In this tutorial, you’ll learn how to prepare for “fit” questions in investment banking interviews efficiently and how to use the “Rule of 3” to develop short anecdotes and responses that you can re-use to answer the most common questions. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 3:57 Your 3 “Short Stories” 6:22 Your 3 Strengths and 3 Weaknesses 8:36 Your Top 3 Real Weaknesses 12:59 Recap and Summary Lesson Outline: The WORST way to approach “fit” questions is to memorize dozens or hundreds of questions and answers. Instead, you should develop a few stories that you can use and re-use for the most common qualitative questions. Your 3 “Short Stories” should include a Success Story, a Failure Story, and a Leadership Story that demonstrate the qualities bankers are looking for: Analytical skills, ability to work in a team, ability to work long hours, attention to detail, communication skills, and a demonstrated interest in finance. For example, you could discuss an internship where you made several corporate finance processes more efficient, a Treasury internship where you worked with other departments to help the company avoid breaching a Debt covenant, and a math tutoring business you started but ultimately had to shut down. Your 3 Strengths should be easy because you already know the qualities bankers are seeking. Your 3 Weaknesses are tougher because they must be real, but not too real, they can’t be overly personal, and they must be things you could conceivably fix (e.g., don’t say you’re “too short”). You could say that you take too long to make decisions or second-guess yourself, that you’re not always good about speaking up, or that you don’t always follow up on tasks and assignments. For your 3 “Real Weaknesses,” compare yourself to the *ideal* candidate for IB roles (Ivy League school, perfect grades and test scores, accounting/finance major, multiple languages, multiple finance internships, sports, study abroad, and international recognition in some area), and assess how you’re different. Maybe you went to a non-target school or you have low grades; maybe you don’t have much finance experience or you became interested in banking too late; or maybe you haven’t taken any accounting or finance classes. Find your top 3 weaknesses and develop ways to address them. For example, you could say that your family couldn’t afford an Ivy League school or that you attended your university because of a generous scholarship. Or you could explain that you’ve been moving in the direction of finance ever since you became interested in it, despite a late start that precluded you from winning internships. Or you could point to self-study, the CFA, or other courses to explain your accounting/finance skills and how you’ve learned the requirements independently. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Investment-Banking-Fit-Questions.pdf
Views: 28378 Mergers & Inquisitions / Breaking Into Wall Street
In this lesson, you'll get a quick and easy-to-implement, but still very effective. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You'll also get tips on how to improve your resume / CV walk-through in investment banking, private equity, and other finance interviews. Your resume walk-through is how you answer the "Tell me about yourself" or "Walk me through your resume" or "Why are you here today?" question when you walk into an interview and first introduce yourself. This is IMPORTANT because it's y our first impression, and interviewers often decide your status within the first 5 minutes of the interview. Come across well, and you can answer other questions poorly but still receive a job offer or move onto the next round; come across poorly, and you won't move to the next round no matter how great your Excel skills are. We recommend this outline for your resume walk-through: 1. The Beginning - Where you went to school, where you started out working, your family background, etc. 2. The Spark - What, specifically, made you interested in finance initially? A person? An event? Your parents day trading or running a business? A professor? An internship? 3. Growing Interest - How did you develop this interest via classes, activities, further internships or jobs, and your networking and self-study efforts? 4. The Future / Why You're Here Today - What's your future goal (advising / investing in companies?) and how will working at this firm allow you to contribute TO that firm while also achieving your long-term goals? THE PROBLEM: Often, the last part - the "Future" / "Why You're Here Today" segment is BORING and what you say sounds identical to everyone else's statement. "I want to become a trusted adviser to companies." "I want to invest in companies in XX sector." THE SOLUTION: Link it back to the FIRST PART of your story - either your Beginning or Spark - to make it more memorable and attention-grabbing. It works in movies (see: Inception and The Usual Suspects), and it works in interviews, too! Example 1: You're in a private equity interview, and your Spark is how you helped a private tech company raise funds; you saw additional expansion opportunities via partnerships and other deals, but in investment banking you just advise on one deal and that's it... so you started looking into PE in more detail. Instead of just saying, "I want to combine my interest in tech with my background in finance and invest in tech companies in the future," say: "So I'm here today because of that original situation with the private company that sparked my interest in the industry - I want to get more opportunities like that, where I can help improve businesses over the long-term via partnerships, acquisitions, and operational changes that you only get to implement in private equity. And in the future, I want to be an investor in the tech sector, and your firm is the best place for that because... [Insert the rest of your reasons here]" Example 2: You're in an investment banking interview, and your Spark was working at a non-profit that merged with another non-profit one summer, after which you started taking more finance classes and learning more about the industry. You have a background in public policy, and your long-term plan is to advise in the Project Finance / Public Finance sectors. Instead of just saying that for the last part of your story, you could say: "I want to advise organizations that may not be as ‘savvy’ about finance, like the merged non-profit I was at a few years ago – and become a trusted adviser to those types of public/private organizations. Your firm is the ideal place to do that because of [And insert references to other deals or clients they've advised here]."
Views: 58611 Mergers & Inquisitions / Breaking Into Wall Street
How to Tell Your "Story" in Investment Banking Interviews in 5 Simple Steps... http://www.mergersandinquisitions.com/how-to-tell-your-story-investment-banking-interviews/ (Get the full article and transcript here) In past tutorials we've talked a lot about your "story" in interviews, how important it is, and the mistakes you could make that will cost you an offer. But now I'm going to go beyond that and actually give you a blueprint that will let you tell your "story" effectively and win offers no matter what level you're at. Why Does This Matter So Much? Three reasons: - Your story sets the tone for the entire interview, and a poor first impression is impossible to overcome.- Interviewers often make offer / no offer decisions subconsciously within the first 2-3 minutes, based 100% on your story. - It's easier to fix your "story" than to "fix" your lack of finance/accounting knowledge. We're talking hours vs. weeks. In this lesson, you'll learn how to craft your story to wow your interviewers and land lucrative investment banking job offers. --- WANT MORE FREE TUTORIALS, TIPS & TEMPLATES? Subscribe to the Banker Blueprint, a complete action plan for getting into Investment Banking, PE and Hedge Funds. www.mergersandinquisitions.com/banker-blueprint
Views: 84331 Mergers & Inquisitions / Breaking Into Wall Street
How to Tell Your Story in Investment Banking Interviews - Updated for 2017. A lot of our advice from past years is still applicable, but a few things have changed over time. Table of Contents: 1:08 Part 1: What’s Different About Your Story Now? 1:47 Part 2: What is Your Story? 2:45 Part 3: How to Tell Your Story in 4 Simple Steps 10:20 Part 4: Mistakes to Avoid in Your Story 12:02 Recap and Summary To get the full written version, templates, and other examples, click on the links below: http://www.mergersandinquisitions.com/how-to-tell-your-story-investment-banking-interviews/
Views: 39531 Mergers & Inquisitions / Breaking Into Wall Street
In this LBO Model tutorial, you'll learn how to build a very simple LBO model "on paper" that you can use to answer quick questions in PE (and other) interviews. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" This matters because in many cases, they'll ask you to calculate numbers such as IRR and multiple of invested capital very quickly and will not actually ask you to build a more complex model until later in the process. You should always START this exercise by looking at the actual question or set of questions they are asking you: "Calculate the purchase price required for ABC Capital to obtain a 3.0x multiple of invested capital (MOIC) if it plans to sell OpCo after five years at an EV / EBITDA multiple of 6.0x." So they're giving you the exit multiple and the return on investment that the PE firm is targeting, and you have to figure out the initial purchase price by "working backwards." Here's how we interpret each line in this case study and use it in the model: "OpCo currently has EBITDA of $250mm, and ABC believes that the new management team could keep EBITDA flat for the next 5 years." This tells you to make the initial EBITDA $250mm and keep it at that level for 5 years - skip revenue, COGS, OpEx, and everything else because none of that matters if this is all they give you. "ABC Capital has obtained debt financing of $750mm at 10% interest, and OpCo expects working capital to be a source of funds at $6mm per year." The initial debt balance is $750mm and there's a 10% interest rate, so the interest expense will be $75mm per year. In the "Cash Flow Statement Adjustments", since Working Capital is a SOURCE of funds it will add $6mm to cash flow each year. "OpCo requires capital expenditures of $35mm per year, and it has a tax rate of 40%. Assume no transaction fees, zero minimum cash required, and that PP&E on the balance sheet remains constant for the next 5 years." Also in the CFS section, CapEx = $35mm per year, and Depreciation also equals $35mm per year since the PP&E balance does not change at all. So you can also fill in the Depreciation figure on the Income Statement. No transaction fees and no minimum cash requirement simplify the purchase price and debt repayment - although we don't even have debt repayment here. "Assume that excess cash is NOT used to repay debt, and instead simply accumulates on the Balance Sheet." This makes the final numbers easier to calculate, since interest expense will never change and you can simply add up cash generated to get to the final cash number at the end. PROCESS: 1. Start with the Income Statement - EBITDA is $250mm per year. Subtract Depreciation of $35mm per year, and interest of $75mm per year. So EBIT = $140mm. Taxes = $140mm * 40%, so Net Income = $140mm - $56mm = $84mm. 2. On the simplified CFS, Net Income = $84mm, Depreciation = $35mm, Change in Working Capital = $6mm, CapEx = ($35mm), so Cash Generated per year = $90mm. 3. EBITDA Exit Multiple = 6.0x, and final year EBITDA = $250mm, so Exit EV = $1.5B. Subtract the outstanding debt of $750mm and add the cash generated in this period of $450mm, so Equity Proceeds = $1.2B. 4. Targeted MOIC = 3.0x so the PE firm would have to invest $400mm in the beginning. $400mm equity + $750mm debt = $1.150B, so the purchase multiple is $1,150 / $250 = 4.6x. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-04-Simple-LBO-Model.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-04-Simple-LBO-Model.xlsx
Views: 208360 Mergers & Inquisitions / Breaking Into Wall Street
