Q/A:

4 Ways investment firms make money:

Investment banking
Investing and lending
Client services
Investment management

1. What is investment banking:

An investment bank is a financial services company or corporate division that engages in advisory-
based financial transactions on behalf of individuals, corporations, and governments.

2. What is a hedge fund?

A hedge fund is an investment fund that pools capital from accredited investors or
institutional investors and invests in a variety of assets, often with complicated portfolio-
construction and risk management techniques

3. What is a derivative?
A derivative is a contract between two or more parties whose value is based on an agreed-
upon underlying financial asset (like a security) or set of assets (like an index). Common
underlying instruments include bonds, commodities, currencies, interest rates, market
indexes, and stocks.
4. 3 financial statements
The three financial statements are the income statement, balance sheet, and statement of
cash flows.
The income statement is a statement that illustrates the profitability of the company. It
begins with the revenue line and after subtracting various expenses arrives at net
income. The income statement covers a specified period like quarter or year.
Unlike the income statement, the balance sheet does not account for the entire period and
rather is a snapshot of the company at a specific point in time such as the end of the quarter
or year. The balance sheet shows the company’s resources (assets) and funding for those
resources (liabilities and stockholder’s equity). Assets must always equal the sum of
liabilities and equity.
Lastly, the statement of cash flows is a magnification of the cash account on the balance
sheet and accounts for the entire period reconciling the beginning of period to end of
period cash balance. It typically begins with net income and is then adjusted for various
non-cash expenses and non-cash income to arrive at cash from operating. Cash from
investing and financing are then added to cash flow from operations to arrive at net
change in cash for the year.”
5. Major line items on each of these:
Income Statement: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative
Expenses); Operating Income; Pretax Income; Net Income.

Balance Sheet: Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E);
Accounts Payable; Accrued Expenses; Debt; Shareholders' Equity.

Cash Flow Statement: Net Income; Depreciation & Amortization; Stock-Based

 Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations;
Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends
Issued; Cash Flow From Financing.

6. How are three financial statements linked together?

(A) Net income which is profit before tax less tax expense is connected on all three financial
statements. Net income is located at the bottom of the income statement and directly at
the top of the cash flow statement followed by cash from operations. On the balance
sheet, net income feeds into retained earnings. Retained earnings represent the portion
of a business’s profits that are not distributed as dividends, but rather reinvested back
into the business.
(B) To calculate cash flow from operations, depreciation needs to be added back to net
income. Depreciation is recognized on the balance sheet under the asset section labeled
Property Plant and Equipment (PP&E). On the income statement it is recognized as an
expense, depreciation expense. Capital expenditures, which consists of money spent by a
business on acquiring or maintaining fixed assets, are recognized on the PP&E account on
the balance sheet and flow through cash from investing on the cash flow statement.
(C) Financing activities, such as the issuance of debt affect all three financial statements.
Interest expense is found on the income statement, the principal amount of debt owed is
found on the balance sheet, and the change in the principal amount owed is reflected on
the cash flow statement in the cash from financing section.
7. Only one statement:
You would use the Cash Flow Statement because it gives a true picture of how much cash
the company is actually generating, independent of all the non-cash expenses you might
have. And that's the #1 thing you care about when analyzing the overall financial health of
any business - its cash flow.
8. Choose two statements:
You would pick the Income Statement and Balance Sheet, because you can create the Cash
Flow Statement from both of those (assuming, of course that you have "before" and "after"
versions of the Balance Sheet that correspond to the same period the Income Statement is
tracking).
9. What happens when Inventory goes up by $10, assuming you pay for it with cash?
No changes to the Income Statement. ( bcs In the case of Inventory, the expense is only
recorded when the goods associated with it are sold - so if it's just sitting in a warehouse, it
does not count as a Cost of Good Sold or Operating Expense until the company
manufactures it into a product and sells it.)
On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from
Operations - it goes down by $10, as does the Net Change in Cash at the bottom.
On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the
changes cancel out and Assets still equals Liabilities & Shareholders' Equity.
10. Could you ever end up with negative shareholders' equity? What does it mean?
A: Yes. It is common to see this in 2 scenarios:
1. Leveraged Buyouts with dividend recapitalizations - it means that the owner of the
company has taken out a large portion of its equity (usually in the form of cash), which can
sometimes turn the number negative. 2. It can also happen if the company has been losing
money consistently and therefore has a declining Retained Earnings balance, which is a
portion of Shareholders' Equity.
It doesn't "mean" anything in particular, but it can be a cause for concern and possibly
demonstrate that the company is struggling (in the second scenario).
 Note: Shareholders' equity never turns negative immediately after an LBO - it would only
happen following a dividend recap or continued net losses.
11. Negative working capital?
1,. Some companies with subscriptions or longer-term contracts often have negative
Working Capital because of high Deferred Revenue balances. 2. Retail and restaurant
companies like Amazon, Wal-Mart, and McDonald's often have negative Working Capital
because customers pay upfront - so they can use the cash generated to pay off their
Accounts Payable rather than keeping a large cash balance on-hand. This can be a sign of
business efficiency. 3. In other cases, negative Working Capital could point to financial
trouble or possible bankruptcy (for example, when customers don't pay quickly and upfront
and the company is carrying a high debt balance).
12. What is a bailout?
A bailout is a colloquial term for the provision of financial help to a corporation or country
which otherwise would be on the brink of failure or bankruptcy.
13. What's the difference between accounts receivable and deferred revenue?
Accounts receivable has not yet been collected in cash from customers, whereas deferred
revenue has been. Accounts receivable represents how much revenue the company is
waiting on, whereas deferred revenue represents how much it has already collected in cash
but is waiting to record as revenue.
14. What's the difference between LIFO and FIFO? Can you walk me through an example of how
they differ?

BETAS
Following sectors can be classified as cyclical sectors (those whose business performance
and stock performance is highly correlated with the economic activities. If the economy is in
recession, then these stock exhibit poor results and thereby stock performance takes a
beating. ) and tend to exhibit High Stock Betas.

 Automobiles Sector
 Materials Sector
 Information Technology Sector
 Consumer Discretionary Sector
 Industrial Sector
 Banking Sector

Low Beta is demonstrated by stocks in defensive sector. Defensive stocks are stocks
whose business activities and stock prices are not correlated with the economic
activities. Even if the economy is in recession, these stocks tend to show stable
revenues and stock prices.

Following sectors can be classified as defensive sectors and tend to exhibit Low Stock Betas-

 Consumer Staples
 Beverages
 HealthCare
 Telecom
 Utilities