Numerics
- 8-K regulatory filing (interim report of material events), 99, 100
- 10-K report (annual report), 99–100
- 10-Q report (quarterly report), 100
- 13D report, 99
- 13F report, 98–99
A
- ABN Amro, 79
- accounting scams
- Enron, 332
- off–balance sheet financing
- credit default swaps, 293–295
- Enron, 290–292
- Olympus Corporation, 292–293
- operating lease, 290
- overview, 289–290
- overstating financial position
- pension liabilities, 284–288
- WorldCom, 288–289
- overstating revenue, 278–282
- overview, 277–278
- understating expenses
- Eddie Antar, 283–284
- matching principle, 282
- Waste Management scandal, 282–283
- accounts payable, balance sheet, 123
- accounts receivable, balance sheet, 122
- accredited investors, 32, 178
- accretion/dilution analysis, 72
- acquisition targets, 66–67
- active traders, 38
- activity ratios, 244
- actuaries, 285
- adjustable-rate (floating-rate) bonds, 189
- ADRs (American depository receipts), 292
- advisory fees, 16
- aftermarket trading, 35, 51
- aggregators, 112
- algorithmic trading (program trading; automated trading), 38–39
- Alphabet company, 179
- alternative investments
- commodities, 302–303
- cryptocurrencies, 305–306
- currencies, 305–306
- defined, 87
- hedge funds, 298–300
- overview, 297–298
- real estate, 303–304
- venture capital, 301
- American depository receipts (ADRs), 292
- amortization
- defined, 229
- statement of cash flows, 128
- analysts
- buy-side analysts, 37–38, 70–72
- rules and regulations, 270–274
- sell-side analysts, 37–38, 53–56, 75–76
- spreadsheet analysis, 212
- annual report (10-K report), 99–100
- Antar, Eddie, 283–284
- AOL Time Warner, 337
- appreciation, 173, 188
- arbitrage
- arbitrage funds, 299
- defined, 41
- Arthur Andersen, 283, 290
- asset management, 306–313
- attracting investors to, 306–307
- bond mutual funds, 308–309
- ETFs, 309
- fees, 16
- handling conflicts, 309–313
- stock mutual funds, 307–308
- assets
- on balance sheets, 122–123
- correlation coefficient, 303
- illiquid, 301
- liquid, 126, 142, 302
- liquid assets, 142
- ROA ratio, 147
- total, 123, 251–252
- auction-rate securities, 13
- automated trading (algorithmic trading), 38–39
B
- back office, investment bank, 14
- balance sheets, 121–126
- assets, 122–123
- book value of equity, 126
- common sizing analysis, 124–125
- comparing debt to equity, 125
- equity, 124
- liabilities section, 123
- net worth statement, 126
- opportunity cost, 126
- overview, 121
- Performance Ade, 321–322
- Yankee Beverages, 321–322
- bank loans
- Banking Act of 1933 (Glass–Steagall Act), 263, 264, 358
- Barings Bank, 334, 357
- barriers to entry, 47
- basis points, 196
- BEA (Bureau of Economic Analysis), 353
- Bear Stearns, 359
- Bendix, 75
- benefit pension plan, 285
- Berkshire Hathaway, 63, 68
- Berra, Yogi, 77, 342
- bill and hold practice, 279–280
- bill of exchange, 357
-
Billions (TV series), 300
- BIS (Bureau of Industry and Security), 353
- bitcoin, 305–306
- Blodget, Henry, 56, 270, 271, 307, 332
- Bloomberg machine, 106, 111, 350
- Bloomberg website, 201
- board of directors, 50, 132
- boiler room, 266
- bond indenture, 186
- bond mutual funds, 308–309
- bondholders, 185–186, 190–192
- bonds
- bond indenture, 186
- bond trustee, 191
- bondholders, 185–186, 190–192
- callable bonds, 189
- choosing between debt and equity, 202–203
- convertible bonds, 188–189
- coupon rate of interest, 186
- covenants, 186, 191–192
- change-of-control covenant, 192
- debt covenant, 191
- mergers covenant, 192
- creditworthiness, 230
- defined, 186
- denominations of, 186
- fallen angels, 231
- fixed-income securities, 187
- floating-rate bonds, 189
- maturity, 186
- perpetual bonds, 194
- plain-vanilla bonds, 188
- pricing
- coupon rate effect, 197–198
- credit spreads, 196–197
- duration, 198–200
- interest rate sensitivity, 197–200
- present value, 192–195
- term to maturity effect, 198
- yield to maturity and, 195–196
- puttable bonds, 189
- secured, 190
- tracking bond market, 200–202
- zero-coupon bonds, 190
- book building process, 35
- book value
- calculating, 126
- defined, 138
- Warren Buffett's advocacy of, 139
- bottom-up analysis, 346
- boutique investment firms, 15, 60
- Brandeis, Louis, 272
- bridge loans,
- Briefing.com, 111
- Bristol-Myers Squibb, 26
- broken deals, IPOs, 51
- brokerage services,
- Brown, F. Donaldson, 251
- Buffett, Warren, 256, 295, 303, 340
- advocacy of utility of book value, 68
- approach to M&A, 68
- Goldman Sachs and, 16
- as White Knight, 75
- build-up method, calculating cost of equity capital, 215–216
- bulge bracket investment firms, 15
- bullet payment, 229
- Bureau of Economic Analysis (BEA), 353
- Bureau of Industry and Security (BIS), 353
- Bureau of Labor Statistics, 353
- Burns, Robert, 342
- business section, prospectus, 49
- business summary, research report, 59
- buyouts. See also M&A
- buyout targets, 20
- stocks, 179
- buy-side analysts, 37–38, 70–72
C
- CAIA (Chartered Alternative Investment Analyst Association), 313
- call options, 175
- call premium, callable bonds, 189
- callable bonds, 189
- callable stocks, 175
- cap-based funds, 308