In this tutorial, you'll learn about the most common LBO modeling-related questions and some tricks and rules of thumb you can use to approximate the IRR and solve for assumptions like the purchase price and EBITDA growth in leveraged buyouts. Table of Contents: 2:36 Question #1: LBO Model Walkthrough 5:34 Question #2: Ideal LBO Candidates 8:09 Question #3: How to Approximate IRR 11:46 Question #4: How to Solve for EBITDA or the Purchase Price 13:58 Question #5: How to Approximate the IRR in an IPO Exit 16:03 Recap, Summary, and Key Principles Lesson Outline: Will you get LBO-related questions in interviews? Yes, possibly, but full case studies are unlikely unless you're interviewing for PE roles or more advanced IB roles. Interviewers now ask trickier questions about the fundamentals, they ask progressions of questions on the same topic or scenario, and they're more likely to give you *simple* cases and numerical tests rather than complex ones. A typical progression for LBO models might be as follows: Question #1: LBO Model Walkthrough "In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it; the math works because leverage amplifies returns; the PE firm earns a higher return if the deal does well because it uses less of its own money upfront." In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins. In Step 2, you create a Sources & Uses schedule to calculate the Investor Equity paid by the PE firm. In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill. In Step 4, you project the company's statements, or at least its cash flow, and determine how much Debt it repays each year. Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the MoM multiple and IRR. Question #2: Ideal LBO Candidates Price is the most important factor because almost any deal can work at the right price – but if the price is too high, the chances of failure increase substantially. Beyond that, stable and predictable cash flows are important, there shouldn't be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion. Question #3: Approximating IRR "A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt. The company's EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What's the IRR?" Initial Investor Equity = $100 million * 10 * 40% = $400 million Exit Enterprise Value = $150 million * 9 = $1,350 million Debt Remaining Upon Exit = $600 million – $250 million = $350 million Exit Equity Proceeds = $1,350 million – $350 million = $1 billion IRR: 2.5x multiple over 5 years; 2x = 15% and 3x = 25%, so it's ~20%. Question #4: Back-Solving for Assumptions "You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA. You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?" Initial Investor Equity = $100 * 10 * 50% = $500 20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%) Exit Equity Proceeds = $500 * 2.5 = $1,250 Remaining Debt = $250, so Exit Enterprise Value = $1,500 Required EBITDA = $150, since $1,500 / 10 = $150 Question #5: Approximating IRR in an IPO Exit "A PE firm acquires a $200 EBITDA company for an 8x multiple using 50% Debt. The company's EBITDA increases to $240 in 3 years, and it repays ALL the Debt. The PE firm takes it public and sells off its stake evenly over 3 years at a 10x multiple. What's the IRR?" Initial Investor Equity = $200 * 8 * 50% = $800 Exit Enterprise Value = Exit Equity Proceeds = $240 * 10 = $2,400 "Average Year" to Exit = 1/3 * 3 + 1/3 * 4 + 1/3 * 5 = 4 years IRR: 3x over 3 years = ~45%, and 3x over 5 years = ~25% Approximate IRR: ~35% (This one's a bit off – see Excel.) RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-13-LBO-Model-Interview-Questions-Slides.pdf
Views: 42222 Mergers & Inquisitions / Breaking Into Wall Street
You’ll learn about the most common merger model questions in this tutorial, as well as what type of “progression” to expect and the key principles you must understand in order to answer ANY math questions on this topic. Table of Contents: 3:26 Question #1: The Basic Rules 5:23 Question #2: With Real Numbers 8:21 Question #3: Equity Value, Enterprise Value, and Valuation Multiples 12:17 Question #4: Ranges for the Multiples 14:26 Question #5: What if the Buyer is Twice as Big? 16:26 Recap, Summary, and Key Principles Question #1: The Basic Rules "A company with a P / E multiple of 25x acquires another company for a purchase P / E multiple of 15x. Will the deal be accretive or dilutive?" ANSWER: You can’t tell unless it’s a 100% Stock deal. If it is, it will be accretive because the Cost of Acquisition is 1 / 25, or 4%, and the Seller’s Yield is 1 / 15, or 6.7%. Since the Seller’s Yield is higher, it will be accretive. For Cash and Debt deals, or deals with a mix of all three, you’d calculate the Weighted Cost of Acquisition by using Foregone Interest Rate on Cash * (1 – Buyer’s Tax Rate) * % Cash + Interest Rate on Debt * (1 – Buyer’s Tax Rate) * % Debt + 1 / (Buyer’s P / E Multiple) * % Stock and compare that to the Seller’s Yield. Question #2: With Real Numbers “Let’s say it is a 100% Stock deal. The Buyer has 10 shares at a share price of $25.00, and its Net Income is $10. It acquires the Seller for a Purchase Equity Value of $150. The Seller has a Net Income of $10 as well. Assume the same tax rates for both companies. How accretive is this deal?” ANSWER: The buyer’s EPS is $10 / 10 = $1.00. It must issue 6 additional shares to do the deal, so the Combined Share Count is 10 + 6 = 16. Since both companies have the same tax rate and since no Cash or Debt is used, Combined Net Income = $10 + $10 = $20, and Combined EPS = $20 / 16 = $1.25, so the deal is 25% accretive. Question #3: Equity Value, Enterprise Value, and Valuation Multiples “What are the Combined Equity Value and Enterprise Value in this same deal? Assume that Equity Value = Enterprise Value for both the Buyer and Seller.” ANSWER: Combined Equity Value = Buyer’s Equity Value + Value of Stock Issued in the Deal = $250 + $150 = $400. Combined Enterprise Value = Buyer’s Enterprise Value + Purchase Enterprise Value of Seller = $250 + $150 = $400. The Combined EV / EBITDA multiple won’t be affected by the mix of Cash, Stock, and Debt, but the P / E multiple will be. It’s 20x here ($400 / $20), but it will change for non-100%-Stock deals. Question #4: Ranges for the Multiples “Without doing any math, what ranges would you expect for the Combined EV / EBITDA and P / E multiples, and why?” ANSWER: They should be somewhere in between the Buyer’s multiples and the Seller’s purchase multiples. It’s almost never a simple average because of the relative sizes of the Buyer and Seller – and for P / E, the purchase method also plays a role. Question #5: What if the Buyer is Twice as Big? "What happens if the Buyer is twice as big, i.e. it has an Equity Value of $500 and Net Income of $20?" ANSWER: The deal becomes *less* accretive because the company making it accretive, the Seller, now has a lower weighting. The Buyer was previously $250 / $400 of the total, but is now only $500 / $650, which is ~63% vs. ~77%, so we’d expect accretion to fall by 10-15%, which it does. The Combined Multiples will all be closer to the Buyer’s multiples now as well. Recap, Summary, and Key Principles Principle #1: If the Seller’s Yield is above the Weighted Cost of Acquisition, it’s accretive; dilutive if the opposite. Principle #2: Combined Equity Value = Buyer’s Equity Value + Value of Stock Issued in the Deal. Principle #3: Combined Enterprise Value = Buyer’s Enterprise Value + Purchase Enterprise Value of Seller. Principle #4: The Combined P / E Multiple is affected by the Cash / Debt / Stock mix, but the Combined EV / EBITDA Multiple is not. Principle #5: The Combined Multiples will be in between the Buyer’s multiples and the Seller’s purchase multiples – exact numbers depend on sizes of the Buyer and Seller. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/108-11-Merger-Model-Interview-Questions-Slides.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/108-11-Merger-Model-Interview-Questions.xlsx
Views: 22050 Mergers & Inquisitions / Breaking Into Wall Street
In this Merger Model tutorial, you'll learn how to complete a merger model case study exercise given at an assessment center. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You will also learn how to set up a simplified model, how to calculate accretion / (dilution) under different scenarios, and how to calculate the pro-forma credit stats and ratios for the combined company. http://youtube-breakingintowallstreet-com.s3.amazonaws.com/108-04-Merger-Model-Assessment-Center-Case-Study.pdf "Before" Excel File: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/108-04-Merger-Model-AC-Case-Study-Before.xlsx "After" Excel File: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/108-04-Merger-Model-AC-Case-Study-After.xlsx Table of Contents: 3:01 How to Interpret the Case Study and Model Requirements 5:18 Financial Information for Companies A and B 5:31 How to Calculate the Missing Information 8:02 Entering the Key Deal Assumptions 10:55 How to Combine the Income Statements 14:36 How to Calculate Accretion / (Dilution) and Credit Stats 16:46 Answering the Case Study Questions 21:06 Key Takeaways from the Case Study 22:39 Recap and Summary Step 1: Read and interpret the instructions... and understand where to cut corners! Requirements: Need to be able to change the purchase price and % debt and stock used... but cash and the foregone interest on cash are unnecessary, which simplifies things. Also, they've given us incomplete information in a few spots and we need to go through and calculate some figures for Company A and Company B, such as the shares outstanding. SKIP the formatting! Step 2: Enter the financial information for Company A and Company B. Fairly straightforward, but remember that we need to calculate a few additional numbers for this to work, such as the shares outstanding for each company and the Net Income and EPS, at least for the buyer. Step 3: Calculate the "missing information" - Net Income, EPS, and Share Counts. Start with Pre-Tax Income, then calculate Net Income based on the tax rates for both companies, and then EPS... not completely necessary for Company B, but definitely need it for Company A. Then, calculate the Share Count for both companies and the Enterprise Value (just for reference). Step 4: Go up to the top and enter the key assumptions, starting with Question #1. To save time, skip the (1 + Premium) * Share Price * # Shares calculation and just calculate the purchase price based on the premium to Company B's Market Cap instead -- same result either way. Calculate %s for debt and stock, then the amount of debt raised, debt interest rate, and shares issued. Then, fill in the information about the synergies -- no information on expenses here, so we leave it out. Step 5: Combine the Income Statements for Company A and Company B. Start with the Synergies, and then combine all the other line items, factoring in those synergies on top. Remember to factor in acquisition effects, such as additional interest expense. Calculate down to EPS, making sure you include the NEW shares issued in the transaction and increase Company A's share count as appropriate. Step 6: Calculate Accretion / (Dilution) and the Pro-Forma Credit Stats. Take the combined company's EPS and divide by the buyer's EPS and subtract 1. For the credit stats, the two key ones are the Leverage Ratio (Net Debt / EBITDA here) and the Coverage Ratio (EBITDA / Interest) - so calculate those each year. Step 7: Create sensitivities... if you have time. Here, we would argue it's pointless since it takes more time and effort to set them up, and they don't save much time beyond the model we already have -- so we're skipping this step. Step 8: What is the POINT of this case study exercise? Takeaway #1: Even if we pay a higher premium for a seller, the deal might be MORE accretive depending on the purchase method... debt tends to be less expensive than stock. Takeaway #2: Company B is a very cheap asset -- MUCH lower P / E and EV / EBITDA multiples than Company A. When a more expensive buyer acquires a much less expensive seller, the deal will almost always be accretive. Company B's significantly higher tax rate also makes a difference -- Company A gets "free money" after the acquisition since it's only paying 25% in taxes rather than 40%. Takeaway #3: Using debt tends to produce more accretion than stock, but it also produces higher leverage ratios and lower coverage ratios -- so there is a trade-off between accretion / (dilution) and the credit stats following the deal.
