured yet
    • ROA is net income divided by average total assets, measuring how efficiently a company uses its assets to generate earnings●●○○○
    • ROE is net income divided by average shareholders' equity, measuring how efficiently the company uses the capital shareholders contributed to generate earnings●●○○○
    • A 50/50 debt-to-equity mix means assets are funded half by debt and half by equity●●●●●
    • On $100 of assets, $50 is debt and $50 is equity●●●●○
    • A 10% ROA means net income of $10 on $100 of assets●●●●○
    • ROE is $10 of net income over $50 of equity, or 20%●●●○○
    • Equity multiplier = assets / equity = $100 / $50 = 2, so ROE = ROA × equity multiplier = 10% × 2 = 20%●●●○○

23. **What is ROIC? How do you calculate it?

    Not measured yet
    • ROIC (return on invested capital) measures how efficiently a company converts capital invested in the business into after-tax operating profit●○○○○
    • ROIC is the core test of whether management is a good allocator of capital●○○○○
    • ROIC is calculated as NOPAT (net operating profit after tax) divided by invested capital●●●○○
    • NOPAT is operating income times (1 − tax rate), which isolates operating profitability from financing decisions●●●○○
    • Invested capital is debt plus equity, or equivalently total assets minus non-interest-bearing liabilities like payables and accruals●●●●○
    • ROIC matters because of the comparison to WACC, the blended cost of the debt and equity funding the business●●●●○
    • WACC is the hurdle rate that ROIC must clear●●●○○
    • If ROIC exceeds WACC, each reinvested dollar earns more than it costs, so management is allocating capital efficiently and creating value●●●○○
    • If ROIC is below WACC, the company destroys value with every dollar it reinvests, no matter how fast revenue grows●●●○○

24. What are the quick & current ratios?

    Not measured yet
    • The current and quick ratios are liquidity ratios measuring whether a company can cover obligations due within a year●●○○○
    • Current ratio = current assets / current liabilities●●○○○
    • A current ratio above 1 means short-term assets exceed short-term obligations●●●○○
    • Quick ratio = (cash + accounts receivable + short-term investments) / current liabilities — it excludes inventory and prepaids●●●○○
    • The quick ratio is the stricter test●●●○○
    • Inventory and prepaids are excluded from the quick ratio because they often can't be converted to cash quickly or without discounting●●●○○
    • Both ratios can be misleading: receivables in the numerator may be uncollectible●●●○○
    • Both ratios can be misleading: short-term investments can be illiquid in practice●●●○○
    • Because of those caveats, you'd supplement the ratios with receivables aging or the cash conversion cycle●●●○○

25. **What are the asset, inventory, receivables, accounts payable turnovers? What do they mean?

    Not measured yet
    • Turnover ratios are activity ratios measuring how efficiently the company converts balance sheet items into sales, expressed as times per year●○○○○
    • Asset turnover = revenue for the period divided by average total assets over the period — dollars of sales generated per dollar of assets●●●○○
    • Inventory turnover = COGS for the period divided by average inventory over the period — how many times a year the company sells through its stock●●○○○
    • Inventory turnover uses COGS rather than revenue because inventory is carried on the books at cost●●●●○
    • Receivables turnover = revenue for the period divided by average accounts receivable over the period — how quickly customers pay their bills●●○○○
    • A/P turnover measures the rate at which the company pays its suppliers, and a lower payables turnover indicates the company is stretching payment terms to hold onto cash longer●●●○○
    • Each turnover converts to a days metric by dividing 365 by the ratio — DSO, DIO, DPO●●●●○
    • DSO, DIO, and DPO combine into the cash conversion cycle — the days a dollar is tied up between paying suppliers and collecting from customers●●●○○
    • Higher isn't always better: faster inventory and collections are good, but a lower payables turnover can actually help cash flow●●●○○

26. **What is the DSCR & FCCR? How to calculate? When are they used?

