This document provides an overview of an investment banking technical interview workshop. It discusses the interview format, common valuation methods like discounted cash flow (DCF), public comparables, and precedent transactions. Sample technical questions are provided on these topics as well as accounting questions. General interview tips are offered such as thinking through questions logically and having follow up questions prepared.
What makes a business model viable? How to move it from viable to great? What are the key metrics to analyze business model performance? How and when should you decide to change your business model? How to manage the transition?
Mr. Chander Sawhney, Partner & Head – Valuation & Deals, Corporate Professionals shared his thoughts as a guest Speaker on Relative Valuation - Techniques & Application at a Business Valuation Masterclass organised by VC Circle on 31st August, 2016.
Relative Valuation in which value of an asset or liability is done by comparing it to its Peers is pervasive and preferred for ascertaining Fair Value at a point of time as it reflects the market positioning of the Industry and Peers at that time. While Discounted Cash Flow (DCF) method is applied for arriving at Fundamental Valuation, most M&A transaction are based on Relative Valuation multiples (mostly Earnings based). The valuation ratio typically expresses the valuation as a function of a measure of Key Financial Metrics like PE, EV/EBITDA, EV/Sales or Book Value Multiple.
But before using a multiple, one should know the fundamentals determining the multiple and how changes impact it. Sanity check through use of fundamental valuation method like DCF is strongly recommended.
About Corporate Professionals Valuation Practice
Corporate Professionals Capital Pvt. Ltd. is a SEBI Registered (Cat-1) Merchant Banker and has a successful track record of providing a broad range of M&A and Transaction Advisory Services. Our Dedicated Team has more than 10 years of rich Valuation experience and we have executed more than 500 Corporate Valuations for clients of International Repute across different Context, Industries and Boundaries.
To know more about Our Valuation offerings and how we can help you, please visit us at www.corporatevaluations.in or download our Valuation profile @ http://www.corporatevaluations.in/VALUATION_PROFILE.pdf
What makes a business model viable? How to move it from viable to great? What are the key metrics to analyze business model performance? How and when should you decide to change your business model? How to manage the transition?
Mr. Chander Sawhney, Partner & Head – Valuation & Deals, Corporate Professionals shared his thoughts as a guest Speaker on Relative Valuation - Techniques & Application at a Business Valuation Masterclass organised by VC Circle on 31st August, 2016.
Relative Valuation in which value of an asset or liability is done by comparing it to its Peers is pervasive and preferred for ascertaining Fair Value at a point of time as it reflects the market positioning of the Industry and Peers at that time. While Discounted Cash Flow (DCF) method is applied for arriving at Fundamental Valuation, most M&A transaction are based on Relative Valuation multiples (mostly Earnings based). The valuation ratio typically expresses the valuation as a function of a measure of Key Financial Metrics like PE, EV/EBITDA, EV/Sales or Book Value Multiple.
But before using a multiple, one should know the fundamentals determining the multiple and how changes impact it. Sanity check through use of fundamental valuation method like DCF is strongly recommended.
About Corporate Professionals Valuation Practice
Corporate Professionals Capital Pvt. Ltd. is a SEBI Registered (Cat-1) Merchant Banker and has a successful track record of providing a broad range of M&A and Transaction Advisory Services. Our Dedicated Team has more than 10 years of rich Valuation experience and we have executed more than 500 Corporate Valuations for clients of International Repute across different Context, Industries and Boundaries.
To know more about Our Valuation offerings and how we can help you, please visit us at www.corporatevaluations.in or download our Valuation profile @ http://www.corporatevaluations.in/VALUATION_PROFILE.pdf
Slides Mike Claiborne recently used in his discussion w/ mentees of The Product Mentor.
The Product Mentor is a program designed to pair Product Mentors and Mentees from around the World, across all industries, from start-up to enterprise, guided by the fundamental goals…Better Decisions. Better Products. Better Product People.
Throughout the program, each mentor leads a conversation in an area of their expertise that is live streamed and available to both mentee and the broader product community.
http://TheProductMentor.com
Investment Valuation Ratios are used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. Investment valuation ratios compare relevant data that help users gain an estimate of valuation.
Investment Valuation Ratios: Per Share Ratios, Dividend Per Share (DPS), Earnings Per Share (EPS), Dividend Payout Ratio (DPR),
Dividend Yield Ratio, Price / Earnings ratio (PER), Price to Cash Flow, Price to Book Value, Price to Earnings Growth (PEG), Enterprise Value (EV) multiple
Corporate Valuations “Techniques & Application”: A compilation of research oriented valuation articles.