Views: 34319 Mergers & Inquisitions / Breaking Into Wall Street
A walk-through on how to calculate EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) for Steel Dynamics. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" EBITDA is important NOT because it is a good "proxy for cash flow" - as is commonly claimed by financiers and some academic sources - but rather because it lets you more easily compare different companies' valuations, especially companies with different capital structures, tax rates, and depreciation policies. To calculate it, you start with Operating Income (EBIT) on the Income Statement, and then add back Depreciation & Amortization (D&A) on the Cash Flow Statement, and then any other one-time or non-recurring charges you find on the financial statements or in the Notes to the Financial Statements. To qualify as an add-back, an item MUST: 1. Actually be non-recurring. A Restructuring Charge that has recurred every year over the past 10 years is NOT "non-recurring" even if the company claims it's just temporary. 2. Impact Operating Income. You would never add back something like Deferred Income Taxes because they're "below the line" and only impact the company's Income Taxes, not its Operating Income. Sometimes, items could go either way; for example, some banks and groups add back Stock-Based Compensation while others do not. We keep things as simple as possible and ONLY add back charges that are truly non-recurring and ones that actually impact Operating Income in this example. You'll learn how to tell whether or not an item meets those criteria above, even when it's a tricky case such as deciding if Gains / (Losses) truly affect the Operating Income line. WANT MORE FREE FINANCIAL MODELLING TUTORIALS? Receive a Free 3-Part Tutorial on How to Build Your First Merger Model based on the $16B United / Goodrich deal. Visit: www.breakingintowallstreet.com/biws
Views: 48739 Mergers & Inquisitions / Breaking Into Wall Street
In this merger model lesson, you'll learn how a company might decide what mix of cash, debt, and stock it might use to fund... By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" ... might use to fund a merger or an acquisition - and you'll understand how to determine the appropriate amount of each one in a deal. 2:24 General Order of Funding for M&A Deals 4:49 Cash - How Much Can You Use? 9:56 Debt - How Much Can You Use? 14:08 Stock - How Much Can You Use? 16:32 Exceptions 18:03 Recap and Summary How Do You Determine the Cash / Stock / Debt Mix in an M&A Deal? Very common interview question, and you also need to know it for what you do on the job. 3 ways to fund a company, and to fund acquisitions of other companies: use cash on-hand, borrow the money from other entities (debt), or issue equity (stock) to new investors. But how does a buyer in an M&A deal decide whether it should use… 50% debt and 50% stock vs. 33% debt, 33% stock, and 33% cash vs. 50% cash and 50% debt vs…. And the list goes on. Easiest: Think about the "cost" of each method, start with the cheapest method, use the most of THAT method that you can, and then move to the next cheapest method, and continue like that. GENERALLY: Cheapest: Cash, since interest rates on cash are lower than interest rates on debt, and tend to be low in general. Next Cheapest: Debt, since it is still cheaper than equity and since interest paid on debt is tax-deductible. Most Expensive: Stock, since the Cost of Equity tends to exceed the Cost of Debt… in theory and in practice. To Compare Them: Look at the "After-Tax Yields"… for debt and cash, just take the Interest Rate and multiply by (1 - Buyer's Tax Rate). Stock: Take the buyer's Net Income and divide by its Equity Value (or "flip" its P / E multiple). SO: Always start with cash, use the most you can, then move to debt, use the most you can, and finish up with stock. Cash - How Much is "The Most You Can?" Easy: Company has minimal cash and can't use anything, or it has a huge cash balance and can use all of it. More Common Case: Look at the company's "minimum" cash balance and use the excess cash above that to fund the deal. EX: Company has $500 million in cash right now, but its minimum cash balance to keep operating is $200 million… So it can use $300 million of its cash to fund the deal. How to Determine: Can be tough, but sometimes companies disclose it… ...or you can look back at historical cash balances and make a guesstimate based on that (what was its lowest cash balance in past years?). Debt - How Much Can You Use? So let's say you've now used $300 million of cash to fund the deal… but it's a deal for $1 billion total. How much debt can you use to fund the remainder? $700 million? $300 million? $500 million? Easiest Method: Calculate the key credit stats and ratios for the combined company - for example: Total Debt / EBITDA Net Debt / EBITDA EBITDA / Interest Expense And see what amount of debt makes these look "reasonable", in line with historical figures and also figures for comparable companies. EX: Let's say that if the company uses $500 million of debt, its Debt / EBITDA is 4x. Historically, it has been around 2-3x, and no peer company is levered at more than 3.5x. If that's the case, we'd say that 3.5x - 4.0x is probably the "maximum" (whatever amount of debt that means). Here: We have the Debt / EBITDA and other ratios for the Men's Wearhouse / Jos. A. Bank peer companies. Stock - Now What? Often used as the "method of last resort" because: A) It tends to be the most expensive method for most companies. B) Most acquirers don't like giving up ownership and diluting existing shareholders unless absolutely necessary. So in this example, if we've used $300 million of cash and $500 million of debt, we're still not quite at $1 billion... need an extra $200 million, which we can get by issuing stock. # of Shares = $200 million / Buyer's Share Price. Technically, there's no real "limit," but it would be very odd for a company to give up more than, say, 50% ownership to another company… unless they're very close in size. Exceptions: Buyer has an exceptionally high P / E multiple (Amazon) - stock might be the cheapest! Buyer wants to do a tax-free deal (Google / YouTube) and it's much bigger anyway, so won't make a difference. Companies are similarly sized - stock might always be necessary because cash/debt are implausible (mergers of equals). Summary Which purchase method do you use? MOST relevant when companies are closer in size… doesn't make much difference when the buyer is 100x or 1000x bigger than the seller. Order: 1. Cash - Any excess cash above the company's minimum cash balance. 2. Debt - To the upper range of the Debt / EBITDA of comparables (and other metrics). 3. Stock - For any remaining funding that's required; ideally give up well under 50% ownership.
Views: 30602 Mergers & Inquisitions / Breaking Into Wall Street
Goldman Sachs only accepts around three percent of job applicants. Who gets hired? How much are they paid? WSJ's Jason Bellini has #TheShortAnswer on what college students considering investment banking should know. Subscribe to the WSJ channel here: http://bit.ly/14Q81Xy Visit the WSJ channel for more video: https://www.youtube.com/wsjdigitalnetwork More from the Wall Street Journal: Visit WSJ.com: http://online.wsj.com/home-page Follow WSJ on Facebook: http://www.facebook.com/wsjlive Follow WSJ on Google+: https://plus.google.com/+wsj/posts Follow WSJ on Twitter: https://twitter.com/WSJLive Follow WSJ on Instagram: http://instagram.com/wsj Follow WSJ on Pinterest: http://www.pinterest.com/wsj/ Follow WSJ on Tumblr: http://www.tumblr.com/tagged/wall-street-journal Don’t miss a WSJ video, subscribe here: http://bit.ly/14Q81Xy More from the Wall Street Journal: Visit WSJ.com: http://www.wsj.com Visit the WSJ Video Center: https://wsj.com/video On Facebook: https://www.facebook.com/pg/wsj/videos/ On Twitter: https://twitter.com/WSJ On Snapchat: https://on.wsj.com/2ratjSM
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How to Get Into Investment Banking If You Have a 3.0 GPA, Graduated from an Unknown School, and Only Recently Learned English http://www.mergersandinquisitions.com/break-into-investment-banking-3-0-gpa-unknown-school/ (Get the full article right here) MENTIONED RESOURCES http://www.BreakingIntoWallStreet.com (Financial Modeling Training) http://www.MergersAndInquisitions.com (Investment Banking Blog)
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Dan Sheyner, author of the Wall St Oasis Private Equity Interview Guide discusses the industry trends. Check out the popular guide Private Equity Prep Pack here: http://www.wallstreetoasis.com/guide/the-wso-private-equity-interview-prep-package
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How to Network Your Way Into Investment Banking in 5 Simple Steps http://www.mergersandinquisitions.com/network-investment-banking-5-simple-steps/ (Get the full article right here)
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Why You Can't Network Your Way Into Investment Banking -- and What to Do About It http://www.mergersandinquisitions.com/network-investment-banking-mistakes/ (Get the full article here)
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Learn about rules of thumb you can use to determine whether an acquisition will be accretive or dilutive in advance, based on the P/E multiples of the buyer and seller, the % cash, stock, and debt used, and the prevailing interest rates on cash and debt. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Here's an outline of what we cover in the lesson, and the step-by-step process you can follow to figure this out for yourself: Why Do We Care About Rules of Thumb for M&A Deals / Merger Models? It's a VERY common interview question - "How can you tell whether an M&A deal is accretive or dilutive?" People often believe, incorrectly, that there's no way to tell without building the entire model. But shortcuts always exist! Plus, this shortcut is very useful in real life. You can use it to "sanity check" your model, approximate the impact of a deal in advance, and so on. So it's a time-saver *and* a good way to check your work. Rules of Thumb for Merger Models AKA Accretion / Dilution Models: CONCEPT: An M&A deal is accretive if the combined company's EPS (Earnings Per Share) is higher than the buyer's standalone EPS prior to the transaction. It's dilutive if the combined EPS is lower, and it's neutral if the EPS is the same afterward. The outcome depends on price paid for the seller, the method of payment (cash, stock, or debt), the interest rate on debt and cash, and the buyer's P/E multiple, among other factors. In real life, it's very difficult to tell with high precision whether the deal will be accretive or dilutive without running the whole model - due to added costs, synergies, write-ups, timing differences, the cumulative impact of additional interest on debt and foregone interest on cash, etc... BUT you can approximate the impact with a simple rule of thumb: 1. Calculate the Weighted "Cost" of Acquisition for the Buyer... 2. And compare it to the Seller's "Yield" AT its purchase price. (i.e. Seller's Net Income / Equity Purchase Price) This step is essential - if the seller is currently valued at $900 million and the buyer pays $1 billion for the seller, you NEED to use the $1 billion actually paid for the seller or these yields won't be correct. 3. If the Seller's "Yield" is higher, it's accretive - otherwise, if it's lower, it's dilutive... Think of it as the buyer getting MORE *from* the seller than what it's paying for the seller, vs. getting LESS than what it's paying. 4. How do you calculate the Weighted "Cost" of Acquisition? You need to calculate the after-tax "cost" of each component, since Net Income is also after-tax. After-Tax Cost of Cash = Foregone Cash Interest Rate * (1 - Buyer's Tax Rate) After-Tax Cost of Debt = Interest Rate on Debt * (1 - Buyer's Tax Rate) After-Tax Cost of Issuing Stock = 1 / Buyer's P/E Multiple (i.e. take the reciprocal of the buyer's P/E multiple) That last one is effectively the buyer's "after-tax yield"... For example, if you buy 1 share of the buyer's stock, it's the Net Income you'd be entitled to with that 1 share... So in this example, 1 / Buyer's P/E Multiple = 1 / 11.3 x = 8.9%. That means that for each $1.00 of United stock you buy, you get $0.089 in Net Income. Finally, you calculate the Weighted Average Itself with this formula: Weighted Average Cost of Acquisition = Cost of Cash * % Cash Used + Cost of Stock * % Stock Used + Cost of Debt * % Debt Used And if this weighted average cost of acquisition is greater than the seller's yield, it's dilutive - otherwise, if the weighted average cost of acquisition is lower than the seller's yield, it's accretive. LIMITATIONS: This trick doesn't hold up if the tax rates for the buyer and seller are different, especially if they're VERY different. This also doesn't work if you also factor in write-ups / write-downs, synergies, the cumulative impact of interest paid on debt and foregone interest on cash, merger closing costs, integration costs, etc... And it also doesn't work if the acquisition closes mid-year or in between fiscal years - you need to adjust for that with stub periods and the calendarization of financials... But this is a common interview question, so who cares! It's still very useful to know, and will save you a lot of time in interviews and on the job.
