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Accounting Allah shmoop in an accounting course far far away

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You love Star Wars The original Obviously you remember that

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scene with Luke semi blindfolded in the beginning with his

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lightsaber fending off little laser shots from the hovering drone

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practising to be a soldier a dreaming of someday not

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being a farmer that hovering drone was pretty grabby right

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It had a flexibility and in a way intelligence that

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was captivating Alright roll the clock forward a couple of

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decades to the scene at the New York Stock Exchange

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Right here You're banging the opening bell gavel thinking you've

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just taken your drone company Blade Runner Public Your drones

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are expensive at retail They cost about two thousand dollars

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with the works including the cameras sensors extended battery power

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in all the controls But those who loved your drone

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love it a lot and most paid up for the

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works model Every geek a kid wants one and it's

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the parents who will generally pay for them Roll the

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clock forward three more years Great AIPO stock skyrocketed from

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eighteen bucks a share where you raise thirty six million

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dollars for your company by selling two million shares to

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the public to now trading at fifty dollars a share

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Almost three acts Baby The masses love your product and

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through innovation you've been able to take your costs of

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twelve hundred dollars a unit on the works model to

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eleven hundred dollars Right You saved a hundred bucks a

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unit You wholesale the product to places like Target and

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Walmart and Amazon for fifteen hundred dollars where they Mark

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it up 2:2 grand and then sell it So three

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years after the AIPO you are making roughly four hundred

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dollars on a fifteen hundred dollars wholesale price Right so

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fifteen hundred minus eleven hundred cost US four hundred contribution

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The company is profitable but not hugely so and you

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have a ton of competition coming You know that the

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onslaught will test the value of whatever brand equity I'ii

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customer loyalty you've built Thus far you have twenty million

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shares outstanding in a fifty dollars a share It values

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your company at one billion dollars You have no debt

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You have fifty million in cash on the books with

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twenty million and earnings This year you'll have a dollar

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a share in net income and at fifty bucks a

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share Your company trades at well about fifty times earnings

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or forty seven point five times If you x out

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the net cash on the balance sheet there All right

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well how do we get that number Well it's called

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the equity capitalization of the company and its nine hundred

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fifty million dollars market capitalization is a billion dollars right

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It's just twenty million shares times fifty dollar price at

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some market cap that includes everything And it includes the

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cash but get better transparency A lot of investors like

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toe look att the equity capitalization in the company where

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they basically subtract out the net cash and or add

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back Then that debt that a company has to in

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this case company has net cash of fifty million dollars

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and you'd say the equity capitalization of the company is

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nine fifty Okay if company is earning twenty million bucks

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this year well then to get to its multiple we

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divide that nine hundred fifty million dollars Buy twenty million

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to get a price to earnings ratio of forty seven

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point five times this year's earnings Well guess what Nobody

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pays fifty ish times Earnings for anything when people are

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buying your stock They're expecting your earnings to grow or

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come pound at a very high rate And the whisper

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number on the street is that you'll earn two dollars

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a share next year up from a dollar now like

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the hammer or a brokerage or key analyst covering your

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stock might publish in writing that you'll earn a dollar

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forty three next year But the number everyone is whispering

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about is closer to two bucks meaning that your stock

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is whispering Lee poised to go up a lot at

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least in theory So the whisper number believing bulls are

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saying that at fifty dollars a share you're actually only

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trading at about twenty five times earnings and they believe

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you'll generate another thirty million in cash in the next

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year so that you'd have eighty million dollars in cash

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on the books You know up from fifty and you

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can look through that on the balance sheet but you

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have to prove these numbers You know consumers are fickle

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at this moment You have fifty million dollars in net

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cash and for a regular Joe that would seem like

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it's one of money But for a globally distributed high

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end toy maker It's not a lot of money by

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way of comparison Just the marketing budget of one Hollywood

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summer movie is way more than fifty million dollars So

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you have to think carefully about that dough and a

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bunch of questions taunt you at night Should I sell

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another ten percent of my company to the public and

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raise a one hundred million of cash at a billion

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dollars in market capitalization Ten percent is the one hundred

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million bucks How do I feel about my stock at

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fifty times earnings It feels expensive on today's Numbers I'm

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nervous All print 80 cents a share instead of two

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dollars in the stock will crash I will have sold

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a lot of shares to people who trusted me Then

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at fifty dollars when it'll then be worth probably more

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like ten bucks or less Well what are the ethics

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here Is it ethical to not sell shares If I

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feel minor overpriced right Or is it unethical to do

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so Because then I stick the share Buying public was

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shares of my stock at fifty dollars that they should

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have only paid ten dollars for Who do I work

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for who Do I owe the ethical consideration here Or

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should I just take out debt to have the extra

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cash And don't worry about all this stuff What would

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I spend the money on anyway if I had an

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extra hundred million bucks laying around on this last question

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is what you will awake to issue carefully review the

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distribution elements of your business But yeah if you don't

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ask yourself these questions well you might just fall prey 00:05:27.67 --> [endTime] to the dark side

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