Daily Logs

Types of Bonds — In Terms of Guarantee

Secured bonds: has a guarantee behind his back. If issuer cannot repay its debt, you can seize the property assured as guarantee. Debenture bonds: has no guarantee for getting your money back. It is unsecured and it is called junk bond for that of high risk + high interest.

Types of Bonds — In Terms of Term

Term bonds: All bonds issued at the same time has same maturity date. Serial bonds: gradual maturity for bonds. Different bonds issued at the same time has different maturity date.

Cost vs. Fair Value

The value of assets can be written in two ways:

1. Cost: You can write asset's value based on the value you bought it

2. Fair value: You can write asset's value based on the today's actual value

The one simple handicap with fair value is how you are gonna measure asset's today value.

The Three Levels of Fair Value

Level 1: The price you see on the exchange

Level 2: The price you observe through data such as yield curves, forex etc.

Level 3: The price you cannot observe because such data does not exist and to set a price you need a lot of assumptions

Financing Commitment in an LBO

A financing commitment from the investment banks to a financial sponsor includes three documents: a commitment letter, which covers the bank debt and the bridge facility; an engagement letter, in which the sponsor engages the investment banks to underwrite the bonds on behalf of the issuer; and a fee letter, which sets out the fees paid to the banks and is kept confidential.

Traditionally, the sponsor must provide certainty of financing to the seller, so it pays for the bridge commitment even if the bridge is unlikely to be funded at close.

Private Placement

A private placement involves selling stock shares directly to chosen investors and institutions instead of the open market. It is an alternative to an initial public offering (IPO) for a young company seeking to raise money to expand.

Private Placement Memorandum

Private Placement Memorandum (PPM) is a legal disclosure document provided to prospective investors when a company or fund raises capital through an unregistered, private securities offering.

Cash Runway

A cash runway is the number of months a company can continue operating before it runs out of money, assuming current spending levels and revenue streams remain constant. Formula: Cash Runway = Cash on Hand ÷ Monthly Burn Rate. For example, if a startup has $1,200,000 in the bank and spends $100,000 per month, its cash runway is 12 months. Investors and founders use this metric to determine how much time they have before needing to raise more capital, cut costs, or reach profitability.

Earnings Call Jargon

• Backlog: Orders received but not yet fulfilled or delivered.
• Comparable Store Sales (Comps): Measures current store sales revenue against the revenue from the same period in the past. It excludes new openings or closings which focuses on only the current stores growth or decline.
• Whisper Number: The unofficial earnings figure that analysts or investors expect, which may differ from the company's official guidance.
• Guidance: Management's official forecast or projection of future performance.
• Double Click: It is used by executives to indicate they are going to elaborate further on a specific topic.
• Lumpiness: It is used to explain uneven or unpredictable revenue across different quarters.

S-1 Filing

S-1 is the required registration statement filed before a company's IPO. It includes key sections for valuation: Financial statements, MD&A where management breaks down revenue by segments and explains margin trends, operating metrics, cap table which is required for equity value calculations. S-1 documents provide transparency between the company and SEC.

S-3 Filing

S-3 is simplified S-1 filing which company files after its IPO to issue new shares to the public. It is simple because the company already publishes 10-K and 10-Q reports regularly. So, no need to repeat same things over and over again. Investment banks act as underwriters in both S-1 and S-3 transactions.

Comprehensive Income

Comprehensive Income = Net Income + Other Comprehensive Income (OCI). OCI shows changes that comes from unrealized gains/losses like currency translation changes, investments, and pension and postretirement medical plan adjustments. These changes go directly to equity and don’t affect earnings per share.

Predicted Beta

Predicted Beta shows how sensitive a stock is to market movements. Historical beta looks at the past. Predicted beta adjusts it toward 1.0, because betas tend to move closer to 1.0 over time. Formula: Adjusted Beta = (2/3 × Historical Beta) + (1/3 × 1.0). It is used in CAPM when calculing cost of equity for WACC. Don’t use historical beta when you calculate WACC, always use predicted beta.