Views: 62733 Mergers & Inquisitions / Breaking Into Wall Street
In this WACC and Cost of Equity tutorial, you'll learn how changes to assumptions in a DCF impact variables like the Cost of Equity, Cost of Debt. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You'll also learn about WACC (Weighted Average Cost of Capital) - and why it is not always so straightforward to answer these questions in interviews. Table of Contents: 2:22 Why Everything is Interrelated 4:22 Summary of Factors That Impact a DCF 6:37 Changes to Debt Percentages in the Capital Structure 11:38 The Risk-Free Rate, Equity Risk Premium, and Beta 12:49 The Tax Rate 14:55 Recap and Summary Why Do WACC, the Cost of Equity, and the Cost of Debt Matter? This is a VERY common interview question: "If a company goes from 10% debt to 30% debt, does its WACC increase or decrease?" "What if the Risk-Free Rate changes? How is everything else impacted?" "What if the company is bigger / smaller?" Plus, you need to use these concepts on the job all the time when valuing companies… these "costs" represent your opportunity cost from investing in a specific company, and you use them to evaluate that company's cash flows and determine how much the company is worth to you. EX: If you can get a 10% yield by investing in other, similar companies in this market, you'd evaluate this company's cash flows against that 10% "discount rate"… …and if this company's debt, tax rate, or overall size changes, you better know how the discount rate also changes! It could easily change the company's value to you, the investor. The Most Important Concept… Everything is interrelated - in other words, more debt will impact BOTH the equity AND the debt investors! Why? Because additional leverage makes the company riskier for everyone involved. The chance of bankruptcy is higher, so the "cost" even to the equity investors increases. AND: Other variables like the Risk-Free Rate will end up impacting everything, including Cost of Equity and Cost of Debt, because both of them are tied to overall interest rates on "safe" government bonds. Tricky: Some changes only make an impact when a company actually has debt (changes to the tax rate), and you can't always predict how the value derived from a DCF will change in response to this. Changes to the DCF Analysis and the Impact on Cost of Equity, Cost of Debt, WACC, and Implied Value: Smaller Company: Cost of Debt, Equity, and WACC are all higher. Bigger Company: Cost of Debt, Equity, and WACC are all lower. * Assuming the same capital structure percentages - if the capital structure is NOT the same, this could go either way. Emerging Market: Cost of Debt, Equity, and WACC are all higher. No Debt to Some Debt: Cost of Equity and Cost of Debt are higher. WACC is lower at first, but eventually higher. Some Debt to No Debt: Cost of Equity and Cost of Debt are lower. It's impossible to say how WACC changes because it depends on where you are in the "U-shaped curve" - if you're above the debt % that minimizes WACC, WACC will decrease. Otherwise, if you're at that minimum or below it, WACC will increase. Higher Risk-Free Rate: Cost of Equity, Debt, and WACC are all higher; they're all lower with a lower Risk-Free Rate. Higher Equity Risk Premium and Higher Beta: Cost of Equity is higher, and so is WACC; Cost of Debt doesn't change in a predictable way in response to these. When these are lower, Cost of Equity and WACC are both lower. Higher Tax Rate: Cost of Equity, Debt, and WACC are all lower; they're higher when the tax rate is lower. ** Assumes the company has debt - if it does not, taxes don't make an impact because there is no tax benefit to interest paid on debt.
Views: 109142 Mergers & Inquisitions / Breaking Into Wall Street
Request Download links on [email protected] Breaking Into Wall Street – IB Networking Toolkit plus IB Interview Guide Download Breaking Into Wall Street – IB Networking Toolkit plus IB Interview Guide Torrent Breaking Into Wall Street – IB Networking Toolkit plus IB Interview Guide Free Breaking Into Wall Street – IB Networking Toolkit plus IB Interview Guide Full Request Download links on [email protected] https://www.youtube.com/watch?v=hjo0M9bINL0&feature=youtu.be https://www.youtube.com/watch?v=hjo0M9bINL0&feature=youtu.be https://www.youtube.com/watch?v=hjo0M9bINL0&feature=youtu.be https://www.youtube.com/watch?v=hjo0M9bINL0&feature=youtu.be https://www.youtube.com/watch?v=hjo0M9bINL0&feature=youtu.be
Views: 154 Lisa Coffman
In this tutorial, you’ll get a quick but very powerful tip on how to optimize your PowerPoint setup and how to use the Quick Access Toolbar (QAT) and custom shortcuts to save a ton of time when creating pitch books, presentations, stock pitches, and more. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Shortcuts Introduced: These are all BUILT-IN shortcuts: Alt, T, O: Options Menu Alt, H, G, A, L: Align Left Alt, H, G, A, T: Align Top Alt, H, FC: Font Color Shift + Left Click: Select Multiple Shapes Alt, H, G, A, V: Distribute Vertically Alt, H, G, A, H: Distribute Horizontally Alt, H, G, R: Bring to Front Ctrl + G: Group Shapes These are the NEW shortcuts you can create via the Quick Access Toolbar: Alt, 1, L: Align Left Alt, 1, T: Align Top Alt, 1: Alignment Commands Alt, 2: Font Color Alt, 1, L: Align Left Alt, 1, V: Distribute Vertically Alt, 1, H: Distribute Horizontally Alt, 6, R: Bring to Front Lesson Outline: Many PowerPoint shortcuts that you use repeatedly when creating presentations are actually cumbersome to enter. Something as simple as left alignment takes 5 keystrokes – Alt, H, G, A, L – if you use the built-in method for it. Other common commands such as distribution, font color changes, shape fill, shape outline, and shape insertion also take 3-4 keystrokes. A more efficient alternative is to set up the Quick Access Toolbar (QAT) so that you can access the most common commands with shortcuts like Alt, 1; Alt, 2; Alt, 3; and so on instead. You can either import our file (see the link below under RESOURCES) or go to the Options menu (Alt, T, O) and then the Quick Access Toolbar tab, and create the menu yourself. We recommend setting “Align Objects” in position #1, followed by Font Color, Shape Fill, Change Outline Color, More Options, Arrange, and Font Size. Then, you can add the Rectangle command, Draw Horizontal Text Box, Shapes, Straight Connector, and Merge Shapes. These are some of the most frequently used commands in PowerPoint, and you’ll save a ton of time with the new, shorter versions. A command like Align that used to take 5 keystrokes now takes only 3 (Alt, 1, L/R/T/B) with this approach; even a command like Font Color that took 4 keystrokes before now takes only 2 (Alt, 2). You might see anywhere from 30% to 50% time savings when creating slides and manipulating text and objects if you set up these shortcuts properly. They’re especially useful on crowded slides with a lot of objects when you need to align and distribute shapes. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/PowerPoint-QAT-Export.exportedUI https://youtube-breakingintowallstreet-com.s3.amazonaws.com/PowerPoint-Shortcuts-Investment-Banking.pdf
Views: 24398 Mergers & Inquisitions / Breaking Into Wall Street
In this tutorial, part 1 of a 2-part series on LBO case studies, we’ll look at what you might expect in a case study modeling test given at an assessment center or at the end of your internship at a bank or PE firm. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 1:59 Case Study Overview 5:00 Strategy for Tackling the Case Study 9:39 Step 1: Assumptions and Sources & Uses 12:22 Step 2: Income Statement 13:12 Step 3: Cash Flow Statement and Debt Repayments 16:42 Step 4: Interest Expense and Linking the Statements 21:22 Step 5: IRR and Cash-on-Cash Multiple Lesson Outline: Download the documents linked to under this video to see the case study instructions and understand this lesson (and the follow-up lesson after this one). Key Points: With a time-pressured case study like this, you have to SIMPLIFY and cut corners where needed. Here, for example, we can simplify by only including 3 years of projections, skipping a complex debt schedule and Balance Sheet Projections, and consolidating the assumptions and Sources & Uses schedules. However, there are also a few tricky parts to be aware of – first off, despite the instructions, you do need to assume a purchase EBITDA multiple so that the model works initially. Also, you need to include more of a “real” investor returns calculations area, and you have to go a bit out of order because of the specific assumptions here. Step 1: Assumptions and Sources & Uses Assume a baseline purchase multiple just to get a price to use in the model, and then base the Uses side on this purchase price and the associated fees. Then, fill in Sources using the x EBITDA assumptions given for each tranche of debt, and back into Investor Equity by taking Total Uses and subtracting the debt sources so far. Step 2: Income Statement On the Income Statement, project revenue, EBITDA, and D&A according to the given assumptions, and calculate Pre-Tax Income and Net Income based on the tax rate assumption. Step 3: Cash Flow Statement and Debt Repayments Then, start the CFS with Net Income, add back the non-cash charges (just D&A for now), and factor in the changes in Inventory, AR, and AP. Since you don’t have a Balance Sheet, take a shortcut and just use the change in revenue times the relevant percentages to get these. Inventory and AR increasing will decrease cash flow, and AP increasing will increase cash flow. Calculate FCF by taking all of that and subtracting CapEx, and then include the amortization of Term Loans A, B, and C to determine the Net Change in Cash. At the bottom, the Cash Balance each year equals the Cash Balance from the prior year plus the Net Change in Cash. Step 4: Interest Expense and Linking the Statements First, track how Term Loans A through C change each year by subtracting the annual amortization. Hold the Second Lien constant. Keep the PIK Loan blank for now. Calculate interest expense using the BEGINNING balance (i.e. the one from the end of the previous year), not the average, to avoid circular references. Do this for all the debt tranches, as well as the interest earned on cash. Use LIBOR and the LIBOR spread, or the fixed interest rates for the Second Lien and the PIK Loan, to do this. Then, go back and make the PIK Loan increase by the PIK Interest each year, and then go back and link the Net Interest Expense on the Income Statement (it should be a negative there). Finally, make sure you include the PIK Interest as a non-cash add-back on the Cash Flow Statement now. Step 5: IRR and Cash-on-Cash Multiple Calculate the IRR and cash-on-cash multiple the normal way at the bottom; Investor Equity should always be a negative in Year 0, and you calculate the Exit Enterprise Value in Year 3 using the EBITDA in Year 3 and the EBITDA exit multiple we were instructed to use. Subtract Net Debt to calculate the Exit Equity Value. For now, Investor Equity = Exit Equity Value. Sum up all positives in the Investor Equity line and divide by the sum of all negatives there to calculate the cash-on-cash multiple; use the built-in IRR function in Excel to calculate that. In part 2 of this series, we’ll complete the case study by building sensitivity tables and using Goal Seek to turn the LBO model into a valuation methodology. We will also answer the case study questions. RESOURCES: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-08-LBO-Model-Assessment-Center-Case.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-09-LBO-Model-Assessment-Center-Case-Answers.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-08-LBO-Model-Assessment-Center-Case-Before.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-08-LBO-Model-Assessment-Center-Case-After.xlsx
Views: 29747 Mergers & Inquisitions / Breaking Into Wall Street
WSO Video Library (100+ full webinars): http://www.wallstreetoasis.com/wall-street-videos Interview Guides: http://www.wallstreetoasis.com/guide-to-finance-interviews WSO Resume Review: http://www.wallstreetoasis.com/wso-finance-resume-review WSO Mentors: http://www.wallstreetoasis.com/wall-street-mentors-finance-mock-interviews WSO Events: http://www.wallstreetoasis.com/events
Views: 407 WallStreetOasis
Breaking Into Wall Street is the leading provider of dedicated online training for aspiring investment bankers and ambitious professionals who want to master it as quickly as possible. Our material is different because it's based on real companies and real deals - not boring textbook theory. Rather than just "watching" the lessons, you become an active participant by following our proprietary BASES learning methodology - so you master the material in short order. You also benefit from certifications on all our modeling courses, unlimited lifetime updates, unlimited expert support and an active community of tens of thousands of peers to enhance your results. Learn more at https://breakingintowallstreet.com/
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Learn the building blocks of a simple one-page discounted cash flow (DCF) model consistent with the best practices you would find in investment banking. If you are preparing for investment banking interviews, know that the DCF is the source of a TON of investment banking interview questions. To download the backup Excel file, go to www.wallstreetprep.com/blog/financial-modeling-quick-lesson-building-a-discounted-cash-flow-dcf-model-part-1/ The DCF modeled here is a simplified version of a fully-integrated DCF model. For a deeper dive into DCF modeling in Excel, please visit www.wallstreetprep.com.