- capital
- cost of debt capital, 214–215
- cost of equity capital, 215–217
- defined,
- invested capital, 228
- raising,
- capital asset pricing model. See CAPM
- capital expenditures, 161
- capital leases, 123
- capital structure, 169, 190, 213
- capitalization structure, prospectus, 49
- CAPM (capital asset pricing model)
- beta, 217–218
- empirical studies on, 219–220
- market risk premium, 218–219
- risk-free rate of return, 218
- cash flow. See also discounted free cash flow model
- cash flow ratios, 244
- LBOs and, 89–90
- cash flow from operations (CFO), 211
- cash/cash equivalents, balance sheet, 122
- Catholic Church, role in high finance, 356
- CEO (chief executive officer), 49–50
- CFA Institute, 313
- CFO (cash flow from operations), 211
- CFO (chief financial officer), 49–50
- CFRA, 57–58, 60
- CFTC (Commodities Futures Trading Commission), 264
- change-of-control covenant, 192
- channel checks, 38
- channel stuffing, 279–280
- Chartered Alternative Investment Analyst Association (CAIA), 313
- chief executive officer (CEO), 49–50
- chief financial officer (CFO), 49–50
- chief operating officer (COO), 49–50
- Chinese wall (firewall), 311, 312
- churning, 266
- clientele effect, 318–319
- closed-end mutual funds, 307
- Coca-Cola, 255–257
- COGS (cost of goods sold), 118
- Cohen, Stephen, 299, 300
- collateralized debt obligations, 359
- Collins, Chris, 265
- commissions, 15
- commodities, 39, 302–303
- Commodities Futures Trading Commission (CFTC), 264
- commodity trading advisor (CTA), 302
- common sizing analysis
- balance sheets, 124–125
- industry analysis, 160, 163–166
- WorldCom’s income statements, 289
-
common stock, 49, 175
- company filings, 112
- comparison universe, 155
- adjusting, 158–159
- GICS, 156–157
- identifying competitors, 158
- management pay, 158
- overview, 155
- competition, comparison universe, 158
- compound interest, 194–195, 221
- conglomerate mergers, 63
- conglomerates, 155
- constant growth formula, discounted free cash flow model, 221
- contribution pension plan, 285
- control premium, 322
- convertible arbitrage, 299
- convertible bonds, 188–189
- COO (chief operating officer), 49–50
- corporate culture, 78
- corporate lending,
- correlations
- correlation coefficient, 303
- discounted cash flow analysis, 344–345
- cost of goods sold (COGS), 118
- counter-cyclical firms, 65
- country funds, 308
- coupon rate effect, 197–198
- coupon rate of interest, 186
- covenants
- bank term loans, 230
- bonds, 186
- change-of-control covenant, 192
- debt covenant, 191
- mergers covenant, 192
- credit default swaps, 13, 293–295, 334
- credit spreads, bond, 196–197
- Credit Suisse First Boston, 336
- credit-rating agencies, 269
- creditworthiness, bonds, 230
- cross-market arbitrage, 41
- crowdfunding, 33
- cryptocurrencies, 305–306
- CTA (commodity trading advisor), 302
- culture wars, M&A process and, 78
- currencies, 305–306
- cyclical firms, 65
D
- Dalio, Ray, 275
- data management. See information management
- days inventory outstanding ratio, 283
- Dealogic, 113
- debenture holders (unsecured creditors), 190
- debt covenant, 191
- debt/debt capital
- bank debt, 228–230
- defined, 11
- LBOs and, 28
- long-term debt, 123, 130
- M&A process and, 74
- mezzanine debt, 232–234
- short-term debt, 129
- debt-to-equity ratio, 141–142, 169–170
- DEF 14A document. See proxy statement
- Dell, Michael, 83, 161, 163
- Dell company, 31, 161–163
- Delta, 165–166
- denominations, bond, 186
- Department of Commerce, 353
- depreciation
- balance sheets, 122
- statement of cash flows, 128
- derivatives
- credit default swaps, 293–295
- defined, 39
- transparency, 268
- detachable warrants, 233
- dilution, IPOs, 52–53
- direct costs, 118
- disclosure of information, 266–267
- discounted free cash flow model, 19–20
- bottom-up analysis, 346
- correlations, 344–345
- discounted cash-flow analysis, 71
- FCF, 210–211
- interest rates and, 345–346
- Monte Carlo analysis, 341–342
- overview, 207–209, 339–340
- pro forma financial statements, 342
- projections, 342–343
- sales growth estimates, 343–344
- sensitivity analysis, 340–341
- target weightings, 347
- top-down analysis, 346
- valuing firm
- constant growth formula, 221
- perpetuity growth formula, 220–221
- stress testing, 223
- two-stage growth model, 222–223
- valuing shares of stock, 224–225
- WACC, 346–347
- CAPM, 217–220
- cost of debt capital, 214–215
- cost of equity capital, 215–217
- importance of, 213–214
- overview, 212–213
- diversification, 65, 303
- dividend payout rate, ROE ratio, 245–247
- dividends, 130
- documents and reports. See also EDGAR database
- annual report, 99–100
- formatting
- importing into Excel, 107–109
- interactive data, 109
- tools for, 105–106
- interim report of material events, 100
- overview, 97–98
- prospectus, 100
- proxy statement, 100
- quarterly report, 100
- types of information, 98–99
- Dodd–Frank legislation, 267–269
- Dot-Com boom and bust (Internet bubble), 330–331
- downgraded bonds, 230
- dual classes of shares, 74
- due diligence, 24, 71, 295–296
- Dunlap, Al, 279–280
- DuPont analysis, 250–257
