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Strategic Capital Group
Workshop #1: InvestmentFundamentals
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Agenda
Creating a Company
Types of Financing
Financial Statements
Calculating Value
Exercise and Closing
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Meet the USIT Shirt Company
Currently run out of Parkers
dads garage, we are providers
low cost, awful quality t-shirts
to any suckers who will buy
them.
Currently, we arent producingmuch, and with so many other
competitors, we cant seem to
make a dent on the market.
However
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Breaking News: Hippies destroy all T-
shirt factories in protest of
something!
Q2FY12 Profits Soar!
Sales up 400% Profit doubles as customer count skyrockets
Heavy demand need for capital to expand
As the last surviving shirt company,what should USIT Co. do?
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Capital Financing: Debt
USIT T-Shirt Co. can raise debtto fund its growth
Terminology:
Par value: Initial amount paid by investor; returned at
maturity
Interest/Coupon: Amount paid periodically to
investors
Types of Debt: Bonds (source - public markets)
Loans (source - privately traded ornot traded)
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Capital Financing: Equity
USIT T-Shirt Co. can raise equityto fund itsgrowth
Terminology:
Stock: a share of ownership in a company Initial Public Offering: initial issuance of stock by a
company
Secondary Markets: investors exchanging securities
Types of Equity: Common Stock: no guaranteed dividend, vote
Preferred Stock: guaranteed a dividend, no vote
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Debt vs Equity
Debt
Advantages:
Doesnt seize ownership
Not as influence by marketswings
Easy to raise
Disadvantages:
Legal obligation to pay
Claim on assets during
bankruptcy
Equity
Advantages:
No legal obligation to pay
No claims on assets Disadvantages:
Giving over ownership
Shareholder activism
Outside investors (hostile)
Voting rights
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Sanity Check
Weve created a company
Weve talked about debt and equity
Terminology: Common Stock, Preferred Stock,
Bonds, Loans, IPO, Coupon, Par Value,
Secondary Markets, Primary Markets
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50/50 Split
50% Debt
Senior: more important paid first
Junior: less important paid after senior
50% Equity
Meet the investment bankerWERE GOING TO
GOLDMAN
All common stock
USIT T-Shirt Co. Raises Debt andEquity
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USITs Finances
Total Capital Gain:
10,000,000 shares at $1.00 share
$5,000,000 in senior-secured bonds
$5,000,000 in junior bonds
Expanded to 100 countries in less than one year
Indonesia, China, Germany, Chile, etc.
Factories, raw materials, human capital, more garages
Continued to increase revenues at fast rate
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The year rolls to a close
Public companies are required by the Securities
and Exchange Commission (SEC) to produce
financial statements that detail revenues, costs,
profits, assets, liabilities, equity, and cash
employed in the business on an annual report or
10-K.
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USIT Co.s Statements
The Income Statement:
-Tells us how much we sold, what it cost us to
sell it, and how much profit we made during
the period.
Revenue: $100,000,000
-Costs: $40,000,000Profit: $60,000,000
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USIT Co.s StatementsThe Balance Sheet:
-Tells us what resources are in the business (assets),
how much we owe (liabilities) and the equity within
the business.
Assets:Cash
Inventory
Equipment
Building
Liabilities:Bonds
Equity:
Common Stock
$10,220,000
$780,000
$2,350,000
$6,650,000
$10,000,000
$10,000,000
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Sanity Check Part 2
Weve learned about accounting
Weve raised debt and equity for USIT Co.
Terminology: 10-K, Asset, Liability, Balance
Sheet, Income Statement, Revenue, Cost
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Valuable Metrics Inside the 10-K
Literallyhow much your company earns per each share
Profit Margin =
Net Income (Profit)
Revenue (Sales)
=$60 Million
$100 Million
= 60%
Earnings per Share =Net Income (Profit)
Shares Outstanding
=$60 Million
10 million
=$6 per
share
What percentage of your sales turn are left as profits
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A Wild Pokmon Has Appeared! SCG
Shirts Co.! Another t-shirt company has seen our success
and entered the market!
Revenue: $120,000,000
Costs: $20,000,000
Profit: $100,000,000
Shares Outstanding: 5,000,000
Share Price: $2.00
EPS: (100mm) / (5mm) = $20.00
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Become The Investor
Which is the cheaper investment?
$1.00 per
share
$2.00 per
share
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P/E- The Price to Earnings Ratio
Share price is not enough!
P/E: how much does one dollar of
this companys earnings cost?
USIT P/E =Price (the amount you pay)
Earnings per share (how much the
firm makes)
=$1.00
$6.00
= .17x
SCG P/E =
Price (the amount you pay)
Earnings per share (how much the
firm makes)
=
$2.00
$20.00= .10x
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Become The Investor
So now which is the cheaper investment?
.17x .10x
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P/E: What Does It Mean?
Widely varying interpretations
High P/E investors value the earnings more,
willing topay more
Could mean optimism
Low P/Echeaperearnings
Note: This is all relative
Compare to other companies in industry
Cheap-er, costli-er
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More Ratios
P/B: Price-to-Book
Book Value: Accounting value of a companys
assets
Tells us what we are paying for every dollar ofassets the company owns
P/S: Price-to-Sales
Tells us how much we are paying for a dollar ofrevenues.
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Beta
Beta > 1 = more volatileBeta < 1 = less volatile
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Sanity Check Part 3
Weve learned about three Price Multiples
Weve covered what Beta is
Weve compared two companies and decidedwhich to invest in
Terminology: Price to Earnings, Price to Sales,Price to Book, Beta, EPS, Margin
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Exercise
Which of the following companies would you
buy? Why?
Company Price Shares Assets Revenue Profit Margin P/E P/B P/S
USIT $4.00 10,000,000 $11,000,000 $100,000,000 $33,300,000 33.3% 1.20 3.64 0.40
SCG $7.57 5,000,000 $12,000,000 $125,000,000 $48,000,000 38.4% 0.79 3.15 0.30
UCF $82.53 1,000,000 $19,800,000 $228,000,000 $49,500,000 21.7% 1.67 4.17 0.36
Nike $67.73 2,000,000 $8,000,000 $48,000,000 $35,700,000 74.4% 3.79 16.93 2.82
Average $40.46 4500000 $12,700,000 $125,250,000 $41,625,000 41.9% 1.86 6.97 0.97