    Not measured yet
    • DSCR measures whether a company's cash flow can cover its debt service, making it a core creditworthiness test.●○○○○
    • DSCR matters most in distressed or highly leveraged situations, where the question is whether the borrower can keep paying.●●○○○
    • DSCR equals EBITDA minus CapEx, divided by mandatory principal repayments plus interest expense.●●●●○
    • CapEx is subtracted from EBITDA because cash must first cover reinvestment before it can service debt.●●●○○
    • Lenders typically require DSCR of at least 1.25x to 1.5x, so cash flow covers debt service with a cushion.●○○○○
    • DSCR thresholds are standard covenants in restructuring and real estate lending.●●●○○
    • FCCR measures whether earnings cover all fixed charges — including lease obligations — not just interest and principal.●●○○○
    • FCCR equals EBIT plus lease expense, over lease expense plus interest expense, and also generally needs to clear 1.25x to 1.5x.●●○○○
    • Lease expense sits in both the numerator and denominator of FCCR because you compare cash available before paying fixed charges to the charges themselves.●●●○○

27. How does share repurchases affect the 3 statements?

    Not measured yet
    • On the income statement, there is no effect from a share repurchase.●●○○○
    • Net income is unchanged because a buyback is not revenue, an expense, or a tax item.●●○○○
    • On the cash flow statement, the repurchase is a financing cash outflow, not an operating or investing cash flow.●●○○○
    • The repurchase is like a dividend or debt repayment.●●●○○
    • On the balance sheet, cash falls by the repurchase amount on the asset side.●○○○○
    • Shareholders' equity falls by the same amount as the cash outflow.●●○○○
    • The repurchased shares are held as treasury stock, which reduces equity.●●●●○
    • Assets and equity shrink together, so the balance sheet stays balanced.●●○○○
    • Shares outstanding drop while net income is unchanged, so EPS rises.●●●○○

28. When can a company capitalize software development costs under accrual accounting?

    Not measured yet
    • Under accrual accounting, software development costs are generally expensed as R&D as they are incurred.●●○○○
    • Broader rule: there are two specific situations in which software development costs get capitalized rather than expensed as R&D; in all other cases they are expensed as incurred.●●●○○
    • First situation: for software a company builds for its own internal use, costs can be capitalized once the project reaches the application development stage.●●●●○
    • The application development stage means actual coding and configuration of the software; upfront planning, design, and other preliminary activities are not part of it.●●●○○
    • Second situation: for software the company intends to sell or market, costs can be capitalized only once technological feasibility has been established — that is, the details of the design and the plan are complete enough to determine whether the product can actually be built and brought to market. Technological feasibility is not reached merely because coding has begun.●●●○○
    • Technological feasibility means design and planning are complete enough that the product can actually be built and brought to market.●●●○○
    • Before either trigger point — the start of the application development stage for internal-use software, or the establishment of technological feasibility for software to be sold — costs flow through the income statement as expenses.●●●○○
    • Once capitalized, the costs sit on the balance sheet like a fixed asset purchase, and are amortized over the software's useful life.●●●○○
    • Amortizing the capitalized costs spreads them across future periods, shifting expense off the current income statement and flattering near-term profit.●●●○○

29. You buy a factory for $10M at the start of the year. It has a 10-year useful life. Then you sell it in the beginning of year 2 for $5M. Record the changes in the 3 statements in year 1 & year 2 assuming a 50% tax rate.

    Not measured yet
    • A factory purchase is a capital expenditure, so the $10M purchase never touches the income statement at acquisition; it is a $10M investing outflow on the year 1 cash flow statement.●●○○○
    • Over year 1 the factory depreciates $1M straight-line ($10M cost over a 10-year life), cutting pre-tax income by $1M and net income by $500K at the 50% tax rate.●●●●○
    • Year 1 cash flow statement starts from the -$500K net income and adds back the $1M of non-cash depreciation, leaving operating cash flow +$500K thanks to the tax shield.●●●●○
    • Year 1 investing cash flow is down $10M for the purchase, so total cash falls $9.5M.●●●○○
    • Year 1 balance sheet: cash down $9.5M and PP&E up $9M net of depreciation, so total assets and retained earnings (equity) are each down $500K and the sheet balances.●●●○○
    • Year 2: the sale happens at the start of the year, so no depreciation is recorded, and selling for $5M against the $9M book value creates a $4M loss.●●●●○
    • Year 2: the $4M loss reduces net income by $2M after the 50% tax rate and is added back as non-cash, so operating cash flow is +$2M, and the $5M proceeds sit in investing — total cash up $7M.●●●●○
    • Year 2 balance sheet: cash up $7M against PP&E down $9M, so assets and equity both fall $2M and the sheet balances.●●●○○
    • Netted across both years, cash and equity are each down $2.5M — we paid $10M, got back $5M, and the tax shields recovered part of the loss.●●●○○