- Cola wars, 255–257
- five-factor method
- non-operating items, 253–254
- operating profit margin, 253
- tax effect ratio, 254
- overview, 250–252
- three-factor method, 251–252
- duration, bonds, 198–200
E
- earnings before interest and taxes. See EBIT
- earnings before interest, taxes, depreciation, and amortization. See EBITDA
- earnings per share (EPS), 72, 180
- earnings season, 116
- East Asian Financial crisis of 1997, 335
- Ebbers, Bernie, 288
- EBIT (earnings before interest and taxes)
- defined, 140
- tax-adjusted, 148
- EBITDA (earnings before interest, taxes, depreciation, and amortization)
- EV/EBITDA ratio, 138–140, 168–169
- LBOs and, 236–238
- economic indicators, 110–111
- consumer confidence, 111
- defined, 110
- inflation, 111
- retail sales, 111
- unemployment reports, 111
- economies of scale, 62
- EDGAR database
- annual report, 99–100
- computing free cash flow, 210
- interactive data, 109
- interim report of material events, 100
- overview, 98–99
- prospectus, 100
- proxy statement, 100
- quarterly report, 100
- as research tool, 100–103
- social media and, 104–105
- efficiency ratios
- calculating growth rate, 150–151
- industry analysis, 170
- overview, 146–147
- POE ratio, 149
- ROA ratio, 147
- ROC ratio, 148–149
- efficient market, 66
- 8-K regulatory filing (interim report of material events), 99, 100
- Einstein, Albert, 153, 194, 221
- Electronic Data-Gathering Analysis and Retrieval. See EDGAR database
-
emerging-market funds, 308
- Enron, 290–292, 332
- enterprise value
- defined, 139
- EV/EBITA ratio, 138–140, 168–169
- EPS (earnings per share), 72, 180
- equity. See also stocks
- balance sheets, 124
- defined, 11
- LBOs, 234
- equity cushion, 190
- equity holders, 228
- equity kicker, mezzanine debt, 231
- equity long-short, 299
- equity REITs, 304
- equity sweetener, mezzanine debt, 231
- ETFs (exchange-traded funds), 309
- event arbitrage, 41
- event-driven funds, 299
- Excel
- copying and pasting financial data into, 107
- importing directly into, 108–109
- exchange-traded funds (ETFs), 309
- executive pay section, prospectus, 49–50
- exercise price, 232
- exit strategy, LBOs
- IPOs, 92–94
- overview, 91–92
- sale to strategic buyer, 94
- secondary LBOs, 94
- setting timetable for exit, 92
- expenses, understating
- Eddie Antar, 283–284
- matching principle, 282
- Waste Management scandal, 282–283
- expert network firms, 265
F
- Facebook, 46, 104
- Factset Mergers, 113
- fair price amendments, 74
- fairness opinion, 72
- FCF (free cash flow), 210–211, 318
- computing, 210
- forecasting, 211
- statement of cash flows, 130–131
- FDIC (Federal Deposit Insurance Corporation), 10
- Federal Reserve, 354
- Field, James A., Jr., 262
- financial advisory,
- financial crisis of 2007, 359
- financial data section, prospectus, 49
- financial failures. See also accounting scams
- accounting scams, 332
- AOL Time Warner, 337
- Barings Bank, 334
- credit default swaps, 334
- Credit Suisse First Boston, 336
- Dot-Com boom and bust, 330–331
- Enron, 332
- flash crash, 333–334
- high-frequency trades, 334
- JPMorgan, 334
- London Whale case, 334
- Long-Term Capital Management, 334–335
- municipal bankruptcy, 335–336
- overview, 329–330
- subprime mortgage loans, 333
- tainted research, 331–332
- too big to fail, 330
- WorldCom, 332
- Financial Industry Regulatory Authority (FINRA), 201, 264
- financial instruments, 10
- financial models, 37. See also discounted free cash flow model
- financial position, overstating, 284–289
- pension liabilities, 284–288
- WorldCom, 288–289
- financial ratios. See ratios
- Financial Services Modernization Act of 1999 (Gramm–Leach–Bliley Act), 359
- financial sponsors, of LBOs, 27
- financial statements, 18, 21–22
- balance sheets
- assets, 122–123
- book value of equity, 126
- common sizing analysis, 124–125
- comparing debt to equity, 125
- equity, 124
- liabilities, 123
- net worth statement, 126
- opportunity cost, 126
- overview, 121
- defined, 49
- income statements
- COGS, 118
- finding investment banking opportunities, 120–121
- GAAP, 116
- gross profit, 119
- income taxes, 119
- interest expense, 119
- net profit, 119
- NOPAT, 120
- operating income, 119
- pro-forma analysis, 120
- revenue, 118
- SG&A, 119
- use by investment bankers, 117–118
- overview, 115–116
- Performance Ade, 320–322
- proxy statement
- management pay packages, 133–134
- management team incentive, 132–133
- overview, 131–132
- statement of cash flows
- financing activities, 129–130
- free cash flow, 130–131
- investing activities, 128–129
- operating activities, 128
- role in deal making, 127
- Yankee Beverages, 320–322
- financing
- clientele effect, 318–319
- LBOs
- bank debt, 228–230
- choosing method of, 238–239
- equity, 234
- junk bonds, 230–232
- maturity, 235–236
- mezzanine debt, 232–234
- seniority, 235
- off–balance sheet financing
- credit default swaps, 293–295
- Enron, 290–292
- Olympus Corporation, 292–293
- operating lease, 290
- overview, 289–290
- FINRA (Financial Industry Regulatory Authority), 201, 264
- firewall (Chinese wall), 311, 312
- five-factor method, DuPont analysis