Views: 352656 Wall Street Prep
Get the files and resources here: http://www.mergersandinquisitions.com/3-statement-model-case-study/ https://samples-breakingintowallstreet-com.s3.amazonaws.com/IBIG-06-01-Three-Statements-30-Minutes-Blank.xlsx https://samples-breakingintowallstreet-com.s3.amazonaws.com/IBIG-06-01-Three-Statements-30-Minutes-Complete.xlsx Table of Contents: 3:34 Step 1: Fill Out All the Assumptions (if possible) 11:34 Step 2: Fill Out the Entire Income Statement 13:49 Step 3: Fill Out What You Can of the Balance Sheet 16:03 Step 4: Fill Out the Entire Cash Flow Statement 20:35 Step 5: Finish Linking the Balance Sheet 23:25 Step 6: Check Your Work and Answer the Questions 24:42 Recap and Summary
Views: 29872 Mergers & Inquisitions / Breaking Into Wall Street
You’ll get a quick, but very powerful, tip on how to optimize your Excel setup with the Quick Access Toolbar (QAT) and custom shortcuts in this tutorial. These tips will save you a ton of time when creating valuations, organizing data, and doing any formatting exercise. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Shortcuts Introduced: These are all BUILT-IN shortcuts: Alt, T, O: Options Menu Alt, H, FC: Font Color Alt, H, FS: Font Size Alt, H, H: Fill Color Alt, H, A, C: Center Alt, H, B: Borders Alt, H, O, I: AutoFit Column Width Alt, H, O, W: Column Width Alt, H, 0: Increase Decimal Places Alt, H, 9: Decrease Decimal Places These are the NEW shortcuts you can create via the Quick Access Toolbar: Alt, 1: Font Color Alt, 2: Font Size Alt, 3: Fill Color Alt, 4: Center Alt, 5: Borders Alt, 6: AutoFit Column Width Alt, 7: Column Width Alt, 8: Increase Decimal Places Alt, 9: Decrease Decimal Places Lesson Outline: Many Excel shortcuts that you use repeatedly when creating valuations, models and when formatting data are cumbersome to enter. Something as simple as changing the font color takes 4 keystrokes – Alt, H, F, C – if you use the built-in method for it. Other common commands such as alignment, fill colors, borders, and column widths also take 3-4 keystrokes. A more efficient alternative is to set up the Quick Access Toolbar (QAT) so that you can access the most common commands with shortcuts like Alt, 1 instead. You can either import our file (see the link below under RESOURCES) or go to the Options menu (Alt, T, O) and then the Quick Access Toolbar tab, and create the menu yourself. We recommend setting “Font Color” in position #1, followed by Font Size, Fill Color, Center, Borders, AutoFit Column Width, Column Width, and Increase and Decrease Decimal places. These are some of the most frequently used commands in Excel, and you’ll save a ton of time with the new, shorter versions. A command like AutoFit Column Width that used to take 4 keystrokes now takes only 2 (Alt, 6) with this approach. You might realize 30-40% time savings when working in Excel if you use this full set of shortcuts. They’re especially useful for formatting and analyzing data and doing the initial setup in financial models. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-QAT-Export.exportedUI https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-Shortcuts-Investment-Banking-Slides.pdf
Views: 45974 Mergers & Inquisitions / Breaking Into Wall Street
In this tutorial, you’ll learn how to write a flexible Excel formula that lets you summarize quarterly or monthly data in an annual format using the INDIRECT, MATCH, and SUMIFS functions. This is a common task given in Excel tests and case studies, especially in industries such as real estate. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 2:54 Using SUMIFS to Make the Dates Flexible 4:59 Using MATCH and INDIRECT to Make the Entire Function Flexible 11:20 Testing the Formula 13:42 Recap and Summary Resources: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-Test-INDIRECT-Match.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-Test-INDIRECT-Match-Blank.xlsx https://youtube-breakingintowallstreet-com.s3.amazonaws.com/Excel-Test-INDIRECT-Match-Complete.xlsx Lesson Outline: Some of the most frequently-tested topics in Excel tests include the proper uses of lookup functions (HLOOKUP and VLOOKUP), INDEX/MATCH, INDIRECT, and the SUM, SUMIF, and SUMIFS functions to find and summarize data. Often, interviewers will ask you to write a single function that accomplishes a task elegantly rather than having to modify the function slightly or otherwise change it each time you use it. In many cases, you could write simple SUM formulas to sum up cells manually, but it’s far more robust to use the SUMIFS function so that you can check the dates and include only the matching quarterly or monthly data for the year you’re in. But to make the function truly flexible so that you can copy and paste it down and around and use it to sum up data for different rows, you must use the MATCH and INDIRECT functions. MATCH lets you move down to the appropriate row based on the data you need – for example, if “Profits” is 25 rows down in the monthly spreadsheet, the MATCH function will retrieve 25 when you use it in that spreadsheet with “Profits” as the input. Then, INDIRECT lets you create your own variable references to other spreadsheets. For example, instead of using E9:T9 as the fixed range, you could let the “9” parts vary based on the row or column you’re in or the output of functions. We used INDIRECT and MATCH to rewrite the SUMIFS function with a fixed summation range and make the summation range variable. The function is more flexible because when we copy it down, the summation range reference will change, and the row will match the correct row number of the data we’re seeking.
In this Enterprise Value lesson we take a look at the rules of thumb to figure out what should be added or subtracted when you calculate it. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" This also covers a short case study based on Vivendi (a leading media/telecom conglomerate based in France), Everyone knows the definition of Enterprise Value: Take Equity Value, add Debt and Preferred Stock (and others), and subtract Cash... But WHY do you do any of that? Enterprise Value represents the value of the company's CORE BUSINESS OPERATIONS to ALL THE INVESTORS in the company - equity, debt, preferred stock, etc. So focus on OPERATIONAL ITEMS and ALL INVESTORS when thinking about what to include... and what to exclude! Table of Contents: 1:19 What Enterprise Value Means 2:10 The 3 Key Rules of Thumb 5:15 Walk-Through of Vivendi's Assets and What to Subtract 11:08 How to Determine the Proper Treatment for Certain Assets 12:33 Excel Calculations for Assets Subtracted 13:30 Walk-Through of Vivendi's Liabilities & Equity and What to Add 15:14 How to Determine the Proper Treatment for Certain Liabilities 17:04 Excel Calculations for Liabilities Added 18:57 The Equity Section and Noncontrolling Interests 19:45 Recap and Summary The Three Rules of Thumb: 1. Is this item a *long-term funding source* for the company? In other words, will the funds we raise from this item help fund our business for years to come? If so, you should ADD this item when calculating Enterprise Value! Examples: Debt, Preferred Stock, Noncontrolling Interests (Minority Interests), Capital Leases, Unfunded Pension Obligations, Restructuring/Environmental Liabilities... 2. Will this item cost an acquirer of the company something extra when they go to buy it? And is it NOT something that will be repaid out of the company's normal operating cash flows (e.g., Accounts Payable)? If so, ADD it when calculating Enterprise Value! Examples: Debt, Preferred Stock. 3. Is this item NOT an operating asset? In other words, could the company continue to operate even WITHOUT this particular asset and be fine? If so, SUBTRACT it when calculating Enterprise Value! (These items often "save acquirers money" when buying the company.) Examples: Cash, Liquid Investments, Net Operating Losses, Assets from Discontinued Operations or Assets Held for Sale... How Does Each Item In Our Analysis Satisfy This Criteria? ITEMS THAT YOU SUBTRACT: Cash - Non-operating asset, the company doesn't "need" it to run its business beyond a certain low, minimum level. Liquid Investments - Also non-operating, the company has no need to invest in the stock market if it sells normal products/services. Equity Investments - Non-operating, not recorded in this company's revenue/expenses, doesn't "need" it to run the business. Other Non-Core Assets - Typically items that will be sold off or discontinued soon, so they're the very definition of "non-operating." NOLs - Also non-operating since long-term tax savings from these are not required to run the business. ITEMS THAT YOU ADD: Debt - Long-term funding source, and an acquirer has to repay it. Preferred Stock - Long-term funding source, and an acquirer has to repay it. Noncontrolling Interests - Long-term funding source, but this one's mostly for *comparability*... the company has recorded 100% of revenue and expenses from this company, so we want to capture 100% of its value as well (see our dedicated lesson on this one). Unfunded Pension Obligations - They're a long-term funding source! "Work for us now, we'll pay you a bit less, but we'll take care of you when you retire! Really!" To the company, very much like super-long-term debt.... but owed to employees, not outside investors. Plus, an acquirer has to pay for these somehow... Capital Leases - Also a long-term funding source, sort of like debt used to fund PP&E... these leases are used to fund operations and must be repaid. Restructuring & Legal Liabilities - Increases the cost to an acquirer, and they are also "long-term funding" of a sort - "Instead of paying for these expenses right now, we'll take care of them far into the future and reflect that liability." The Bottom-Line The Enterprise Value calculation is always somewhat subjective, and you'll see it done different ways. Everyone agrees on certain items (Cash, Debt, Preferred Stock), but the treatment of others varies by group, firm, industry, etc. As long as you can justify and explain how you calculated it, you'll be fine - even if someone else wants to change it later. To do that, keep in mind the 3 key rules of thumb above. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-07-VIV-Equity-Value-Enterprise-Value.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-07-VIV-Annual-Financial-Statements-Notes.pdf
Views: 34382 Mergers & Inquisitions / Breaking Into Wall Street
Joshua Rosenbaum and Joshua Pearl, authors of the highly acclaimed and authoritative textbook, Investment Banking, walk you through some common behavioral questions asked during the investment banking interview process. Learn with the pros at http://www.efficientlearning.com/ib. Don't guess what it takes to ace your interview and and answer questions such as "Why investment banking?" Access additional lecture videos and practice questions with a 14 day free trial of Wiley's Investment Banking Prep course: https://www.efficientlearning.com/investment-banking/products/free-trial/
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In this LBO Model tutorial, we walk through Silver Lake's $24 billion leveraged buyout of Dell and explain the tasks you might have to complete if you were to analyze this deal as part of a case study in a private equity interview. By http://www.mergersandinquisitions.com/ "Break Into Investment Banking or Private Equity, The Easy Way" Among other topics, we cover typical LBO case study questions to expect, why this particular deal was so unusual, and how to begin gathering data from industry reports, equity research, Dell's filings and investor presentations, and other sources. Then, we delve into how the transaction assumptions are set up, why the calculation for debt and equity is somewhat unusual, and how to factor in Michael Dell's equity rollover and cash contribution and the company's own excess cash usage. Finally, we conclude with a discussion of the Sources & Uses schedule and how that works, plus a description of the different types of debt used in the transaction. WANT MORE FREE FINANCIAL MODELING TUTORIALS? Receive a Free 3-Part Tutorial on **How to Build Your First Merger Model** based on the $16B United / Goodrich deal. Visit: www.breakingintowallstreet.com/biws MENTIONED RESOURCES http://www.mergersandinquisitions.com/leveraged-buyout-lbo-model-overview-capital-structure/ (Click to access the full case study and FREE downloadable templates)
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This lesson was prompted by a question that came in from a reader and student of our courses the other day: "When you divide Enterprise Value by Revenue (EV / Revenue), or Price Per Share by Earnings Per Share (P / E), what does that actually mean? By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" In other words, if Enterprise Value / Revenue is 5.8x, what does that number actually mean?" Answer often given in textbooks: How valuable a company is in relation to its sales, profits, and so on... based on those metrics, how does the market value that company? But the real answer: the multiple itself means nothing at all! By itself, a single valuation multiple such as 5.8x or 15.3x or 25.7x means... absolutely nothing. Valuation multiples are ONLY meaningful in relation to the multiples of OTHER, similar companies ("public comps" or "public company comparables"). It's like saying, in real life, "The asking price for that house is $500,000, or around $500 per square foot. What does that mean?" Answer: It depends... on the asking prices of similar houses in the region, also on the location, the type of house, # beds and bathrooms, the condition, the neighborhood, the public school system... Could mean that the house is very expensive, or that it's very cheap, or that it's priced about right. You already know this if you've studied valuation and have valued companies on your own... BUT there are 2 specific points that often go overlooked with valuation multiples: 1. The companies you're comparing should ideally have similar growth and margin profiles, or the comparison is less meaningful. It's NOT enough just to be in the same industry and be about the same size - that's a starting point, but financial profiles should ideally be similar as well. Be very careful - acquisitions often distort these numbers! Very different margins also distort the numbers (ex: 2 companies with similar revenue and 1 has a much higher margin - mathematically speaking, very likely to trade at a LOWER multiple just because the denominator will be bigger). 2. Even if the companies DO have similar financial profiles, a higher or lower multiple doesn't necessarily mean that one company is "overvalued" or "undervalued" because qualitative factors also play a role. For example, did the company just make an acquisition? Did it miss earnings? Did it get sued? Did a new competitor pop up? Think of valuation multiples as "clues" in a detective story... they can guide you in the right direction, but 1 clue is not enough evidence to solve the mystery of whether a company is valued appropriately. We demonstrate both of these points with Ralcorp (a food and beverages company) in the video, and show you how the set of public comps all have very different financial profiles that were impacted by acquisitions in some cases. Key Takeaways: 1. A valuation multiple means nothing on its own - only meaningful when compared to other companies', and ideally the median multiple from a set of other companies. 2. When picking a set of public comps, it's not just about industry and size... even if you do select companies with those criteria, must pay attention to growth and margins as well. If all the companies in your set have very different growth and margins from the company you're valuing, you may want to consider a different set. If there are acquisitions, it's better to pay more attention to forward multiples / growth rates / margins instead - for 1-2 years in the future. The analysis is MOST meaningful if, for example, all the companies have very similar growth and margins but the one you're looking at trades at much different multiples - then it's worth investigating further and seeing what explains that. 3. Just because a multiple is higher or lower than other companies' multiples doesn't mean that the company you're valuing is overvalued or undervalued... it's just one of many factors. Here, the presence of a hostile bidder threw off the numbers. Plus, rumors of the company spinning off divisions... Could be any number of things in real life as well - earnings announcements, changes in strategy, expansion plans, patents, lawsuits, management team changes, etc.