Contents: Business valuation, Relative valuation, Sum of the parts valuation and value creation, ESOP valuation, Discounted Cash Flow Valuation, Enterprise Valuation etc.
A Business Valuation Article: Relative Valuation uses the valuation ratios of Comparable publicly traded companies and applies that ratios to the comapny being valued subject to necessary adjustments.
Key Issues in Relative Valuations- a) Peer Selection, b) Current Multiples or Forward Multiples, c) Adjustments to the Value...
A compilation of all the articles and sources I have found useful to value early stage (including pre-revenue) startups.
Sources of compiled information:
• UpCounsel https://www.upcounsel.com/startup-valuation-methods
• http://billpayne.com/wp-content/uploads/2011/01/Scorecard-Valuation-Methodology-Jan111.pdf
• https://www.investopedia.com/terms/d/dcf.asp
• https://en.wikipedia.org/wiki/Cost_of_capital
• http://andrewchen.co/how-to-measure-if-users-love-your-product-using-cohorts-and-revisit-rates/
• http://www.perceptualedge.com/articles/guests/intro_to_cycle_plots.pdf
Fundamental Analysis by Vivek SrivastavaAxis Direct
Fundamental Analysis is a study of factors (company specific and external environment) that affect the value of stock. This program will help you to understand the impact of factors on the valuation of the stock, analysis of the environment and interpretation of financial statement.
For more information visit : https://simplehai.axisdirect.in/learn/eclasses
Slides Mike Claiborne recently used in his discussion w/ mentees of The Product Mentor.
The Product Mentor is a program designed to pair Product Mentors and Mentees from around the World, across all industries, from start-up to enterprise, guided by the fundamental goals…Better Decisions. Better Products. Better Product People.
Throughout the program, each mentor leads a conversation in an area of their expertise that is live streamed and available to both mentee and the broader product community.
http://TheProductMentor.com
Investment Valuation Ratios are used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. Investment valuation ratios compare relevant data that help users gain an estimate of valuation.
Investment Valuation Ratios: Per Share Ratios, Dividend Per Share (DPS), Earnings Per Share (EPS), Dividend Payout Ratio (DPR),
Dividend Yield Ratio, Price / Earnings ratio (PER), Price to Cash Flow, Price to Book Value, Price to Earnings Growth (PEG), Enterprise Value (EV) multiple
Corporate Valuations “Techniques & Application”: A compilation of research oriented valuation articles.
Contents: Business valuation, Relative valuation, Sum of the parts valuation and value creation, ESOP valuation, Discounted Cash Flow Valuation, Enterprise Valuation etc.
A Business Valuation Article: Relative Valuation uses the valuation ratios of Comparable publicly traded companies and applies that ratios to the comapny being valued subject to necessary adjustments.
Key Issues in Relative Valuations- a) Peer Selection, b) Current Multiples or Forward Multiples, c) Adjustments to the Value...
A compilation of all the articles and sources I have found useful to value early stage (including pre-revenue) startups.
Sources of compiled information:
• UpCounsel https://www.upcounsel.com/startup-valuation-methods
• http://billpayne.com/wp-content/uploads/2011/01/Scorecard-Valuation-Methodology-Jan111.pdf
• https://www.investopedia.com/terms/d/dcf.asp
• https://en.wikipedia.org/wiki/Cost_of_capital
• http://andrewchen.co/how-to-measure-if-users-love-your-product-using-cohorts-and-revisit-rates/
• http://www.perceptualedge.com/articles/guests/intro_to_cycle_plots.pdf
Fundamental Analysis by Vivek SrivastavaAxis Direct
Fundamental Analysis is a study of factors (company specific and external environment) that affect the value of stock. This program will help you to understand the impact of factors on the valuation of the stock, analysis of the environment and interpretation of financial statement.
For more information visit : https://simplehai.axisdirect.in/learn/eclasses
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
Business analyst interview questions and answersRobin G
Prepare better for your interview with this comprehensive set of 'Business Analyst Interview Questions and Answers'.