- non-operating items, 253–254
- operating profit margin, 253
- tax effect ratio, 254
- fixed-income instruments, 19. See also debt/debt capital
- fixed-income securities, 187. See also bonds
- flash crash, 333–334
- floating-rate (adjustable-rate) bonds, 189
- follow-on offering
- forecasting, 77, 211, 342–343. See also projections
- foreign markets, accessing, 64–65
- forensic accounting, 277, 295–296. See also accounting scams
- forex (FX) market, 305
- Form 4 documents, stocks, 181
- formatting data, 105
- forward P/E ratios, 137
- free cash flow (FCF), 318
- computing, 210
- forecasting, 211
- statement of cash flows, 130–131
- Friedman, Milton, 133
- friendly mergers, 68
- front office, investment bank, 12–13
- front running, 312
- fund of funds, 299
- fundamental analysis, 54
- Fundamental Analysis For Dummies (Krantz), 118
- futures contracts, 39
- futures markets, 298
- FX (forex) market, 305
G
- GAAP (generally accepted accounting principles), 22, 116
- Gates, Bill, 30
- General Motors pensions, 288
-
generally accepted accounting principles (GAAP), 22, 116
- GICS (Global Industry Classification Standard), 156–157
- Glass–Steagall Act (Banking Act of 1933), 263, 264, 358
- Global Analysis Research Settlements, 331
- Global Industry Classification Standard (GICS), 156–157
- global macro funds, 299
- going-private transactions, 30–31
- golden parachutes, 73
- Goldman Sachs, 16–17, 360
- goodwill, 88, 123, 126, 293
- Graham, Benjamin, 340
- Gramm–Leach–Bliley Act of 1999 (Financial Services Modernization Act), 359
- grant-date value, stock options, 134
- Great Depression, 263
- Greenmail, 74–75
- Griffin, Ken, 275
- gross margin, 144
- gross profit
- defined, 144
- income statements, 119
- gross profit margin, 247–248, 253
- growth funds, 308
- growth rate, company
- calculating, 150–151
- spreadsheet analysis, 212
- trend analysis, 160–163
- Grubman, Jack, 56, 270, 272, 307, 311, 332
- Gupta, Rajat, 265
H
- Hastings, Reed, 104, 267
- hedge funds
- arbitrage funds, 299
- defined, 298
- equity long-short, 299
- event-driven funds, 299
- fund of funds, 299
- global macro funds, 299
- long-only funds, 299
- relative value, 299
- sophisticated investors, 300
- Hershey
- calculating growth rate, 150–151
- calculating return on capital, 148–149
- common sizing analysis, 164
- high-frequency trades, 41, 334
- highlights/summary, research report, 58
- high-yield bonds, 231
- high-yield funds, 308
- horizontal mergers, 62–63
- hostile takeovers, 27, 69
- hybrid REITs, 304
- hybrid securities, 11
I
- idiosyncratic premium, stocks, 216
- illegal insider trading, 264–265
- illiquid assets, 301
- Immune Design, 69
- implied enterprise value, stocks, 182–183
- implied equity value, stocks, 182–183
- importance of due diligence, 295–296
- income from continuing operations margin, 144–145
- income statements
- COGS, 118
- finding investment banking opportunities, 120–121
- GAAP, 116
- gross profit, 119
- income taxes, 119
- interest expense, 119
- net profit, 119
- NOPAT, 120
- operating income, 119
- Performance Ade, 320–321
- pro-forma analysis, 120
- revenue, 118
- SG&A, 119
- use by investment bankers, 117–118
- Yankee Beverages, 320–321
- income taxes, 119
- independent equity research, 57–58
- Index Fund Advisors, 352
- index funds
- indicated interest, 35
- indirect costs, 119
-
industry (sector) funds, 308
- industry analysis
- common sizing, 160, 163–166
- comparison universe
- adjusting, 158–159
- GICS, 156–157
- identifying competitors, 158
- management pay, 158
- overview, 155
- debt-to-equity ratio, 169–170
- efficiency ratios, 170
- EV/EBITDA ratio, 168–169
- importance of, 154–155
- overview, 153–154
- P/E ratio, 167
- trend analysis, 160–163
- industry data section, prospectus, 48
- industry groups, 156–157
- industry outlook section, research report, 59
- information management. See also documents and reports; EDGAR database
- aggregators, 112
- company filings, 112
- corporate profits, 113
- economic indicators, 110–111
- IPO calendar, 113
- M&A process, 112–113
- macro economy, 110
- monitoring news, 111–112
- non-financial information, 110–113
- initial public offerings. See IPOs
- insider trading, 181, 264–265
- institutional client services, 17
- institutional investors, 234
- interactive data, 109
- interest coverage, liquidity multiples, 142–143
- interest expense, income statements, 119
- interest rates
- bond sensitivity
- coupon rate effect, 197–198
- duration, 198–200
- term to maturity effect, 198
- discounted cash flow analysis and, 345–346
- interim report of material events (8-K regulatory filing), 99, 100
- internal rate of return (IRR), 90–91, 240
- international funds, 308, 309
- Internet bubble (Dot-Com boom and bust), 330–331
- in-the-money warrants, 233
- inventory, balance sheets, 122
- invested capital, 228
- investing activities, statement of cash flows, 128–129
- Investment Advisors Act of 1940, 263
- investment banking. See also securities
- advisory fees, 16
- asset management fees, 16
- boutique investment firms, 15
- bulge bracket investment firms, 15
- buyout targets, 20
- commissions, 15