30. What is the difference between Levered FCF & Unlevered FCF?

    Not measured yet
    • Unlevered FCF is the cash from core operations available to all capital providers — debt and equity holders — before any financing effects.●●○○○
    • UFCF equals EBIT times (1 minus tax) plus D&A, minus the change in net working capital, minus CapEx.●●●●○
    • Unlevered FCF is not reduced by interest expense or any debt service, because it is computed before financing flows.●○○○○
    • Levered FCF is the cash remaining for equity holders after financing — cash from operations minus CapEx minus debt principal repayments.●○○○○
    • Interest isn't subtracted separately in the levered formula because it has already been deducted inside cash from operations under US GAAP.●●●○○
    • Levered FCF is reduced by mandatory debt service, so higher leverage lowers levered FCF even when operating cash flow is unchanged.●●●○○
    • You discount unlevered FCF at WACC to get enterprise value, and levered FCF at the cost of equity to get equity value.●●●○○
    • Because the two measures use different discount rates and different claimholders, substituting one for the other in a DCF yields the wrong value.●●○○○

31. If a company has no debt, what is its WACC? How is CoE calculated?

    Not measured yet
    • WACC is the blended required return on all capital, weighting each source's cost by its share of the capital structure.●○○○○
    • With no debt, equity is 100% of the capital structure.●●○○○
    • Because the debt weight is 0%, the weighted average has only one nonzero term, so WACC equals the cost of equity.●○○○○
    • Cost of equity is calculated with CAPM: the risk-free rate plus levered beta times the equity risk premium.●●●○○
    • The risk-free rate compensates investors for the time value of money, and in practice is the 10-year Treasury yield.●●●○○
    • Beta measures how sensitive the stock is to movements in the overall market.●●●○○
    • Levered beta is used because it reflects the risk of the company as it is actually financed — all equity in this case.●●●○○
    • The equity risk premium is the extra return the market pays above the risk-free rate for bearing systematic risk.●●●○○

32. If a company had a 0% chance of defaulting, what would be its CoD, CoE, and WACC?

    Not measured yet
    • Cost of capital is the return investors demand to compensate for risk — remove the risk and you remove the required compensation.●●○○○
    • Lenders charge a spread over Treasuries almost entirely to price default risk.●●●○○
    • With zero chance of default there is no credit loss to compensate, so no default-risk spread is required on the debt.●●●○○
    • Since even Treasuries carry a sliver of default risk, a truly riskless asset deserves no risk compensation at all, so the cost of debt is 0%.●●●●○
    • Under CAPM, the cost of equity is the risk-free rate plus beta times the equity risk premium.●●●○○
    • The company's cash flows are uncorrelated with the market, so its beta is zero, and the equity risk premium term vanishes; the cost of equity is therefore 0%.●●●●○
    • WACC is the weighted average of the cost of debt and the cost of equity, so with both at 0% the WACC is 0%.●●○○○

33. **What is the formula to go from Unlevered -> Levered Beta?

