Investment Banking Technical Interview Questions All Answers Correct

Investment Banking Technical Interview Questions All Answers Correct Would you be calculating Enterprise Value or Equity Value when using a multiple based on free cash flow or EBITDA? ️Enterprise Value. EBITDA and free cash flow represent cash flows that are available to repay holders of a company's debt and equity, so a multiple based on one of those two metrics would describe the value of the firm to all investors. What does Balance Sheet show? What's the equation? ️It is a snapshot of the company's economic resources and funding for those economic resources AT a given point in time. Assets= Liabilities + Shareholder's Equity What does the Income Statement show? What's the equation? ️The income statement illustrates the profitability of the company OVER a specified period of time Net Income = Revenues- Expenses What does Cash Flow Statement show? What's the equation? ️Shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities (over a period of time). Beginning Cash+ CF from Operations+ CF from Investing+ CF from Financing= Ending Cash How are the three financial statements connected? ️The bottom line of the Income Statement is Net Income. Net income links to both the Balance Sheet and Cash Flow statement. In terms of the balance sheet, net income flows into stockholder's equity via retained earnings. Retained earnings is equal to the previous period's retained earnings plus net income from this period minus dividends (from this period). In terms of the cash flow statement, Net Income is the first line as it is used to calculate cash flows from operations. Also, any non-cash expenses or non-cash income from the Income Statement (i.e., depreciation and amortization) flow into the Cash Flow Statement and adjust net income to arrive at cash flow from operations. Any balance sheet items that have a cash impact (i.e., working capital, financing, PP&E, etc.) are linked to the cash flow statement since it is either a source or use of cash. The net change in cash at the bottom of cash flow statement and cash from the previous period's balance sheet comprise cash for the current period. What are the three components to the Cash Flow statement? What are the line items under each? ️1. Cash from Operations. Think of it as the activities that are necessary to run the day-to-day operations of a business (Net Income, D&A, Changes in Working Capital) 2. Cash from Investing. Investing activities are different from operating activities in that they are not necessary to run it daily. Generally speaking, these cash flows primarily consist of purchasing/selling PP&E, as well as capital expenditures. (PP&E, Capital Expenditures, Investments in short-term notes receivable) 3. Cash from Financing. (Proceeds from Common stock, Dividends on Common stock, Repayment of long term loans) If you could only use one financial statement to assess the financial state of a company, which one would you use? ️Cash flow statement because it shows the actual liquidity position as well as how much cash a company is using and generating. Income Statement can be misleading due the number of non-cash expenses represented in net income. The Balance Sheet shows a snapshot of the company at one period in time and doesn't show how operations are actually preforming. What is EBITDA? When is it commonly used? ️Earnings Before Interest Taxes Debt Amortization. A good metric used to evaluate a companies profitability (EBITDA= Revenues - Expenses [excluding interest, taxes, debt, amortization]. It is commonly used in the common valuation multiple EV/EBITDA and for leverage (Total Debt/EBITDA) and interest ratios (Total Interest/EBITDA) What is Enterprise Value (EV)? What is the equation for EV? ️The value of an entire firm both debt and equity. In transactions, this would be the price a company would pay to acquire another company. Enterprise Value= Market Value of Equity + Debt + Preferred Stock + Minority Interest - Cash What is net debt? ️A company's total debt minus cash it has on its balance sheet. Why subtract cash from Enterprise Value? ️Cash has already been accounted for in the market value of equity. It can also be used to pay a dividend or to reduce debt which reduces the purchase price of a company. What is Equity Value? ️The value of a firm's equity (market value per share x total shares outstanding) When looking at the acquisition of a company, do you look at equity value or enterprise value? ️Enterprise value since the acquiring company must purchase both equity and debt (assets and liabilities) of the business When calculating Enterprise Value, do you use the book value or the market value of equity? ️Market value of equity since that is the true supply and demand value of the company's equity in the market. What is the difference between public Equity Value and book Equity Value? ️Public value of equity-- Market value of equity (how it appears in the stock market) Book value of equity-- Equivalent to the Shareholder's Equity on the Balance Sheet Can have negative book Equity value (taking out large dividends or running at a net loss) but not a negative public Equity value (no such thing as negative stock price) What is valuation and what is it used for? ️The procedure of calculating the worth of an asset or company. It is used by bankers to value a company for clients when purchasing another company or selling itself. What are some ways you can value a company? ️1. Comparable Companies Analysis -- Finding a group of companies with similar financial, size, and sector background to the target company and work out a valuation based on what they're worth 2. Precedent Transactions -- Based on the idea that a company's worth can be determinedby looking at the prices paid for similar companies in similar situations in the past. 3. Market Value -- What the market values the company at (multiplying the number of shares outstanding by the current stock price) 4.. Discounted Cash Flow Analysis (DCF)-- Uses future free cash flows projections (usually 5-10 years) and discounts them to arrive at a present value estimate. How do you do comparable company analysis? (5) ️1. Select the Universe of Comparable Companies (find companies with similar business and financial characteristics) 2. Locate the necessary financial information via SEC files, equity research reports, and press releases. 3. Calculate the key statistics, ratios, then trading multiples for the comparable universe. I.E. Size (Equity value, Entreprise value, Net Income), Profitability (Gross Profit Margin, EBITDA, EBIT), Growth Profile, Return on Investment, Credit Profile (Leverage ratios, credit ratings, coverage ratio). Use that information to calculate relevant trading multiples such as P/E, EV/EBITDA, EV/EBIT, EV/Sales. 4. Benchmark the Comparable Companies. Lay out the financial statistics and ratios alongside those of the target and see the similarities and differences. 5. Determine Valuation. Use the medians for the relevant trading multiples such as EV/EBITDA as the basis for extrapolating an initial range. Narrow down the range by selecting the multiples of the closest comparables (2 to 3 companies). The apply the chosen range to the target's relevant financial statistics to produce an implied valuation. How do you do market value/market capitalization valuation? Can you do it for private companies?