- complying with regulations, 21
- defined,
- discounted cash flow, 19–20
- financial statements, 18, 21–22
- fixed-income instruments, 19
- Goldman Sachs, 16–17
- history of, 355–360
- leverage, 20
- mega-institutions, 14
- organizational structure, 12–14
- overview, –8
- ratios, 18–19
- regional investment firms, 15
- role of, –10
- services provided by, –10, 11–12
- trading income, 16
- traditional banking versus, 10–11
- underwriting fees, 16
- Investment Company Act of 1940, 263
- investment opinion, research report, 59
- investment-grade bonds, 230
- investment-grade funds, 308
- investments. See securities
- IPO calendar, 113
- IPOs (initial public offerings)
- aftermarket trading, 51
- broken deals, 51
- company lifecycle and, 32–34
- defined, 24
- dilution, 52–53
- as exit strategy for LBOs, 92–94
- follow-on offering, 52
- lockup period, 51–52
- meeting requirements for, 45–47
- offering price, 51
- preparing company for, 44–45
- prospectus
- business section, 49
- capitalization structure, 49
- discussion and analysis of financial condition section, 49
- executive pay section, 49–50
- financial data section, 49
- industry data section, 48
- legal matters section, 51
- management section, 49–50
- principal and selling shareholders section, 50
- related-party transactions, 50
- risk factors section, 47–48
- summary section, 47
- underwriting section, 51
- use of proceeds section, 48
- quiet periods, 52
- roadshows, 52
- role of investment bankers in, 34–36
- secondary offering, 53
- sell-side analysts
- conflicts of interest, 55–56
- disseminating research, 55–56
- goals of, 54–55
- investors expectations for, 55
- overview, 53–54
- IPOScoop.com, 351
- IRR (internal rate of return), 90–91, 240
J
- Jefferson County, Alabama bankruptcy, 335–336
- J.M. Smucker, 26
- Jobs Act of 2012, 33
- JPMorgan, 334
- junk bonds, 230–232, 235
K
- Karp, David, 30
- Kessler, Andy, 288
- key statistics section, research report, 58
- Klarman, Seth, 340
- Krantz, Matt, , 118
L
- Lambert, Drexel Burnham, 231
- LBOs (leveraged buyouts)
- big institutions, 84–85
- Blackstone, 29
- cash flow, 89–90
- defined, 24
- exit strategy
- IPOs, 92–94
- overview, 91–92
- sale to strategic buyer, 94
- secondary LBOs, 94
- setting timetable for exit, 92
- financial sponsors, 27
- financing
- bank debt, 228–230
- choosing method of, 238–239
- equity, 234
- junk bonds, 230–232
- maturity, 235–236
- mezzanine debt, 232–234
- seniority, 235
- investment banks, 83–84
- IRR, 90–91
- management and, 85–86
- management buyouts, 27
- overview, 81–82, 227–228
- private-equity firms and, 27–29
- pro forma financial statements, 236–238
- pros and cons, 240–241
- role of debt in, 28
- stock and bond investors, 86–87
- targets, 87–91
- taxes, 240
- Leeson, Nick, 334
- legal matters section, prospectus, 51
- Lehman Brothers, 360
- leverage, 20, 187
- common sizing, 163–165
- ROE ratio and, 252
-
leveraged buyouts. See LBOs
- liabilities. See also debt/debt capital
- liabilities section, balance sheet, 123
- pensions, 286–287
- LinkedIn, 26, 29
- liquid assets, 126, 142, 302
- liquidity, 40
- liquidity multiples, 140–143
- debt-to-equity ratio, 141–142
- defined, 244
- interest coverage, 142–143
- overview, 140–141
- quick ratio, 142
- lockup period, IPOs, 51–52
- London Whale case, 334
- long-only funds, 299
- Long-Term Capital Management, 334–335
- long-term debt, 123, 130
- long-term investments, 122
- low-margin businesses, 121
- Lynch, Peter, 117
M
- M&A (mergers and acquisitions), 24–27
- acquisition targets, 66–67
- AOL Time Warner, 337
- bondholders, 190
- buy-side analysts
- closing deals, 72
- due diligence, 71
- identifying acquisition targets, 70
- negotiating terms, 72
- valuing company, 71–72
- conglomerate mergers, 63
- Dealogic, 113
- defined, 24
- Factset Mergers, 113
- friendly mergers, 68
- horizontal mergers, 62–63
- hostile takeovers, 27, 69
- M&A advisory,
- Mergermarket, 113
- overview, 24–25, 61
- Performance Ade, 316–326
- proxy fight, 69
- reasons for, 64–66
- reasons for failure
- culture wars, 78
- faulty analysis, 77
- misplaced incentives, 76–77
- overpaying, 78–79
- overstated synergies, 78
- sell-side advisors, 75–76
- shark repellent
- acquiring debt, 74
- dual classes of shares, 74
- fair price amendments, 74
- golden parachutes, 73
- Greenmail, 74–75
- Pac-Man defense, 75
- poison pills, 73
- poison puts, 73
- staggered boards of directors, 74
- supermajority voting, 74
- white knights, 75
- strategic buyers, 26
- synergy, 62
- targets, 27
- tender offer, 69
- vertical mergers, 63
- Warren Buffett's approach to, 68
- Yankee Beverages, 316–326
- macro economy, 110
- Madoff, Bernie, 274
- managed futures, 302
- management
- LBOs and, 85–86
- M&A process and, 64–65
- pay packages
- comparison universe, 158
- Dodd–Frank legislation, 269–270
- proxy statement, 134
- management buyouts, 27
- management section, prospectus, 49–50
- management’s discussion and analysis of financial condition section, prospectus, 49
- margin of safety concept, 77, 340
- market capitalization. See market value
- market makers, 39, 266
- market making process, 17