    Not measured yet
    • Levered (equity) beta reflects the company's business risk plus the extra risk added by its capital structure.●●○○○
    • Unlevered (asset) beta strips out leverage to isolate pure business risk.●●○○○
    • The relevering formula is: levered beta = unlevered beta × [1 + (1 − tax rate) × (D/E)].●●○○○
    • Unlevering is the inverse operation: unlevered beta = levered beta / [1 + (1 − tax) × D/E].●●●●○
    • The (1 − tax) term exists because interest is tax-deductible.●●●○○
    • The interest tax shield dampens how much extra risk each dollar of leverage piles onto equity.●●○○○

34. How do you estimate Cost of Debt?

    Not measured yet
    • Cost of debt is the effective yield a company pays on its borrowed funds — the return its lenders require●●○○○
    • If the company's debt is publicly traded, use the market yield on that debt directly as the cost of debt●●●○○
    • In practice, because corporate bonds often are not liquidly traded, proxy the yield on the debt as average interest expense divided by average total debt●●●○○
    • If there is no public debt, build a synthetic rating by benchmarking the company's credit metrics — its leverage and interest coverage ratios — against those of rated peers●●●○○
    • For the synthetic (or actual) rating, take the market credit spread investors demand for bonds of that rating and add it to the risk-free rate●●●○○
    • The sum of the credit spread and the risk-free rate is the estimated yield on the debt, i.e. the estimated cost of debt●●○○○

35. How are operating & financial leases treated in a DCF?

    Not measured yet
    • Under the simple GAAP method, operating lease payments sit in rent expense inside operating income, so unlevered free cash flow already reflects them●●●○○
    • Under simple GAAP, operating lease obligations are not added to debt and get no WACC adjustment, because doing so would double count the rent already in FCF●●●○○
    • Finance leases are debt-like under both frameworks: interest is a financing cost excluded from FCF and the lease liability counts as debt●●○○○
    • Under IFRS 16 all leases are capitalized, so you build a schedule splitting each fixed payment into ROU depreciation and principal repayment●●●○○
    • In the IFRS schedule, depreciation is a non-cash charge added back to FCF, while the principal repayment is a financing outflow excluded from FCF●●○○○
    • The hard GAAP method treats operating leases as debt: capitalize the obligation, exclude rent from FCF, and include the liability in WACC●●●●○
    • The hard method is argued against because the full lease payment is tax-deductible as rent, whereas debt treatment only gives a tax shield on interest, misstating taxes●●●○○

36. A company takes on $1000 in operating leases to buy PP&E. How does Equity Value & Enterprise Value change?

    Not measured yet
    • Taking on an operating lease means committing to fixed rental payments to use an asset instead of buying it outright with financing●●●●○
    • Equity value is unchanged because a lease is an operating commitment, not a financing transaction — no cash is raised from investors●●●●○
    • Enterprise value increases because the lease obligation is added back as a debt-like item●●●○○
    • The add-back applies when valuing off EBITDAR or revenue multiples, whose metrics exclude the lease expense and therefore its capital-structure-like effect●●●○○
    • By contrast, borrowing to buy the asset would bring in cash and change equity holders' position●●●●●
    • The ROU asset sits inside enterprise value as a productive operating asset, while equity holders' claim stays untouched●●●○○

37. How are operating & financial leases change over time? How does it differ from other types of debts?

    Not measured yet
    • Each fixed lease payment is split between reducing the lease liability and expensing the right-of-use asset●○○○○
    • Under GAAP operating leases, the single lease expense reported each period is a fixed, straight-line amount for the entire lease term, and it is not presented as an interest-plus-depreciation split●●●●○
    • Because the expense is level, the ROU asset reduction equals the liability reduction each period — asset and liability decline at the same speed●●●●○
    • So on the cash flow statement there are no adjustments under GAAP — the fixed cash payment fully explains the change●●●○○
    • Under IFRS, the lessee reports a depreciation charge on the ROU asset and a separate interest expense on the lease liability, rather than one level lease expense●●●○○
    • Under IFRS, depreciation is straight-line while interest declines as the liability shrinks●●●●○
    • Early in an IFRS lease, interest is high so principal repayment is small, meaning the liability declines more slowly than the asset●●●●○
    • Unlike the GAAP case, the IFRS cash flow statement needs a schedule that calculates depreciation, interest, and principal separately●●○○○
    • Versus plain debt: debt has no ROU asset, and like IFRS leases its interest declines and principal grows — whereas GAAP operating lease expense stays flat for the whole term●●●●○

