Question and answers on investment banking topics


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This article on "Q&A on Investment Banking topics" lists down most important frequently asked questions on Investment Banking. Topics include M&A, Valuations, Pitch Book etc.

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Question and answers on investment banking topics

  1. 1. Question and Answers on Investment Banking Topics ~ By edu CBA
  2. 2. Topic- Merger & Acquisitions Briefly explain “Accretion” and “Dilution” analysis • In order to gauge the impact of an acquisition to the acquirer’s Earnings per share (EPS) and also compare it with the company’s EPS if acquisition would have not been executed, accretion and dilution analysis is undertaken. • In simple words we could say that in the scenario of the new EPS being higher, the transaction will be called “accretive” while the opposite would be called “dilutive.”
  3. 3. What are synergies and its types? Synergies are where the buyer gets more value than out of an acquisition than what the financials would predict. There are basically two types of synergies: • Revenue synergy: the combined company can cross sell products to new customers or up sell new products to existing customers. Because of the deal it could be possible to expand in new geographies. • Cost synergies: the combined company could amalgamate buildings and administrative staff and can lay off redundant employees. It could also be in a position to close down redundant stores or locations.
  4. 4. Topic- Valuation Which are the situations in which we do not use a DCF in the valuation? • We would not use a DCF in the valuation if the company has an unstable or unpredictable cash flow or when debt and working capital serve a fundamentally different role. • For example financial institutions like banks do not re-invest debt and working capital forms a major part of their balance sheets- so here we do not use a DCF for such companies.
  5. 5. Explain PEG ratio • This stands for Price/earnings to growth ratio and takes the P/E ratio and then accounts for how fast the EPS for the company will grow. • A stock which is growing rapidly will have a higher PEG ratio. • A stock that is fine priced will have the same P/E ratio and PEG ratio.
  6. 6. Topic- IPO Briefly describe what would you do if you are working on an IPO for a client • Meet the client and gather all the necessary information such as their financial details, customers and learn about the sector they belong to. • Meet other bankers and lawyers for the registration statement which would describe the company’s business and market to its investors. • Receive comments from the SEC and keep revising the document until it is acceptable. • Spend the coming weeks in organizing road shows and present the company to the institutional clients and also convince them to invest in them. • After raising capital the company would start trading on the exchange.
  7. 7. Topic- Miscellaneous What is in a Pitch book? Pitch book depends on the kind of deal the company is pitching for but the common structure would include: • Bank credentials to prove their expertise in completing similar deals before. • Summary of company’s options • Appropriate financial models and valuation • Potential acquisition targets or potential buyers • Summary and key recommendations
  8. 8. When buying a company why do private equity firms use leverage? • The private equity firm reduces the amount of equity to the deal by using significant amounts of leverage (debt) to help finance the purchase price. • By doing this it will increase the private equity firm’s rate of return substantially when exiting the investment.
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