- market manipulation, 265–266
-
market power, M&A process and, 64
- market risk premium
- market valuation
- defined, 136
- publicly traded company, 30
- market value, 308
- MarketSmith, 352
- Markopolos, Harry, 274
- Martin Marietta Corporation, 75
- matching principle, 282
- matchmaking services, 25
- maturity
- McLean, Bethany, 292
- Medici bank, 356
- Meeker, Mary, 270, 307
- mega-institutions, 14
- merchant banker, 356
- Merck, 69
- Mergermarket, 113
- mergers and acquisitions. See M&A
- mergers covenant, 192
- Meriwether, John, 335
- Merrill Lynch, 360
- mezzanine debt, 232–234
- Microsoft, 26, 29
- middle office, investment bank, 13
- Milken, Michael, 231
- monetary exchange, 357
- monitoring news, 111–112
- Monte Carlo analysis, 341–342
- Moody’s, 351–352
- Morgan Stanley, , 360
- Morningstar, 60, 352–353
- mortgage (secured) bonds, 190
- mortgage REITs, 304
- mortgage-backed securities, 359
- Munger, Charlie, 306
- municipal bankruptcy, 335–336
- municipal funds, 309
N
- Nasdaq Private Market, 178
- net margin, 145
- net operating profit after tax (NOPAT), 120
- net pension liability, 286–287
- net profit, 119
- net profit margin, ROE ratio, 249
- net worth statement, 126
- Netflix, 104, 267
- New York Stock Exchange (NYSE), 264
- non-financial information, 110
- aggregators, 112
- company filings, 112
- corporate profits, 113
- economic indicators, 110–111
- IPO calendar, 113
- M&A, 112–113
- macro economy, 110
- monitoring news, 111–112
- non-operating items, DuPont analysis, 253–254
- NOPAT (net operating profit after tax), 120
- NYSE (New York Stock Exchange), 264
O
- off–balance sheet financing
- credit default swaps, 293–295
- Enron, 290–292
- Olympus Corporation, 292–293
- operating lease, 290
- overview, 289–290
- offering price, IPOs, 51
- Olympus Corporation, 292–293
- One Up on Wall Street (Lynch), 117
- Online Investing For Dummies (Krantz),
- online resources
- Bloomberg machine, 350
- Bureau of Economic Analysis, 353
- Bureau of Industry and Security, 353
- Bureau of Labor Statistics, 353
- Department of Commerce, 353
- Federal Reserve, 354
- Index Fund Advisors, 352
- IPOScoop.com, 351
- MarketSmith, 352
- Moody’s, 351–352
- Morningstar, 352–353
- Renaissance Capital, 351
- Reuters, 350
- SEC, 351
- Standard & Poor’s, 350–351
- Trefis, 354
- open-end mutual funds, 307
- operating activities, statement of cash flows, 128
- operating income, 119
- operating lease, 290
- operating profit margin, 249
- opportunity cost, 126
- options, stock, 134, 175, 266
- original-issue junk bonds, 231
- orphans, defined, 54
- overhead costs, 144
- overstating financial position
- pension liabilities, 284–288
- WorldCom, 288–289
- overstating revenue, 278–282
P
- Pac-Man defense, 75
- passive investment, 233
- Paulson, John, 294, 299, 310
- P/E (price-to-earnings) ratio, 137, 167
- pensions
- assumed rate of return, 285–286
- on balance sheets, 123
- benefit pension plan, 285
- contribution pension plan, 285
- General Motors, 288
- net pension liability, 286–287
- overview, 284–285
- Pepsico, 255–257
- Performance Ade, 316–326
- perpetual bonds, 194
- perpetuity growth formula, discounted free cash flow model, 220–221
- plain-vanilla bonds, 188
- Point72 Ventures, 300
- poison pills, 73
- poison puts, 73
- post-retirement benefits, on balance sheets, 123
- preferred stock, 11, 175
- defined, 49
- sold by Goldman Sachs, 360
- pre-IPO marketplaces, 179
- price multiples, 244
- price target section, research report, 58
- price target, shares, 38
- price-to-book ratio, 137–138
- price-to-earnings (P/E) ratio, 137, 167
- pricing
- bonds
- coupon rate effect, 197–198
- credit spreads, 196–197
- duration, 198–200
- interest rate sensitivity, 197–200
- present value, 192–195
- term to maturity effect, 198
- yield to maturity and, 195–196
- primary market, 16
- primary securities market, 263
- principal and selling shareholders section, prospectus, 50
- private business sales
- going-private transactions, 30–31
- overview, 29–30
- private placements, 31–32
- rationale for, 30
- private equity partnership, 234
- private equity sponsor, 228
- private placements, 31–32
- private-equity firms
- Blackstone, 29
- handling debt in deal making, 28
- IPOs, 28
- LBOs and, 27–29
- recapitalizations, 28
- selling to strategic buyers, 28
- privately held companies, 177–178
- pro forma financial statements
- defined, 71
- discounted cash flow analysis, 342
- income statements, 120
- LBOs, 236–238
- Performance Ade, 324–326
- Yankee Beverages, 324–326
- probability distribution, 341
- profit margins
- defined, 143
- gross profit margin, 247–248
- net profit margin, 249
- operating profit margin, 249
- profitability ratios
- defined, 244
- gross margin, 144
- income from continuing operations margin, 144–145
- net margin, 145
- overview, 143–144
- program trading (algorithmic trading), 38–39
- projections. See also forecasting
- discounted cash flow analysis, 342–343
- pro forma financial statements, 71, 120, 236–238, 324–326, 342
- property, plant, and equipment assets, balance sheet, 122
- proprietary trading, 268–269