Views: 49013 Mergers & Inquisitions / Breaking Into Wall Street
Investment Banker Resume Tutorial for Students. I get a lot of questions on how to structure your resume, how to write about your experience, what to focus on, and how much to write. By http://www.mergersandinquisitions.com/ "Discover How To Break Into Investment Banking or Private Equity, The Easy Way" Rather than writing a giant Q&A on all these topics, I'm going to give you a resume/CV template that you can just copy and modify for your own experiences. http://www.mergersandinquisitions.com... (Get the full Word and PDF template here) "But I'll Have the Same Resume as Everyone Else!" No, because only 0.1% of those who see this template will actually download it and use it. Don't overestimate the competition. And even though this site is well-known, only a tiny fraction of those interested in investment banking have visited it. If you are worried, just modify the formatting and use different fonts, spacing, or margins. --- WANT MORE FREE TUTORIALS, TIPS & TEMPLATES? Subscribe to the Banker Blueprint, a complete action plan for getting into Investment Banking, PE and Hedge Funds. www.mergersandinquisitions.com/banker-blueprint
Views: 73308 Mergers & Inquisitions / Breaking Into Wall Street
What is Accounts Receivable ("AR")? Why This Question Matters? What happens when AR goes up? What happens when it goes down? By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Here's an outline of what we cover in this free tutorial: 1. Why This Question Matters This one is both a "real world" scenario, AND a very common question in interviews. 2. What is Accounts Receivable ("AR")? Line item on Balance Sheet for cash that you still need to collect from customers. Recorded it as revenue, but haven't received the cash payment from them yet (Like an "IOU"). Sent invoice and delivered product, but still waiting on payment from customer. (Standards differ a bit by company and industry, but that's the basic idea) 3. What happens when AR goes up - record revenue and profit, but no cash received yet... so cash goes down! Intuition: Recorded paper profit that you haven't actually gotten in cash yet... But those taxes you pay on that profit ARE in cash! So you're paying extra taxes for profit you don't have yet, which reduces your cash. 4. What happens when AR then goes down after you've collected the cash - no changes on IS, but cash now INCREASES to reflect the collection, AR decreases, and other side balances via Retained Earnings. Intuition: AR "going down" means a cash collection has taken place... but the revenue, profits, and taxes you've recorded don't change. So all you do is REMOVE the cash decrease on the CFS... And cash on the Balance Sheet is now up, with Retained Earnings up on the other side to balance it. 5. Summary & Intuition Behind Each Step. Click the link below and go to "Files & Resources" to get this Excel file for yourself. http://breakingintowallstreet.com/biws/3-statement-excel-model-interview-questions/
Views: 14674 Mergers & Inquisitions / Breaking Into Wall Street
WSO Video Library (100+ full webinars): http://www.wallstreetoasis.com/wall-street-videos Interview Guides: http://www.wallstreetoasis.com/guide-to-finance-interviews WSO Resume Review: http://www.wallstreetoasis.com/wso-finance-resume-review WSO Mentors: http://www.wallstreetoasis.com/wall-street-mentors-finance-mock-interviews WSO Events: http://www.wallstreetoasis.com/events
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In this final part, we'll walk you through a presentation template you can use in your own private equity case study interviews. By http://www.mergersandinquisitions.com/ "Discover How To Break Into Investment Banking or Private Equity, The Easy Way" You'll learn the basic structure to use in these presentations, how to combine the Excel work and analysis and channel checks we've performed to create a coherent presentation, and you'll also get a more "generic" template that you can use and apply to deals and companies you're analyzing. http://www.mergersandinquisitions.com/private-equity-case-study-interview/ Please follow the link above to get a ZIP file with all the relevant Excel and PowerPoint files.
Views: 44972 Mergers & Inquisitions / Breaking Into Wall Street
WSO Video Library (100+ full webinars): http://www.wallstreetoasis.com/wall-street-videos Interview Guides: http://www.wallstreetoasis.com/guide-to-finance-interviews WSO Resume Review: http://www.wallstreetoasis.com/wso-finance-resume-review WSO Mentors: http://www.wallstreetoasis.com/wall-street-mentors-finance-mock-interviews WSO Events: http://www.wallstreetoasis.com/events
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Why the Dividend Discount Model (DDM) is used to value commercial banks instead of the traditional Discounted Cash Flow (DCF) analysis. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" There are 3 main reasons why the DCF and the concept of Free Cash Flow (FCF) do not apply to commercial banks: 1. You can't separate operating vs. investing vs. financing activities - the lines are very blurry for a bank, since items like debt are more operationally-related and fund the bank's lending activities. 2. CapEx doesn't represent re-investment in the business, as it does for a normal company - for a bank,"re-investment" means hiring people, doing more lending, etc. 3. Working Capital represents something much different for a bank - the standard definition of Current Assets Excl. Cash Minus Current Liabilities Excl. Debt makes no sense, because for banks that includes tons of investments, securities, other borrowings, etc. so you could see massive swings... What You Do Instead - Use Dividends as a Proxy for Free Cash Flow Why? Because banks are CONSTRAINED by capital requirements - according to the Basel accords (I, II, III), they must maintain a certain "buffer" at all times to cover unexpected losses on their loans... So just like CapEx requirements, Net Income growth, and Working Capital constrain FCF for normal companies, the Tier 1 Capital / Tangible Common Equity / Total Capital requirements constrain dividends for banks. So we'll project a bank's regulatory capital, its asset growth, and its net income, and use those to project its dividends - then, discount, and sum up the dividends and discount and add the NPV of its terminal value. How to Set Up a Dividend Discount Model (DDM) 1. Make assumptions for Total Assets, Asset Growth, targeted Tier 1 (or other) Ratios, Risk-Weighted Assets, Return on Assets (ROA) or Return on Equity (ROE), and Cost of Equity. 2. Next, project Assets and Risk-Weighted Assets. 3. Then, project Net Income based on ROA or ROE. 4. Then, project Shareholders' Equity (AKA Tier 1 Capital) based on targeted capital ratio... 5. And BACK INTO dividends! Different from a normal company's DDM! Set dividends such that the minimum capital ratio is maintained, based on starting Shareholders' Equity and Net Income that year. 6. Flesh out the rest of the model - stats, growth rates, other metrics. 7. Discount and sum up dividends. 8. Calculate, discount, and add Terminal Value so that NPV = NPV of Terminal Value + NPV of All Dividends. 9. Calculate the Implied Share Price and compare to actual Share Price. Is the bank undervalued? Overvalued? What are the clues so far? What Next? Try it with a real company, using its historical financial information. Add more complex / realistic assumptions, based on industry research, channel checks, the bank's own strengths/weaknesses, etc. Add more advanced features - other ways to calculate Terminal Value, more accurate regulatory capital, mid-year discount and/or stub periods, stock issuances / repurchases, multiple growth stages, and so on.
