Wall Street Oasis Exam with Complete Answers Graded A+ 2024 New Update
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Wall Street Oasis
Wall Street Oasis Exam with Complete Answers Graded A+ 2024 New Update
How do you become an equity holder? - Answer-- Provide bootstrap / angel / VC funding
- Buy shares during an IPO or on the open market once the company is trading publicly
- Buy options, warrants or other equity-granting i...
Wall Street Oasis Exam with Complete
Answers Graded A+ 2024 New Update
How do you become an equity holder? - Answer-- Provide bootstrap / angel / VC
funding
- Buy shares during an IPO or on the open market once the company is trading publicly
- Buy options, warrants or other equity-granting instruments
- Be granted stock, options or warrants in lieu of cash compensation
- Provide equity funding in an LBO
Debt holders - Answer-- Cash financing in exchange for a contractural promise to be
repaid over a set period of time with a set amount of interest (yield)
- Little or no say int eh company's strategy
- Contractural covenant rights
- No claim to financial upside beyond their contractural interest payments
- Only downside if the company defaults or goes bankrupt
- More senior than equity, gain a massive amount of power if the company ever defaults
on its debt payments
- Safest investment you can make
- Interest rate (yield) that debt holders receive is lower than the rate of return that equity
holders expect
- Risk averse and want to minis odds of losing principal
LBOs are typically executed with... - Answer-a mixture of capital sources with varying
levels of seniority
Bank debt - Answer-- Bank loans, senior debt, RCFs, Term loan A / Term loan B, Senior
Secured, Secured
- Most senior and secured by both the assets and the cash flow of the company
- Must be repaid in full with interest over 5-8 years and typically include amortization
(repayment of principal in addition to interest)
- May typically be repaid early by the company with no pre-payment penalty
- Frequently contain maintenance covenants and may contain incurrence covenants
- 30-50% of LBO capital, 2-4x LTM EBITDA
- Yield quoted as LIBOR + 200-400 bps (usually gets you to 4-8%)
Term Loan A - Answer-- Bank debt, secured
- Typically shorter terms (5-6 years) and higher levels of annual amortization
Term Loan B - Answer-- Bank debt, secured
- Typically have longer terms (7-8 years) and no principal amortization prior to full
repayment at end of the term
,Revolver (RCF) - Answer-- Corporate credit cards, which may be drawn down and
repaid as needed to fund daily operations
Subordinated Debt - Answer-- Sub-debt or HY debt, Senior unsecured bonds, senior
subordinated bonds, subordinated bonds ("BONDS")
- Juniro to bank debt and usually unsecured by assets
- Longer term in length (typically 7-12 years) with no principal amortization prior to full
repayment
- Principal cannot be prepaid
- Must be at least 100-200mm in size
- Frequently publicly traded with highly fragmented investor base
- No maintenance convents but do have incurrence covenants
- 15-25% of LBO capital, 1-2x LTM EBITDA
- Fixed coupon payments (not calculated off LIBOR), generally 8-12%
"Mezz" - Answer-- Mezzanine debt, warrants, preferred equity
- Junior to all other types of debt and always unsecured
- Debt like qualities because usually entails payment of interest / coupons but also
equity-like upside because it contains provisions for conversion into common equity
- Term length is variable and often indefinite
- Sometimes used instead of HY if the total dollar amount is too small
- Interest / coupons paid in cash or PIK
- No covenants
- 5-15% of LBO capital, 15-20% rate of return (blended with equity convert)
Common equity - Answer-- Most junior capital with the highest risk but most upside
- Controls the company as long as debt convent and payment requirements are met
- 5-15% usually reserved in an option pool to incentivize key management
- 10-50% of LBO capital (20-30% most common) and rate of return demanded of 20-
30%
Covenants - Answer-- Contractural agreements between lenders and borrowers
- Debt holders are risk averse and want extra protections to ensure they get their due
payments in the future
- Rights and protections
Incurrence covenants - Answer-- Both for bank debt and subordinated debt (bonds)
- Prevent company from taking actions that would harm the covenant holder unless the
holder agrees
1. May not incur debt which is more senior in the capital structure (security of their
investments obviously depends on them being senior in the capital structure)
2. May not incur more debt which would cause it to exceed a total leverage ratio or total
debt quantum
3. May not spend cash on certain types of capital investments or acquisitions or
shareholder dividends without the lender's approval
, - No periodic tests for incurrence covenants
Maintenance covenants - Answer-- Common for bank loans
- Ensure company maintains sufficient cash and profitability cushion to never even
approach default
- Debt ratio below a certain ceiling (ex. debt / ebitda or debt / equity)
- Maintain an interest coverage ratio above a certain floor (ebitda / total annual interest)
- Subject to periodic (usually quarterly) tests, a crucial distinction between maintenance
and incurrence covenants
Valuation - comparable companies - Answer-- Multiples are most common
- Ratio of the value of a company relative to some quantitative measure of its
performance
- Investors are willing to pay higher multiples for companies which they expect will
perform better in the future (two companies have same ebitda but one is growing and
other declining, a rational investor would pay a larger multiple for one than the other)
Pros: Quick way to gauge relative valuation of companies of different sizes, less volatile
and less prone to assumption driven swings from bottom up valuation methods
Cons: If market is wrong, your valuation is wrong, no single comp is a perfect proxy
Selecting comps - Answer-- Competitors in the same industry
- Companies that perform similar functions
- Geography
- Growth
- Profitability
- Capitalization
- Competitive position
What does private equity do? - Answer-Buys pieces (equity) of companies with the goal
of selling the equity within 3-7 years for a profit
Who are LPs typically? - Answer-Endowments, pension funds, sovereign wealth funds,
wealthy individuals and large corporations
Profit structure - Answer-GP (PE firm) returns 80% of profit along with original
investment to LPs. Remainder (carried interest or carry) is split among the GP. LPs also
pay an annual management fee to PE firms, generally amounting to 2% of total assets
under management (AUM).
Startup (Early Stage) Investing - Answer-1. Seed Capital
2. Venture Capital
Seed Capital - Answer-- Earliest dollars into new start-up
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