38. How are leases treated on the balance sheet?

    Not measured yet
    • Under both GAAP and IFRS a lease is capitalized, so the balance sheet picks up a right-of-use asset on the asset side and an offsetting lease liability on the liabilities side.●○○○○
    • The ROU asset represents the company's right to use the leased asset.●●○○○
    • The lease liability represents the obligation to keep making the remaining lease payments.●●○○○
    • At inception the ROU asset and lease liability are recorded at the same amount, the present value of the future lease payments, so the balance sheet stays balanced when the lease is signed.●●●●○
    • After inception the liability amortizes with an interest component while the ROU asset is depreciated.●●●●○
    • Because the two sides are subsequently reduced at different rates, the ROU asset and the lease liability diverge and no longer appear as equal amounts.●●●○○

39. How is TV calculated?

    Not measured yet
    • Terminal value captures all free cash flows beyond the explicit forecast period, so it must be calculated explicitly rather than left out of the valuation.●●○○○
    • The first method is Gordon Growth: assume the company's cash flows grow at a constant rate g forever after the forecast●●●○○
    • The Gordon Growth TV equals the projected cash flow for one year after the forecast, divided by r minus g●●●○○
    • The Gordon Growth numerator is the terminal-year cash flow grown one more year at (1+g)●●●●○
    • In the Gordon Growth formula, r is the discount rate, usually WACC●●●●○
    • The second method is the exit multiple: apply an assumed multiple, usually EV/EBITDA, to a metric in the terminal year●●●○○
    • Under either method the terminal value is a value as of the end of the forecast, so it's discounted back to present using the final-year discount factor●●○○○
    • Gordon Growth is highly sensitive to the g and WACC assumptions, so a strong candidate sanity-checks its implied multiple against the exit multiple method●●○○○

40. How are options, restricted stock, convertible bonds and convertible preferred stock counted in share count/enterprise value?

    Not measured yet
    • Options, restricted stock, and convertibles are potentially dilutive securities that must be reflected in fully diluted shares before computing equity value and enterprise value●●○○○
    • Out-of-the-money options — those whose strike price is above the current share price — are excluded from the diluted share count because exercising them would be anti-dilutive●●●●○
    • Under the treasury stock method, assume all in-the-money options are exercised, the company receives the strike proceeds, and it uses those proceeds to repurchase shares at the current market price●●●○○
    • Net option dilution equals options multiplied by (1 minus strike over price), because the repurchase offsets most of the shares issued●●●○○
    • Convertible bonds and convertible preferred stock are counted only when conversion is in-the-money●●●○○
    • The most precise treatment of converts is the if-converted method: add the converted shares and add back the interest or dividends you no longer pay, while a common simplification is to apply the treasury stock approach instead●●○○○
    • Restricted stock is counted in full even when unvested, because there is no strike to hurdle●●●○○
    • Excluding unvested restricted stock would understate the true fully diluted share count●●●○○

41. ** For the perpetuity approach for finding TV of a company, how do you determine the long-term growth rate?

    Not measured yet
    • The terminal growth rate is the perpetual growth applied to final-year FCF in a growing-perpetuity terminal value●●●●○
    • A reasonable long-term growth rate is roughly 1-3%, and you should almost never exceed 5%●●●○○
    • The long-term nominal growth rate of GDP in the company's home market is a strong benchmark or ceiling for a mature company's perpetuity growth rate; for a developed market such as the U.S. that ceiling is approximately 2-3% per year●●○○○
    • For an established developed market, the ceiling on a perpetual growth rate is around historical long-run GDP or inflation growth of about 2-3%, not a higher rate●●●○○
    • If g exceeded long-run GDP growth, the company would eventually grow larger than the entire country's economy — an impossible outcome●●●●●
    • By the terminal period you are valuing a mature business, so it should sit at or below GDP growth, not at a growth-stage rate●●●○○

