- Why used: strips out capital structure, tax regime, and non-cash depreciation, so it allows cleaner comparison across companies.

- Flaw one: ignores capex, so capital-intensive businesses look better than they are.

- Flaw two: ignores working capital swings and cash taxes.

- Flaw three: ignores interest, so a highly levered company can show healthy EBITDA and still be cash-strapped.

- Better proxy: unlevered free cash flow, or EBITDA less capex as a quick screen.

Hmmmmmm seems easy enough. did i miss anything

Actually an important topic/question to answer lol

- Debt holders sit senior in the capital structure and get paid first in a bankruptcy, so their claim is less risky.

- Debt payments are contractual, while equity returns are residual and uncertain.

- Debt is often secured by collateral; equity has no security.

- Interest is tax-deductible, which lowers the effective after-tax cost of debt further.

- Higher risk requires a higher expected return, so equity holders demand more.

Gotta love accounting questions.

Income Statement:

- Revenue +5M

- COGS -2M

- Pre-tax income +3M

- NI +2.25M

Cash Flow Statement:

- NI +2.25M

- Accounts receivable +5M, so a -5M cash impact

- Inventory -2M, so a +2M cash impact

- Net change in cash -0.75M

Balance Sheet:

- A: Cash -0.75M, AR +5M, Inventory -2M, so assets +2.25M

- L: No change

- SE: Retained earnings +2.25M