Views: 39722 Mergers & Inquisitions / Breaking Into Wall Street
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Why Do You Care About This? It's a very common interview question! Q: "How does EBIT differ from EBITDA? What about EV / EBIT vs. EV / EBITDA? When do you use which one? How does P / E compare to those?" By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" And it's very common on the job as well -- you must decide how to value companies and which metrics / multiples to focus on. What are the Differences Between EBIT, EBITDA, and Net Income? These metrics differ in terms of: 1. Who the Money is Available to -- Equity investors, debt investors, and the government? Just equity investors? Someone else? 2. Operating Expenses vs. Capital Expenditures -- Some metrics reflect the impact of both of these, whereas others only reflect the impact of Operating Expenses and ignore spending on long-term assets. 3. Interest, Taxes, and Non-Core Business Activities -- Some metrics include these, and some exclude them. 4. When They're Useful -- Sometimes you WANT to reflect the impact of CapEx, approximating Free Cash Flow, and sometimes you don't. Same for interest and taxes. Here's the summary of differences, by category: How Do You Calculate It? EBIT = Operating Income on the Income Statement EBITDA = Operating Income on the Income Statement + Depreciation & Amortization from the CFS Net Income = Net Income on the Income Statement They Correspond To... EBIT corresponds to Enterprise Value. EV / EBIT is the multiple. EBITDA corresponds to Enterprise Value. EV / EBITDA is the multiple. Net Income corresponds to Equity Value. P / E is the multiple. Who Has a Claim on the Money? For EBIT and EBITDA, equity investors, debt investors, and the government all have a claim. For Net Income, only equity investors have a claim because debt investors have been paid with interest, and the government has been paid with taxes. What Does It Mean? EBIT = Core, recurring business profitability, before the impact of capital structure and taxes. EBITDA = Proxy for core, recurring business cash flow from operations, before the impact of capital structure and taxes. Net Income = Profit after taxes, the impact of capital structure, AND non-core business activities. Which Expenses Does It Reflect? EBIT reflects operating expenses and the impact of CapEx, but EXCLUDES interest, taxes, and non-core business activities. EBITDA is almost the same, but does NOT include the impact of CapEx. Net Income reflects everything -- operating expenses, CapEx, interest, taxes, and non-core business activities. Which Cash Flow-Based Metric Is It Closer To? EBIT is *sometimes* closer to Free Cash Flow, AKA Cash Flow from Operations -- CapEx, because they both reflect CapEx - but really, only *sometimes* is it closer... EBITDA is *sometimes* closer to Cash Flow from Operations because NEITHER one includes CapEx - but really, only *sometimes* is it closer... And Net Income is generally not close to either one. Which One Do You Use And Why? This is a question with a FALSE premise - you're not just picking one or the other! You'll almost always use a variety of metrics and multiples when valuing companies. So, for example, you might look at EV / Revenue, EV / EBITDA, and P / E all for the same company. But generally speaking, if you WANT to reflect the impact of capital expenditures and it's important to do so for the company/industry you're in, EBIT is better than EBITDA. Whereas EBITDA might be better in an industry where CapEx is less important, such as software/Internet/services/anything else where R&D exceeds investments in hard assets. But it also depends on a company's state of development -- CapEx is almost always more important to quickly growing companies, whereas it is less important for mature, stable companies! Regardless of the industry. As for Net Income, you usually look at it as a *supplement* to other metrics and multiples -- on its own, it doesn't necessarily give you a great / accurate view of a company because it's distorted by different tax rates, capital structures, and so on. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/STLD-LNKD-EBIT-EBITDA-Net-Income.xlsx
Views: 118847 Mergers & Inquisitions / Breaking Into Wall Street
In partnership with the Tab, we're breaking down the fundamentals of Investment Banking. SUBSCRIBE: http://jpm.com/x/i/NFPWfK0 About J.P. Morgan: J.P. Morgan is a leader in financial services, offering solutions to clients in more than 100 countries with one of the most comprehensive global product platforms available. We have been helping our clients to do business and manage their wealth for more than 200 years. Our business has been built upon our core principle of putting our clients' interests first. Connect with J.P. Morgan Online: Visit the J.P. Morgan Website: https://www.jpmorgan.com/ Follow @jpmorgan on Twitter: https://twitter.com/jpmorgan Visit our J.P. Morgan Facebook page: http://facebook.com/jpmorgan Follow J.P. Morgan on LinkedIn: https://linkedin.com/company/j-p-morgan/ Follow @jpmorgan on Instagram: https://instagram.com/jpmorgan/ #jpmorgan #FinancialLiteracy #InvestmentBanking A Guide to Investment Banking | The Tab | J.P. Morgan
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In this Revenue Models lesson, you'll learn how to build a revenue model for a consumer retail company. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Chuck E. Cheese, a kids' restaurant chain that was acquired by Apollo for $1.3 billion, is used in this example since their data is readily available and easy to use Table of Contents: 0:39 Why Revenue Models Are Important 2:19 How to Set Up Revenue Models - Units Sold and Market Size Methods 3:39 How You Build a Revenue Model - Examples for Different Industries 5:03 Step 1 - Finding Historical Data 5:59 Step 2 - Assumptions for Stores Opened and Closed 8:02 Step 3 - Assumptions for Sales per Store Growth 9:03 Step 4 - Calculating Ending Stores per Year 10:30 Step 5 - Toggle Calculations for Sales per Store 11:08 Step 6 - Splitting Revenue Into Segments 14:20 Step 7 - How to Review and Tweak the Numbers 15:18 Recap and Summary Why Do Revenue Models Matter? It's a very common topic in case studies and interviews in IB, PE, HFs, and anything else in finance. Revenue models can come up in LBO case studies, 3-statement modeling case studies, normal interview questions, and, of course, on the job. Often, you have enough data to make MORE than just a simple % growth rate assumption for revenue... but not enough data to do the same on the expense side. Theoretically, you could just say 2%, 3%, 4%, etc. growth each year and project revenue like that. BUT it's much more credible to say, "We have 50 stores each generating $2 million in annual sales, on average, and we plan to open 5 new stores per year for the next 5 years -- based on that, revenue is expected to be..." rather than "We're assuming 4% revenue growth per year." The numbers you get will NOT necessarily be different or "more accurate" -- you're still predicting the future! But at least your numbers will have more real-world support behind them... What is a Revenue Model? It can be done many different ways, but most revenue models boil down to Units Sold * Average Selling Price, or Total Market Size * % Market Share. The best method depends on the available data, the work and research you've done, and what the company discloses. For this consumer/retail example, it makes the most sense to use a variation on Units Sold * Average Selling Price, since "market share" is almost impossible to establish for a large and fragmented market like restaurants. How Do You Build a Revenue Model? For retailers, you can divide revenue into into existing stores vs. new stores and assume a figure for average Sales per Square Foot/Meter, or Sales per Store, and then make assumptions for new stores opened, stores closed, and how the sales per store figures change over time. Here's what we cover in this example for Chuck E. Cheese: Step 1: Get the historical data you need -- in this case, the # of stores opened and closed in prior years, and the average sales per store type. These are all taken from the company's filings. Step 2: Make assumptions for the # of stores opened and closed each year -- companies often disclose their plans in their filings, or you can extrapolate from historical data. In this case, CEC told us directly how many stores it planned to open over the next 4 years. Step 3: Assume a growth rate in Sales per Comparable (Existing) Store, and Sales per New Store. Step 4: Calculate Ending Stores each year, with support for the sensitivity toggles built in so that we can easily modify the assumptions. Step 5: Now, make similar "post-toggle" calculations for Sales per New Store and Sales per Existing Store. Step 6: Now, divide the revenue into segments, if applicable... it is very much applicable here! There are different margins for entertainment vs. food and beverages, and there's a clear trend in one direction (away from food and beverages). Step 7: Now, go back and check your numbers, fill in the miscellaneous and smaller items, and see how equity research estimates (and other sources) compare to what you've come up with. Go back and tweak your numbers as necessary. What Next? Pick a company you're interested in, in an industry that's relatively easy to analyze, and project revenue based on what's in their filings. It doesn't have to be super-complicated -- for most companies, revenue comes down to less than 5 key drivers. Avoid conglomerates, companies with tons of business lines, or industries that are more complex, such as oil & gas, commercial banking, etc. Suggestions: Airlines, technology, consumer/retail, industrials/manufacturing, healthcare is iffy because it can get very complex to model a company with a huge drug portfolio. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/CEC-Revenue-Model.xlsx
Views: 16929 Mergers & Inquisitions / Breaking Into Wall Street
In this tutorial, you’ll learn how REITs operate, how to create simple 3-statement projection models for them, how to extend the projections into a DCF analysis, and how to complete a Net Asset Value (NAV) model and use Public Comps to value a REIT. https://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 2:14 Part #1: Basic Characteristics of REITs and U.S. GAAP vs. IFRS 6:17 Part #2: Simple Projection Model for a REIT 12:00 Part #3: Extension of the Projection Model into a DCF for a REIT 16:03 Part #4: Net Asset Value (NAV) for REITs and Public Comps 19:40 Recap and Summary Resources: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/REIT-Valuation-Slides.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/REIT-Valuation-Example.xlsx Lesson Outline: To value REITs simply and effectively, you must understand how they operate, their special requirements, and the differences between U.S. GAAP-based and IFRS-based REITs. REITs buy, sell, develop, and operate properties or other real estate assets. They must distribute a high percentage of Net Income in the form of Dividends (90% in the U.S.), and high percentages of their revenue and assets must come from real estate. In exchange, they pay no corporate income taxes (or greatly reduced corporate taxes). REITs are always maintaining, acquiring, developing, renovating, and selling properties, and since they distribute so much Cash, they constantly need to raise Debt and Equity to operate. The Gains and Losses on property sales make Net Income fluctuate, so you look at alternative metrics, such as Funds from Operations (FFO) or EPRA Earnings, when analyzing REITs. Funds from Operations (FFO) = Net Income + RE Depreciation & Amortization + Losses / (Gains) + Impairments. Under U.S. GAAP, REITs depreciate properties and record a huge Depreciation expense on the IS; under IFRS, they revalue properties constantly and record huge Fair Value Gains and Losses instead. Also as a result of that, Book Value is important and meaningful for IFRS-based REITs but must be adjusted significantly for U.S.-based REITs. To project a REIT’s statements, you start by projecting its “same-store” (existing) properties by assuming rental growth and margins. Then, assume acquisition, development/redevelopment spending, a yield on spending, and margins there, and assume something for dispositions and the lost revenue and operating income. Add up all the property-level revenue and expenses, and then project corporate items such as Depreciation, Maintenance CapEx, and SG&A with traditional percentage approaches. Make Dividends a % of FFO, AFFO, or EPRA Earnings, and assume Debt and Equity issued based on the REIT’s Cash before financing vs. its minimum Cash balance. To value a REIT with a DCF, extend these projections, factor in all CapEx and Asset Sales, as well as Stock Issued, and project revenue, margins, D&A, CapEx, and Asset Sales through a 10-year period. Calculate and discount Terminal Value the normal way, discount and sum up the Free Cash Flows, back into the Implied Equity Value and divide by the share count (current + future shares to be issued) to get the Implied Share Price. The DDM is similar, but you use Cost of Equity instead of WACC, Equity Value-based multiples for the Terminal Value, and you discount and sum up Dividends rather than Unlevered FCF. To calculate NAV for U.S.-based REITs, project the 12-month forward Net Operating Income from properties, divide it by an appropriate Cap Rate or Yield (based on similar transactions or companies in the market), and then take the market value of the other assets and add them up. Then, adjust the Liabilities, and subtract them from the market value of Assets to determine Net Asset Value; divide by the share count to get NAV per Share and compare it to the Current Share Price. Public Comps are similar, but the screening criteria are usually Real Estate Assets, Geography, and Sub-Industry. You can use traditional metrics and multiples like EBITDA and EV / EBITDA, but you’ll also use alternative ones such as FFO, P / FFO, NAV, and P / NAV, and, for IFRS-based REITs, Book Value and P / BV. To find the data, you can use “Related Companies” on Google Finance, get the assumed growth rates for the projections from sources like Yahoo Finance, and go from there.
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In this video, we walk you through how an increase in Depreciation affects the 3 financial statements and highlight the specific line items that change on the Income Statement, Balance Sheet, and Cash Flow Statement. More details in http://breakingintowallstreet.com/biws/3-statement-excel-model-interview-questions/ We also go through the *intuition* behind these changes - namely, how Depreciation affects a company's taxes but is not a true cash expense - and why even though this is a somewhat artificial scenario, it's still a very common question that you need to understand in investment banking and other finance interviews. You can grab the Excel file for yourself by clicking on the link at the top of this description.