42. How do you sanity-check the TV methods with each other?

    Not measured yet
    • The two TV methods — growing perpetuity and exit multiple — are independent estimates of the same number, so you sanity-check each by backing out the input the other implies●●●○○
    • From the perpetuity side, the implied EV/EBITDA multiple equals the perpetuity TV divided by terminal-year EBITDA●●●●○
    • Ask whether a buyer would realistically pay that implied EV/EBITDA multiple — compare it to current trading comps for the company and its peers; if it implies a multiple no buyer would pay, the growth or WACC assumption is off●●●○○
    • From the exit multiple side, reverse the perpetuity formula: since TV equals FCF next year over (WACC minus g), rearranging gives implied g equals WACC minus next-year FCF over the exit-multiple TV●●●●●
    • The full rearrangement is (TV times WACC minus FCF) over (TV plus FCF); most people quote the shortcut WACC minus FCF over TV●●●●○
    • The implied g should fall in the defensible 1-3% long-term band: if it comes out at 7%, your exit multiple is too aggressive; if it is negative, your multiple may be too conservative●●●●○
    • The two methods should land in the same neighborhood; if the implied inputs (WACC, exit multiple, growth rate) are wildly inconsistent, one of your assumptions is wrong — you go back and fix the wrong assumption rather than averaging blindly●○○○○

43. What are the 10 things to look for when building a comp set for companies?

    Not measured yet
    • A comp set is screened for comparability on the ten dimensions that drive multiples, so peer multiples genuinely reflect the target's value●●○○○
    • Profitability matters because a profitable peer earns a different multiple than a cash-burning one●●○○○
    • Capital structure matters because leverage changes equity risk and the comparability of metrics●●●○○
    • Risks — financial and otherwise — such as customer concentration, regulatory exposure, or cyclicality, must be comparable●●●○○
    • Presence in market is the third dimension: market share and competitive position●●○○○
    • Business model and target customer is the fifth dimension: subscription versus transactional, B2B versus consumer, because models with recurring revenue trade at structurally different multiples●○○○○
    • Growth rate is the seventh dimension: a peer growing 30% trades on a very different multiple than one growing 3%●○○○○
    • Margin profile is the eighth dimension: the same revenue with very different cost structures means the multiple isn't telling you the same thing●○○○○
    • No peer matches on everything: you pick matches on the multiple-driving dimensions and adjust for the rest, adding industry classification and end-market exposure as a final screen so you're not comping across sectors that behave differently in a downturn●○○○○

44. A company reports $40M in SBC as a non-cash add-back. When projected UFCF in a DCF, how should SBC be treated?

    Not measured yet
    • Stock-based compensation is employee pay delivered in shares rather than cash●●●○○
    • In a DCF, SBC should be treated as a real cash expense and deducted from UFCF, with no add-back●●●○○
    • SBC is non-cash in the period but is a real economic cost because employees work, the company pays them in equity, and those shares dilute existing shareholders●●●●○
    • The internally consistent alternative is to add the $40M back, as GAAP does on the cash flow statement, but only if you simultaneously increase the diluted share count to reflect the new shares the grants create●●●○○
    • Adding SBC back while leaving the share count alone is a double count that overstates equity value per share●●●○○
    • The add-back on the reported cash flow statement is fine for historical free cash flow because there the dilution is handled separately●●●○○
    • In a DCF you are valuing the whole future, so the cost must be captured either in FCF or in the share count, never in neither●●●○○

45. Acquirer A trades at a P/E of 20.0x with a 20% marginal tax rate. Target B trades at a P/E of 12.0x with a 25% marginal tax rate. Acquirer A buys Target B at a 30% premium using a consideration mix of 60% stock and 40% debt. The pretax cost of debt is 8.0%. Ignoring synergies and purchase price allocation (PPA) adjustments, is this transaction accretive or dilutive to Acquirer A's EPS, and by what net yield differential?