Courtesy : http://thebusinessanalystjobdescription.com
Financial Statement Analysis Project
Valuation
Valuation
The last step of the project is to valuate the company and determine the buy price
We are going to introduce two valuation systems:
Margin of Safety price
Buy price based on Owner Earnings
2
Margin of Safety (MOS) Price
Step 1: EPS Trailing 12 month (EPS TTM)
Sum of EPS from the most recent 4 quarters (from Yahoo Finance or 10-Q)
Step 2: Future Growth Rate (FGR) – Key Parameter
You have calculated annual growth rates of Book Value, EPS, CFO, and Sales per share
Use these growth rates to come up your estimate of FGR (you just need to ball park a FGR, and it will be a rough estimate)
Your estimated FGR should be <= Analysts’ forecast of future growth
Step 3: Future EPS=EPS TTM × (1+FGR)10
Projected EPS in 10 years
Margin of Safety (MOS) Price
Step 4: Future P/E Ratio= 2 × FGR
Should be capped at historical high P/E ratio
Step 5: Future Value= Future EPS × Future P/E Ratio
Projected firm value in 10 years
Step 6: Fair Price= Future Value ÷ 4
Company’s fair value today
We want our money to double up every 5 years
Step 7: MOS Price= Fair price × 50%
I can help you with analysts’ forecast of FGR and historical high P/E ratio, as it can be challenging for you to find out
Buy Price based on Owner Earnings
This is the valuation method Buffett uses and explained in his 1986 Letter to Berkshire’s shareholders
We think of businesses like many people think of a real estate investment – a money making machine based on net profits generated
One way to look at a business is by analyzing cash flow generated after certain expenses. If you can keep a good profit after expenses and expect it to continue in the future, you have a good deal.
Buffett defines this cash flow as “Owner Earnings.”
We are looking to buy a great company at a price that will earn a 10% return (=Owner earnings) every year
Compute Owner Earnings
Pretax Income
+ Depreciation and Amortization
+/- Changes in Accounts Receivable
+/- Changes in Inventories
+/- Changes in Accounts Payable
- Maintenance CapEx (Total CapEx with Growth CapEx taken out)
----------------------
= Owner Earnings
Maintenance CapEx
Maintenance CapEx is the money the company spent to replace worn out property and equipment for the last fiscal year.
In real estate, this is like replacement of roof, countertop, carpet, and furnaces, etc.
The money spent on acquiring more real estate properties is Growth CapEx.
Most companies, however, do not separately report maintenance CapEx.
So we need to read 10-K to help us identify the maintenance CapEx.
Entry Point
Now you have two buy prices calculated. If your company is a great company you would like to own for the next 10 years, wait now until an event puts the company on sale
Great companies are often priced high (e.g., Costco, Chipotle, Ulta), and we don’t chase the stock
An event is an incident that causes the company’s stock price to decline sharply and puts the comp.
Startup Valuation: from early to mature stagesTatiana Siyanko
Methods and approached to startup and company valuations.
Please be free to send me any additions/correction proposals.
Prepared for Startup&co lecture in Freud cafe, Kyiv, April 30, 2014
1. Investment BankingTechnical Interview Workshop Tuesday, January 19, 2010 Presented by: Justine Erickson With contributions by Jessica Delfino, Mike Hudgin & Ekaterina Petrovitch
2. Introduction Justine Erickson Investment Banking Full-Time Analyst RBC Capital Markets, Toronto justine.erickson@mail.mcgill.ca
3. Agenda Interview Format Valuation DCF Public Comparables Precedent Transactions Sample Technical Questions The Infamous Accounting Question General Interviewing Tips
13. Three General Ways to Value a Company: Discounted Cash Flow Public Comparables Analysis (Relative Valuation) Precedent Transaction Multiples For each method, interviewees should address: Basic overview (why this method is used) How it’s practically used (mechanics) Pros & cons of method
14. DCF – Overview DCF is the method of valuation that allows for the most flexibility (and possibly precision) in coming up with the intrinsic value of a firm The DCF method that we use is FCFF (you might know it as WACC method, but refrain from calling it this…) Mapped on many assumptions Based on future expectations of a firm’s cash flows (numerator), and the risks associated with those cash flows (denominator)
15. DCF – Basic Steps First determine WACC = D/V * Rd (1-T) + E/V * Re Effect of capital structure Use target (optimal) D/E ratio Re , Beta CAPM Rd (1-T) discuss importance of tax shield Mechanics of FCFF FCFF = EBIT(1-T) – CAPEX + NCC +- Δ NWC Explain that CAPEX and NWC are all cash sources/uses that don’t affect EBIT, therefore we must adjust. Analyze historical performance to come up with future set of assumptions (COGS, SG&A, R&D, “DEP”, “CAPEX”, “NWC” as a % sales) Therefore, we need to use revenue as a driver, and determine its growth from year to year during our explicit forecast period (5-10 yrs)
16. DCF – Basic Steps (cont’d) Determine FCFF’s each year using assumptions driven off of revenue Determine TV at last year of forecast period 2 methods Growing perpetuity Assumes constant growth rate (2-3%) – not really used Terminal multiple Assumes an exit multiple of an operating metric like EBITDA or FCFF, to determine a value for the enterprise at that point in time Bring everything back to present value at WACC
17. DCF – Basic Steps (cont’d) Now we have the value of the enterprise (Enterprise Value = Net Debt + Equity + Minority Interest) In order to determine Equity Value, we must first subtract Net Debt & Minority Interest At this point we have Equity Value Divide by Shares Outstanding to obtain PPS Sensitivity analysis provides for flexibility in model WACC / Growth Rates / Terminal Multiples
22. Firm can improve margins over time - DCF models are usually optimistic
23.