- prospectus (S-1 document), 100
- business section, 49
- capitalization structure, 49
- defined, 34
- discussion and analysis of financial condition section, 49
- executive pay section, 49–50
- financial data section, 49
- industry data section, 48
- legal matters section, 51
- management section, 49–50
- principal and selling shareholders section, 50
- related-party transactions, 50
- risk factors section, 47–48
- summary section, 47
- underwriting section, 51
- use of proceeds section, 48
- proxy fight, 69
- proxy statement (DEF 14A), 100, 131–134
- management pay packages
- bonuses, 134
- salary, 133
- stock awards, 134
- stock options, 134
- management team incentive, 132–133
- overview, 131–132
- proxy vote, 69
- publicly traded company
- defined, 29
- market value, 30
- publicly traded securities, 177
- pump-and-dump strategy, 265–266
- put options, 175, 266
- puttable bonds, 189
Q
- Quaker Oats, 78
- quarterly report (10-Q report), 100
- quick ratio, 142
- quiet periods, IPOs, 52
R
- Rajaratnam, Raj, 265
- Raju, Ramalinga, 280–282
- ratio analysis section, research report, 59
- ratios
- efficiency ratios
- calculating growth rate, 150–151
- overview, 146–147
- POE ratio, 149
- ROA ratio, 147
- ROC ratio, 148–149
- liquidity multiples
- debt-to-equity ratio, 141–142
- interest coverage, 142–143
- overview, 140–141
- quick ratio, 142
- overview, 135–136
- profitability ratios
- gross margin, 144
- income from continuing operations margin, 144–145
- net margin, 145
- overview, 143–144
- valuation multiples
- EV/EBITDA ratio, 138–140
- overview, 136
- P/E ratio, 137
- price-to-book ratio, 137–138
- real estate, 303–304
-
real estate investment trusts (REITs), 304
- real estate mortgage investment conduits (REMICs), 304
- recapitalizations, 28
- recommendation section, research report, 58
- Reg AC (Regulation Analyst Certification), 273
- Reg FD (Regulation Fair Disclosure), 267
- regional investment firms, 15
- REITs (real estate investment trusts), 304
- related-party transactions, 50, 291
- relative value, 299
- REMICs (real estate mortgage investment conduits), 304
- Renaissance Capital, 113, 351
- Renaissance period banking, 356
- research
- buy-side analysts, 37–38
- empirical studies on CAPM, 219–220
- independent equity research, 58, 60
- overview, 36
- research report
- business summary, 59
- highlights/summary, 58
- industry outlook section, 59
- investment opinion, 59
- key statistics section, 58
- overview, 57–58
- price target section, 58
- ratio analysis section, 59
- recommendation section, 58
- use by sell-side analysts, 59–60
- role of EDGAR database in, 114
- sell-side analysts, 37–38
- research units, investment banks,
- restricted stock, 134
- return on assets (ROA) ratio, 147
- return on capital (ROC) ratio, 148–149
- return on equity ratio. See ROE ratio
- Reuters, 350
- revenue, overstating, 278–282
- revolving credit, 228–229
- risk factors section, prospectus, 47–48
- risk-free rate of return, CAPM, 218
- ROA (return on assets) ratio, 147
- roadshows, IPOs, 45, 52
- ROC (return on capital) ratio, 148–149
- ROE (return on equity) ratio, 149
- dividend payout rate, 245–247
- DuPont analysis
- Cola wars, 255–257
- five-factor method, 253–254
- overview, 250–252
- three-factor method, 251–252
- gross profit margin, 247–248
- importance of, 244
- net profit margin, 249
- operating profit margin, 249
- overview, 243–244
- Rothschild & Son, 357
- Royal Bank of Scotland, 79
- rules and regulations
- on analysts, 270–274
- complying with, 21
- disclosure of information, 266–267
- Dodd–Frank legislation, 267–269
- history of, 262–264
- illegal insider trading, 264–265
- keys to successful regulation, 274–275
- market manipulation, 265–266
- overview, 261
- Regulation Fair Disclosure, 267
- Russian financial crisis of 1998, 335
S
- S&P (Standard & Poor’s), 350–351
- S&P Dow Jones Indices, 113
- S&P Global Market Intelligence, 106
- S-1 document. See prospectus
- S.A.C. Capital Advisors, 300
- sales growth estimates, discounted cash flow analysis, 343–344
- Sarbanes–Oxley Act, 290
- Satyam, 280–282
- Scott Paper, 279
- SEC (Securities and Exchange Commission), 31. See also EDGAR database; rules and regulations
- crowdfunding, 33–34
- ETFs, 309
- as online resource, 351
- research reports and, 56
- secondary LBOs, 94
- secondary market, 173, 263, 307–308
- secondary offering, IPOs, 53
- sector (industry) funds, 308
- sectors, defined, 156–157
- secured (mortgage) bonds, 190
- securities
- auction-rate securities, 13
- derivatives, 39
- fixed-income securities, 187
- hybrid securities, 11
- mortgage-backed securities, 359
- private equity, 10
- publicly traded securities, 177
- TIPS, 309
- Securities and Exchange Commission. See SEC
- Securities Exchange Act of 1934, 263
- Security Act of 1933, 263
- selective disclosure, 267
- selling, general, and administrative costs (SG&A), 119
- selling companies, 43–44. See also IPOs
- sell-side analysts, 37–38
- conflicts of interest, 55–56
- disseminating research, 55–56
- goals of, 54–55
- investors expectations for, 55
- M&A process, 75–76
- overview, 53–54
- use of research report, 59–60