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There’s A LOT of confusion over how Net Operating Losses (NOLs) and Deferred Tax Assets (DTAs) work on the 3 financial statements. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" In this lesson, you’ll learn how NOLs are created and used up, how that impacts the DTA, and what the full impact on the 3 financial statements under different scenarios is. NOLs on the 3 Statements Spreadsheet: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-13-Net-Operating-Losses-NOLs.xlsx NOLs and DTAs on a Real Company's Financial Statements: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/105-13-JAZZ-NOLs-DTAs.pdf Table of Contents: 1:23 The Concept Behind Net Operating Losses (NOLs) 4:06 How NOLs Get Created and Used Up Based on Pre-Tax Income 8:52 Cash Taxes Payable and Changes to the DTA 11:33 Walkthrough of NOLs and DTAs on the 3 Financial Statements 16:44 Recap and Summary Net Operating Losses – How They Get Created and Used Up Idea: If a company has lost money (negative Pre-Tax Income) in prior years, it can reduce its future Taxable Income with these losses ("carry-forwards"), or even receive refunds for some of its past taxes ("carry-backs"). It's easier to explain carry-forwards, so that's what we'll focus on here (plus, it's a far more common interview question and on-the-job modeling task). KEY CONCEPTS: 1. You do NOT adjust the Income Taxes shown on the Income Statement for anything related to NOLs – you make these adjustments separately and show the cash impact on the CFS. 2. The NOL itself does not appear on the Balance Sheet – only the tax savings it corresponds to show up there, within the Deferred Tax Asset (DTA) line item. Example: A company has many years of prior losses accumulated in its Net Operating Loss (NOL) balance, but it suddenly turns profitable and starts recording positive Pre-Tax Income... sometimes. Scenario 1: The company earns $100 in Pre-Tax Income, and has an initial NOL balance of $175. In This Case: The company applies $100 of its NOL balance to offset its Pre-Tax Income and reduce its Taxable Income to $0. It therefore pays $0 in true cash taxes. Its DTA decreases by the tax rate of 40% * $100, or $40. On the Income Statement, nothing changes because taxes are recorded as-is. So the company’s Net Income is simply $60, or $100 of Pre-Tax Income minus $40 of Taxes. On the Cash Flow Statement, the DTA decreasing by $40 causes cash flow to increase by $40. So at the bottom, cash is up by $100 due to $60 of Net Income and the $40 decrease in the DTA. On the Balance Sheet, cash is up by $100, the DTA is down by $40, so the Assets side is up by $60. On the other side, Retained Earnings is up by $60 due to the Net Income of $60, so both sides balance. Scenario 2: The company records a $200 Pre-Tax Income loss, and has an initial NOL balance of $75 from the previous step. In This Case: The company’s NOL balance increases by $200. It pays $0 in cash taxes. Its DTA increases by $200 * 40%, or $80. On the Income Statement, Net Income is simply negative $120 (negative $200 of Pre-Tax Income, minus negative taxes of $80). On the Cash Flow Statement, Net Income is negative $120, and the DTA increasing by $80 reduces cash flow by $80. So cash is down by $200 at the bottom. On the Balance Sheet, cash is down by $200, the DTA is up by $80, so the Assets side is down by $120. On the other side, Retained Earnings is down by $120 due to the Net Income of negative $120, so both sides balance. Scenario 3: The company earns $300 in Pre-Tax Income, and has an initial NOL balance of $275 from the previous step. In This Case: The company applies $275 of its NOL balance to offset its Pre-Tax Income, and reduce its Taxable Income to $25. It therefore pays $10 in true cash taxes ($25 * 40%). Its DTA decreases by 40% * $275, or $110. On the Income Statement, nothing changes. So the company’s Net Income is simply $180, or $300 of Pre-Tax Income minus $120 of Taxes. On the Cash Flow Statement, the DTA decreasing by $110 causes cash flow to increase by $110. So at the bottom, cash is up by $290 due to $180 of Net Income and the $110 decrease in the DTA. On the Balance Sheet, cash is up by $290, the DTA is down by $110, so the Assets side is up by $180. On the other side, Retained Earnings is up by $180 due to the Net Income of $180, so both sides balance.
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Learn the building blocks of a financial model. In this video, we'll build a cash flow statement given an income statement and balance sheet in Excel. To download the Excel template that goes with this video, go to http://www.wallstreetprep.com/blog/financial-modeling-quick-lesson-cash-flow-statement-part-1/ The accounting here is a simplified presentation of how the three major financial statements are inter-related and lays the foundation of financial statement models in investment banking. Many accounting questions that we see time and again in finance interviews are designed to test the understanding explained in this exercise.
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Why Does Working Capital Matter? Many places define it as Current Assets minus Current Liabilities - that is technically true, but it misses something important. By http://breakingintowallstreet.com/biws/ WHY does it matter? What is the point of this? How do you use it? How does it impact a company's value? It's really the CHANGE in Working Capital that matters for valuation and financial modeling purposes. Working Capital, by itself, does not tell you a terrible amount and could mean many different things... but when you also look at the CHANGE in WC, what it is as a % of revenue and other metrics, AND the company's business model, that's when you start gaining insights. What Does the "Change" in Working Capital Mean? Best NOT to use the official definition of Current Assets minus Current Liabilities... First off, cash and debt should be excluded altogether because they are not operational line items and therefore won't factor in when calculating a company's Free Cash Flow in any type of valuation. Also, it's easier to think of this in terms of the *individual items* that comprise these Current, "Operating" Assets and Liabilities. Most Common Current, Operating Assets: Accounts Receivable, Inventory, and Prepaid Expenses. Commonality: Paid for them upfront in cash or represent cash payments you're waiting on. INCREASING these will cost you cash! Most Common Current, Operating Liabilities: Deferred Revenue, Accounts Payable, and Accrued Liabilities. Commonality: You get cash from these! When they increase, your cash flow goes up because you're getting cash in advance (Deferred Revenue) or because you're delaying payments (AP and AL). So with the "Change" in Working Capital, you're seeing which group of items increases by a greater amount: Current Assets Excluding Cash? or Current Liabilities Excluding Debt? If this Change is NEGATIVE, then Current Assets are increasing by MORE than Current Liabilities! Interpretation: Company might be spending a lot on Inventory, might be waiting too long for customer payments, might be paying suppliers very quickly... If this Change is POSITIVE, then Current Liabilities are increasing by more than Current Assets! Interpretation: Could be collecting a lot of cash upfront, might have no or minimal inventory, or might just be delaying payments to suppliers. Examples and Real World Interpretations: Wal-Mart's Change in Working Capital: It's always negative due to huge Inventory expenditures - since WMT is an offline retailer, it MUST pay for Inventory in advance before selling it. It does keep suppliers waiting a fair amount since its AP balance is also high and increasing each year, but Inventory spending outweighs that. This means that as Wal-Mart's business grows, it requires ADDITIONAL cash to keep growing! But as a % of revenue, this is very small so it makes a minimal impact. It will reduce the company's valuation in a DCF, though, because this will push down Free Cash Flow. Amazon's Change in Working Capital: Amazon's Change in WC, by contrast is positive each year. It's still spending a lot on inventory... and actually, as a % of revenue the change is higher than Wal-Mart's each year... BUT it is also not paying suppliers as quickly and is accruing more to the Accounts Payable balance each year. For WMT, the increase in Inventory exceeds the increase in AP every year... for Amazon it's the opposite! Plus, the Deferred Revenue from customers paying in cash in advance for products boosts Amazon's cash flow. The end result: for Amazon, the Change in Working Capital boosts its Free Cash Flow and therefore its valuation in a DCF - quite significantly since it exceeds Net Income. Salesforce's Change in Working Capital: Salesforce also has a positive Change in Working Capital... No inventory required since it's a subscription software company! BUT it still has AR, and Deferred Commissions - must be paid upfront to sales reps in cash and then recognized over term of subscription. The Net Change still ends up being positive, though, thanks to that huge increase in Deferred Revenue each year... subscriptions are often sold months or years in advance, but the cash is collected UPFRONT. So as Salesforce grows, it doesn't require additional cash - it actually GENERATES additional cash. This will increase its Free Cash Flow and therefore increase its valuation in a DCF. Summary - What Does the Change in Working Capital Mean? As the business grows, does it generate MORE cash than you expect... or it does it REQUIRE additional cash to grow? Makes a big difference for a DCF analysis when you value a company based on its cash flows, but also makes a difference for how much funding the business needs to grow, and even what happens when that business gets acquired. Further Resources http://youtube.breakingintowallstreet.com.s3.amazonaws.com/107-04-WMT-AMZN-CRM-Working-Capital.xlsx
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In this follow-up LBO Valuation tutorial, you’ll learn how to use an LBO model for valuation purposes, and how to tweak the model so that you can use built-in Excel functions such as Goal Seek to value companies. You’ll also learn how to answer case study / modeling test questions on how to calculate IRR, the cash-on-cash multiple, and the EBITDA margins required to achieve certain financial results. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 3:15 Requirements to Use an LBO Model for Valuation Purposes 6:32 Excel Demonstration of Goal Seek for LBO Valuation 7:55 Setting Up Sensitivity Tables 10:24 Answering the Other Case Study Questions 14:57 Modeling an IPO Exit 17:19 Recap and Summary Lesson Outline: Download the documents linked to under this video to see the case study instructions and understand this lesson (and the follow-up lesson after this one). Requirements to Use an LBO Model for Valuation Purposes First, you need to reduce the purchase assumption and exit assumptions to single cells, ideally an EBITDA multiple for both, or perhaps a premium to the current share price for the purchase assumption. Second, you must DISABLE circular references and use the beginning debt and cash balances to calculate interest. Otherwise, Goal Seek will not work properly. Finally, your IRR and CoC multiple cells should stay in the same position regardless of the exit year. This just makes it easier to set up sensitivities and to use Goal Seek. Using Goal Seek to Value a Company in an LBO You can use Goal Seek (Alt + A + W + G) to determine how much a private equity firm could pay for a company, if it exits at a specific multiple and is targeting a specific IRR or cash-on-cash multiple. You can also use it to check for multiple conditions, such as what EBITDA margin would be necessary if the targeted multiple is X and the purchase price is Y. In Excel, select the CoC multiple or IRR cell, press Alt + A + W + G, set it to the value you want, and then select the EBITDA purchase multiple cell for the one you’re changing. You will then get a solution that indicates the multiple the PE firm could pay to achieve the returns they are targeting. Setting Up Sensitivity Tables You can also set up sensitivity tables to look at these values over broader ranges. We recommend going up and down by around 20-30% over the baseline purchase and exit multiples. You MUST hard-code the rows and columns of the sensitivity tables and you CANNOT link them to actual parts of the LBO model. Link to the figure you want to calculate in the top-left corner of the table, and then highlight the whole table and press Alt + D + T or Alt + A + W + T to calculate the entire range of values. Answering the Other Case Study Questions With all of this set up, the rest of the case study questions are straightforward to answer: just use Goal Seek to determine the appropriate purchase/exit multiples, EBITDA margins, or revenue growth rates. Modeling an IPO Exit You can use the same analysis for an IPO exit as well, and if you wanted you could even tie it together with the LBO valuation by determining the amount a private equity firm could pay if they take the company public at a certain valuation in the future. In an IPO exit, you assume that only part of the firm’s stake is sold initially, and that the rest is sold over time. The share price may also fluctuate, so the firm may end up with a stake that is worth more or less in future years Finally, the instructions here state that senior debt should be maintained in the IPO exit, so we assume that only the Second Lien and PIK Loan are repaid. The actual assumptions in real life vary, but often at least some debt is maintained even after the company goes public. Recap and Summary The key points with this case study are: 1. Set up the assumptions properly, simplify, and reduce everything down to a few key inputs to save time. 2. Avoid a complex debt schedule since there are no optional repayments anyway. 3. Make sure the investor returns calculations section is flexible enough to work with both an M&A and an IPO exit, and that it supports Goal Seek. 4. For Goal Seek and the case study questions, avoid circular references, simplify the purchase and exit assumptions down to 2 cells, and make sure the IRR and CoC multiple cells stay in the same place. RESOURCES: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-08-LBO-Model-Assessment-Center-Case.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-09-LBO-Model-Assessment-Center-Case-Answers.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-09-LBO-Valuation-Assessment-Center-Case-Before.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-09-LBO-Valuation-Assessment-Center-Case-After.xlsx
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