24. Relative Valuation – Basic Steps Determine the target company’s EPS, EBITDA, and Sales for current year and possibly forward year (using research analyst estimates) Determine the set of comparable companies (comp universe) and their trading multiples Similar companies based on industry, size, business model, risk, capital structure – anything you can control for Separate lists if company is a conglomerate Multiply average industry multiple by current or forward performance of target company to determine the relative value of the firm
25.
26. Don’t have to make assumptions that are necessary for DCF
28. Reflects the market’s current opinions on value – average could be skewed based on company-specific factors, especially in this economic environment
32. Precedent Transactions – Basic Steps Find historical takeovers within industry Again, look for similar transaction size, and most recent first Try to cover at least one economic cycle in terms of precedent transactions, as some takeover premiums might reflect a takeover boom in an industry Multiply relevant multiples (P/E, EV/EBITDA, EV/Sales, etc.) by company’s figure to obtain firm’s value in event of a takeover
33.
34. Reflects how much the company would be worth in the eyes of its industry peers
61. The numbers are not important, but use them when learning the important underlying concepts
62.
63. Further, since the fiscal year end is Dec. 31, we are assuming no depreciation in the first year, and there is no impact to net income, thus no impact to the income statement.
64.
65. $100 increase in capital expenditure: therefore a $100 use of cash in cash flow from investing activities.
75. No change to cash flow from investing or financing activities. (If we assumed some debt amortization, we would have a use of cash in financing activities.)
88. Don’t be cocky or pretend like you know everything about banking. Bankers, especially analysts, find this extremely aggravating and can see through it
113. What, in your opinion, is the most important aspect or quality that a summer analyst should possess and display?
114.
Editor's Notes
-they usually ask tax shield questions-state the formula to them in an explanatory matter... Don’t just state that this is the formula to get the WACC. They will ask why the formula was built that way
-do all assumptions run off of revenue? Check this... I don’t think so
-know the difference between using EV/EBITDA, or P/E multiples!What do you do when comparing companies with vast differences in debt?
-P/EPS…use the multiple on their EPS to get their relative stock price-EV/EBITDA…use the multiple on their EBITDA to get their relative EV
HAVE AN OPINION ON THE FINANCIAL CRISIS You will likely get the question “What happened?” or “Who is responsible?” Obviously no one really knows the correct answers or could answer everything within five minutes, but they’re looking for your level of understanding and passion in the financial markets-although the markets have taken such an extreme downturn, mention that dealflow is starting to increase, and familiarize yourself with some deals that have in fact gone through recently-note the improvement, and give your opinion on whether it will continue Although you will not be investing in stocks as an investment banking analyst, there are a surprising amount of questions on investing in interviews. This is possibly because it is one of the few ways you can demonstrate your genuine interest in the market – putting money where your mouth is. Do not mention anything you don’t know a lot about. Interviewers will likely continue asking you questions on that subject. Start investing! Or at least know one stock and one industry in extreme detail.
-if you pay less and receive more value, it is accretive
Estimate an accounting betaStep 1: Collect accounting earnings for the private company for as long as there is a history. Step 2: Collect accounting earnings for the S&P 500 for the same time period. Step 3: Regress changes in earnings for the private company against changes in the S&P 500. Step 4: The slope of the regression is the accounting beta
-how do you decide whether to finance with debt/equity? Which industries would likely be more inclined to use each type?
-make sure to remember and calculate the numbers in your answer, don’t just explain the theory-make sure to tell them your assumptions!
-Another question: On Jan. 1 of Year 3 the equipment breaks and is deemed worthless. Assume the company pays back the loan immediately. What happens to the 3 statements?
Even seemingly casual questions can be loaded. Interviewers want to see how you can speak and explain a story. You will have to be explaining your models to clients who do not understand financial mumbo jumbo in detail, so if you can’t explain your roles in past internships clearly, or how you chose McGill, then how will you be able to explain a DCF?
Discuss BMO first round dinner – fight (in a modest manner) to shine You should be the last person at every dinner and social event
If you can’t answer this question honestly, clearly, and correctly, there is no way you will make it to final rounds