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Principles of Finance: Unit 1, The Sauce Company 15 Views


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Description:

Time to revisit the Sauce Company. So let's see what's cookin'. Artie and Bernie, who at one time owned 50% of the company each, have been diluted. Fortunately, the sauce has not suffered the same fate.

Language:
English Language

Transcript

00:00

principles of Finance, a la shmoop. the sauce company -all right let's bring

00:07

our attention back to the sauce company. and take a look at their balance sheet.

00:11

well as you can see the company's equity at this point looks like this: five [balance sheet pictured]

00:16

hundred thousand of preferred stock in a million bucks of common stock. so at

00:21

inception Artie and Bernie owned the company fifty-fifty. halfsies. between the

00:26

two of them they own 100% but now each instead of owning 50% owns

00:31

33% assuming a you know successful outcome. so the net worth of the company

00:37

is now $500,000. it's just the cash. that's the net worth there's a million

00:43

dollars of perceived value here though. why? what did Reid buy? well he's a savvy

00:49

guy he knows that Artie and Bernie at 21 are not exactly the Michael Jordan of [Bernie, Artie and Reid pictured]

00:54

the global scale food distribution. in Reid's mind the million bucks pre-money

00:59

valuation he paid for this company was for bubbies secret sauce formula. they

01:05

call that the intellectual property or IP of the company. that's where all the

01:10

value is at this moment. in a pinch Reid hopes that while he could sell it to one

01:15

of the Thousand Islands or Paul Newman or the good folks at Pace. proudly not

01:21

from New York City. at this point Artie officially becomes the CFO and CEO of

01:26

the company. in a tiny company that's common practice but in anything larger

01:31

it's a big no-no. well Reid is looking over their shoulders anyway and he [man folds arms]

01:34

explains the balance sheet equation as ale. yeah kind of like the stuff you

01:38

drink. assets minus liabilities equals equity. $500,000 in assets which is cash

01:45

minus zero dollars in liabilities is $500,000 in equity. confused a bit? all

01:50

right let's break this down assets the barbecues- the knowledge how to make the

01:55

distinctively semi spicy sauce derived from oil schmaltz and secret recipes. the

02:01

brand name, the sauce and well, Bubbie. in more pedantic terms add accounts [top secret file shown]

02:06

receivable investments inventory and property both intellectual and physical,

02:11

all that, assets. liabilities well right now we have

02:15

none. think of liabilities as what do we owe? as the sauce company gets bigger

02:20

it'll start buying a lot of raw materials to make the stuff and it'll

02:24

have agreements with those suppliers to you know pay them later for the onions

02:29

thank you very much. those are called accounts payable. the company might also

02:33

raise additional money on a long term basis by borrowing it. and that borrowing

02:37

would also be considered a liability. now in theory the preferred shares at Book

02:43

value or what they were written down at the book out of five hundred thousand [book value defined]

02:46

dollars would be a liability but preferred shares are actually equity.

02:51

they convert into common when things go well. and there's no liability on the

02:55

company to pay back the five hundred thousand dollars of cash from its

02:59

operations. this is kind of a venture capital flavor of preferred stock

03:03

different from other types of preferred usually found in public companies. well

03:07

don't worry about all that stuff yet what you do have to know is that book

03:11

value is what common shareholders would get if the company just died and put

03:16

itself on eBay, less the bloated listing fees on eBay. they get a net [head stone pictured]

03:21

number whatever the company sold for well preferred shareholders would get

03:24

first and whatever is left that would go to the common shareholders. remember more

03:28

or less that this number ale assets minus liabilities equals equity. okay? got

03:35

it? so that's the equity of the company comes from assets minus liabilities. Book

03:39

value is not an assessment of the selling price of the original

03:42

handwritten copy of Moby Dick .instead book value usually gets brought into

03:46

question for market valuations sake when things have gone horribly wrong and

03:51

there really isn't an ongoing enterprise anymore for the business. not a good

03:55

thing for investors most of the time, meaning people look at Book value or how

03:59

much money the company raised as at least an initial guess for what it's

04:03

worth like the cash they raise they bought a bunch of barbecues what do they

04:07

work now? oh and don't forget equity. that's the amount of value you have in

04:12

asset after subtracting any debts. so as you can see there's a lot more that goes

04:17

into the sauce business than meets the eye ,or the mouth. there's the matter of [sauce simmering]

04:21

your assets liabilities and overall equity but let's not forget the super

04:25

secret sauce recipe Ardie Bernie's grandma is going to get really

04:29

angry about them stealing. [man looks fearful]

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