    Not measured yet
    • Accretion or dilution compares the earnings yield acquired on the target's purchase price against the blended after-tax cost of financing the purchase; if the acquired yield exceeds the financing cost, the deal is accretive to EPS.●○○○○
    • The premium goes into the purchase multiple first: 12x times 1.30 is 15.6x, so the yield you're actually buying is 1 / 15.6, about 6.4%.●●●●○
    • The cost of the stock portion is the acquirer's own earnings yield, 1 / 20 = 5%.●●●○○
    • The cost of debt is the 8% pretax rate tax-effected at the acquirer's 20% marginal rate: 8% x (1 - 0.20) = 6.4%.●●●●○
    • Blend the two costs by the consideration mix: 60% x 5% + 40% x 6.4% = 3.0% + 2.56% = 5.56%.●●●●○
    • The target's 25% tax rate never enters the calculation; with PPA and synergies ignored, target earnings pass through unchanged and only the acquirer's rate, applied to the new interest, matters.●●●○○
    • The acquired yield of about 6.4% beats the 5.56% blended cost by about 0.85 percentage points (roughly 85 basis points), so the transaction is accretive to the acquirer's EPS.●●○○○

46. What are the 2 values to value if a transaction is accretive or dilutive & find the net yield differential?

    Not measured yet
    • There are two complementary ways to test accretion/dilution: compare the acquired yield against the blended financing cost, and compare EPS before versus after the deal.●○○○○
    • Method one starts with the target's earnings yield — 1 divided by its P/E — which is the earnings you earn per dollar of its market cap.●●○○○
    • The premium belongs in this calculation: the yield you're buying is 1 over the target's P/E times (1 + premium), not the target's quoted yield.●●●●○
    • The financing cost blends two pieces: percent stock times the acquirer's earnings yield (1 / acquirer P/E), plus percent debt times the interest rate times (1 − tax rate).●●○○○
    • If the acquired yield exceeds the blended cost, the deal is accretive; the yield method is a quick screen, not the final word.●●○○○
    • Method two is the direct test: build pro-forma combined net income and the new share count, and compute pro-forma EPS.●●○○○
    • Accretion/dilution is reported as (new EPS − old EPS) / old EPS × 100%.●●●●●
    • The EPS method captures the full mechanics — actual shares issued and combined earnings — so it's the number you ultimately report, while the yield method just screens direction.●●●○○

47. A company has 100 options currently valued @ $1. The strike price is $10. Assume a 40% tax rate. First, walk me through Year 1. (note: must be with flashcard 48)

    Not measured yet
    • In Year 1, stock-based compensation is recorded at the fair value of the options granted: 100 options × $1 = $100, and the $10 strike price is irrelevant until exercise.●●●○○
    • On the income statement, the $100 of SBC flows through operating expenses, and at a 40% tax rate the book tax benefit is $40, so net income falls by $60.●●○○○
    • The company gets no actual tax deduction in Year 1; SBC is deductible only when the options are exercised.●●●●●
    • A $40 deferred tax asset (40% of the $100 book expense) is created to carry the deduction into the future.●●●○○
    • On the cash flow statement, you start with the −$60 net income, add back the full $100 of SBC because it is a non-cash charge, and subtract the $40 build in the DTA.●●●○○
    • The −$60 net income, +$100 SBC add-back, and −$40 DTA build net to zero, so operating cash flow and total cash are unchanged in Year 1 despite the $60 net income drop.●●●○○
    • On the balance sheet, assets rise by the $40 deferred tax asset. Separately, APIC rises by the full $100 gross SBC value while retained earnings falls by the $60 after-tax expense.●●○○○
    • The balance sheet balances because the $40 asset increase equals the net $40 equity change made up of $100 APIC less $60 retained earnings.●●●○○
    • The $40 DTA is a deferred tax asset, not a current tax receivable, so it does not reduce taxes payable in Year 1.●●●○○

48. A company has 100 options currently valued @ $1. The strike price is $10. Assume a 40% tax rate. Walk me through Year 2 in 4 different scenarios: the stock price rises to $10.5 (and is exercised), rises to $14 (and is exercised)