- seniority, LBOs, 235
- sensitivity analysis, 340–341
- SG&A (selling, general, and administrative costs), 119
- shareholder approval, 100
- shareholders (stockholders), 172
- shares. See also stocks
- break, 35–36
- price target, 38
- SharesPost, 178
- shark repellent
- acquiring debt, 74
- dual classes of shares, 74
- fair price amendments, 74
- golden parachutes, 73
- Greenmail, 74–75
- Pac-Man defense, 75
- poison pills, 73
- poison puts, 73
- staggered boards of directors, 74
- supermajority voting, 74
- white knights, 75
-
Shark Tank (TV series), 301
- Shiller, Robert, 304
- short-term borrowings, on balance sheet, 123
- short-term debt, 129
- Simons, James, 275, 299
- size premium, stocks, 216
- Slack, 53
- Snapple Beverage Corporation, 78
- social media, as information resource, 104–105
- solvency ratios, 244
- sophisticated investors, 300
- SPE (special-purpose entities; special-purpose vehicles), 290–291
- staggered boards of directors, 74
- Standard & Poor’s (S&P), 350–351
- standard deviation, 188
- statement of cash flows
- financing activities, 129–130
- free cash flow, 130–131
- investing activities, 128–129
- operating activities, 128
- role in deal making, 127
- Stein, Ben, 303
- stock buybacks, 180
- stock exchange, 29
- stock mutual funds, 307–308
- stock-based compensation, 128
- stock-based crowdfunding, 33
- stockholders (shareholders), 172
- stocks
- buyouts, 179
- characteristics of, 173–174
- common stock, 175
- dividends, 173
- follow-on offering, 180
- Form 4 documents, 181
- idiosyncratic premium, 216
- implied enterprise value, 182–183
- implied equity value, 182–183
- insider trading, 181
- market risk premium, 216
- options, 134, 175, 266
- overview, 171–172
- past transactions
- analyzing, 180–184
- finding, 176–179
- preferred stock, 175
- pre-IPO marketplaces, 179
- price appreciation, 173
- pricing, 175–176
- privately held companies, 177–178
- publicly traded securities, 177
- size premium, 216
- special business transactions, 173
- stock bashing, 266
- stock buybacks, 180
- stock ticker symbols, 172
- stockholders, 172
-
Storage Wars (TV series), 79
- strategic buyers
- LBOs and, 94
- M&A process, 26
- stress testing, discounted free cash flow model, 223
- subprime mortgage loans, 333
- summary compensation table, 50
- summary section, prospectus, 47
- Sunbeam, 279–280
- supermajority voting, 74
- synergy, 62, 64, 191
T
- tainted research, 331–332
- target weightings, 213, 347
- targets
- LBOs, 87–91
- M&A process, 27
- TARP (Troubled Asset Relief Program), 360
- tax effect ratio, DuPont analysis, 254
- taxes
- income taxes, 119
- M&A process and, 65–66
- 10-K report (annual report), 99–100
- 10-Q report (quarterly report), 100
- tender offers, 69, 74
- term to maturity effect, bonds, 198
- Tesla, 131, 238
- theory of relativity, 153
- 13D report, 99
- 13F report, 98–99
- Thomson Reuters, 106, 111
- three-factor method, DuPont analysis, 251–252
- time to market, 318
- TIPS (Treasury-Inflation Protected Securities), 309
- too big to fail, 330
- top-down analysis, 346
- total assets
- balance sheets, 123
- total asset turnover, 251–252
- trade facilitation, 39
- trading desks, 38–41
- algorithmic trading, 38–39
- overview, 38–39
- trading strategies, 40–41
- trading financing, 39
- trading income, 16
- traditional banking
- investment banking versus, 10–11
- traditional term loans, 229–230
- transparency, 268
- Treasury-Inflation Protected Securities (TIPS), 309
- Trefis, 117, 354
- trend analysis, 160–163
- Troubled Asset Relief Program (TARP), 360
- Trout, Mike, 194
- Tumblr, 30
- Twain, Mark, 343
- Twitter, 104
- two and twenty compensation scheme, 300, 301
- two-stage growth model, discounted free cash flow model, 222–223
-
two-tiered tender offers, 74
U
- Uber Technologies, 31, 53, 131, 176
- understating expenses
- Eddie Antar, 283–284
- matching principle, 282
- Waste Management scandal, 282–283
- underwriters, 16, 34–36
- underwriting
- underwriting section, prospectus, 51
- unicorns, 53
- unsecured creditors (debenture holders), 190
- use of proceeds section, prospectus, 48
- usury, 356
V
- valuation multiples
- debt-to-equity ratio, 169–170
- EV/EBITDA ratio, 138–140, 168–169
- overview, 136
- P/E ratio, 137, 167
- price-to-book ratio, 137–138
- value funds, 308
- venture capital, 301
- venture capitalists, 33
- venture-capital firms, 44
- Verizon, 30
- vertical mergers, 63
- Volcker, Paul, 268
- Volcker Rule, 268–269
W
- WACC (weighted average cost of capital)
- CAPM, 217–220
- cost of debt capital, 214–215
- cost of equity capital, 215–217
- discounted cash flow analysis, 346–347
- importance of, 213–214
- overview, 212–213
- Walt Disney Company, 117
- warrants, 175, 232–233
- Waste Management scandal, 282–283
- weighted average cost of capital. See WACC
- Weyerhaeuser, 69
- white knights, 75
- Willamette Industries, 69
- WorldCom, 288–289, 332
Y
- Yahoo!, 30
- Yale investment model, 87
- Yankee Beverages, 316–326
- yield to maturity, 195–196
Z
- zero-coupon bonds, 190, 356
- zero-sum game, 294
- Zuckerberg, Mark, 50
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