    Not measured yet
    • At exercise the company's real tax deduction equals intrinsic value at exercise — ($10.50 − $10) × 100 = $50 in Scenario 1 and ($14 − $10) × 100 = $400 in Scenario 2 — not the Year 1 $100 estimate.●●●●●
    • Exercise generates $1,000 of financing cash inflow from strike × shares — $10 × 100 — independent of the stock price.●●●○○
    • Scenario 1 at $10.50: the $50 real deduction yields only a $20 tax benefit against the $40 DTA, a $20 shortfall.●●●●○
    • The shortfall is trued up in the income statement as $20 of extra tax expense, so net income falls $20 in the exercise year.●●●○○
    • Scenario 1 cash flow: −$20 net income offset by the $40 DTA write-down nets to +$20 operating, plus $1,000 financing — cash rises $1,020.●●●○○
    • Scenario 1 balance sheet: DTA down $40 to zero, cash up $1,020, retained earnings down $20, APIC up $1,000 — assets up $980 matches equity up $980.●●●○○
    • Scenario 2 at $14: the $400 real deduction yields a $160 tax benefit, a $120 windfall over the $40 DTA that raises net income $120.●●●●○
    • Scenario 2 cash flow: operating rises $160 ($120 net income plus $40 DTA release) and financing adds $1,000, so total cash rises $1,160.●●●○○
    • In both scenarios the APIC credited from exercise is proceeds minus par value — strike × shares less the par value of the shares issued — so the $1,000 APIC figure is slightly overstated by that par amount.●●●○○

49. A company has 100 options currently valued @ $1. The strike price is $10. Assume a 40% tax rate. Walk me through Year 2 in 4 different scenarios (cont..): (3) is not exercised & expires worthless, and (4) the employee quits & forfeits the options

    Not measured yet
    • At grant, the $100 of stock-based compensation at a 40% rate creates a $40 deferred tax asset.●●●●●
    • Scenario 3: because the company will never get the expected tax deduction at exercise, the $40 DTA reverses straight through the income tax line.●●○○○
    • Scenario 3: income tax expense rises $40 through the tax line.●●●●○
    • Scenario 3: net income falls $40 with no change to pre-tax operating income.●●●○○
    • Scenario 3 cash flow: the $40 net income decrease is offset by a $40 non-cash DTA reversal add-back, so cash is unchanged.●●○○○
    • Scenario 3 balance sheet: DTA down $40 and retained earnings down $40, so it still balances.●○○○○
    • Scenario 4: reverting the original SBC entries drops APIC by the full $100 and drops operating expense by $100.●●●○○
    • Scenario 4: unwinding the DTA raises tax expense by $40, so net income rises only $60 rather than $100.●●●●○
    • Scenario 4 cash flow: NI up $60 plus the $40 DTA reversal offset the negative $100 removal of the SBC add-back, so cash is unchanged.●●○○○

50. Mentally tell me what would happen if the target IRR of your investment was 25%, while current revenue growth was 15% while EBITDA margin remained constant with no multiple expansion, what amount of debt will have to be taken to reach the targeted IRR. Feel free to ask any questions

    Not measured yet
    • With constant EBITDA margins and no multiple expansion, revenue growth is the only value-creation lever, so the unlevered return equals the 15% growth rate●●●○○
    • Clarify the free cash flow conversion rate first●●●●○
    • Clarify the entry and exit multiples●●○○○
    • Clarify the debt sweep rate — what percent of free cash flow actually pays down existing debt each year●●●●○
    • With no FCF conversion and flat multiples, debt paydown and multiple expansion contribute zero, so current IRR is just the 15% revenue growth against a 25% target, and the gap must come from leverage●○○○○
    • Frame the return as a WACC blend: 15% is the asset yield, 25% is the cost of equity on the sponsor's check, and cheaper debt pulls the blended return down to what the assets actually earn●●●●○
    • Set up 15% = equity weight x 25% + debt weight x cost of debt, and solve for the two weights●●●●○
    • Example: at an 8% cost of debt, equity weight is (15-8)/(25-8) = ~41%, so debt is ~59% of the structure, roughly 1.4x equity●●●●○
    • You cannot give a dollar debt figure without the entry price; the framework gives the debt-to-equity mix, then you multiply that debt weight by the capital base to size the debt●○○○○