Chapter 1- Intro to IB

Question 1

A Financial Intermediary Between Corporations and Investors:

Answer 1

1. Investment dealers act as intermediaries between investors (who have money to invest) and corporations (who
   require capital to grow and run their businesses)
2. Investment banking is the division within an investment dealer that serves corporations, governments and other
   institutions by providing capital markets advisory services, including mergers & acquisitions (M&A), raising capital
   (underwriting) and corporate finance advisory

Question 2

Investment Dealer is separated into 2 groups:

Answer 2

1. Investment banking (Private or Sell-Side)
2. Sales, Trading & Research ( Public or Buy-Side)

Question 3

The 3 Primary Service Offerings:

Answer 3

1. Mergers and Acquisitions (M&A) Advisory
2. Raising Capital (Underwriting)
3. Corporate Finance Advisory

Question 4

Mergers and Acquisitions (M&A) Advisory

Answer 4

• Helping companies execute strategic transactions, including acquisitions, mergers or asset divestitures, and identifying and evaluating new strategic opportunities (“idea generation”)
• Includes sell-side M&A (ie. advising the seller) and buy-side M&A (ie. advising the buyer)
• Investment banks typically generate a success fee based on the total enterprise value of the transaction (flat fee on buy-side mandates and a fee grid on sell-side mandates)

Question 5

Raising Capital (Underwriting)

Answer 5

• Helping companies raise capital in the equity and debt markets by acting as an intermediary with investors
• Includes private placements, initial public offerings and follow-on offerings
• Investment banks typically generate a commission on total capital raised

Question 6

Corporate Finance Advisory:

Answer 6

• Includes assessing a company’s strategic and financial position in order to provide capital structure and capital allocation advice
• Is a critical component of both M&A advisory and raising capital
• Investment banks typically provide corporate finance advisory services for free in an attempt to strengthen client relationships and improve the likelihood of generating M&A and financing fees

Question 7

Organizational Structure:

Answer 7

• Most investment banks are structured with specialized “industry” and “product” groups

Question 8

Industry Groups:

Answer 8

• Consumer, Industrial & Telecom
• Healthcare
• Technology
• Real-Estate
• Mining
• Financial Institutions
• Power & Infrastructure
• Energy Transition

Question 9

Product Groups:

Answer 9

• Mergers & Acquisitions (M&A)
• Equity Capital Markets (ECM)
• Debt Capital Markets (DCM)
• Corporate Banking (Lending)
• Risk Management / Hedging
• Corporate Finance

Question 10

Industry groups work with ______ to:

Answer 10

product groups to manage existing
relationships, originate new business and execute transactions

Question 11

Investment Banking Hierarchy and Career Progression: A majority of investment banks have five key positions/titles that follow a similar progression:

Answer 11

1. Analyst
2. Associate
3. VP (Director at CBC)
4. Director ( Executive Director at CIBC)
5. Managing Director

Question 12

Timeline and Primary Role of Analyst and Associate’s:

Answer 12

Timeline: 3 Years
* Industry and company research, comps and precedents,
corporate financial analysis, financial modelling, populating
client pitches, managing the day-to-day items on live projects
(ie. trading updates, data room population, progress trackers)

Question 13

Success Factors of Analyst and Associates:

Answer 13

• Analytical
• Quick Learner
• Detail-Oriented
• Strong Work Ethic
• Attitude/Resilience
• Dependable

Question 14

Timeline and Primary Role of VP:

Answer 14

Timeline: 4+ years

• Project manager, drafting and presenting client pitches, idea
  generation, supporting directors and managing director on
  client coverage

Question 15

Timeline and Primary Role of Director and Managing Director:

Answer 15

Timeline of Director: 4+ years
Managing Director: N/A

• Relationship management (CEO, CFO, Boards), new client
  origination, deal execution, develop coverage strategies,
  provide directional guidance to the rest of the team

Question 16

Success Factors of VP, Director, and Managing Director

Answer 16

• Strong Manager
• Well-Rounded
• Critical Thinker
• Strategy Formation
• Deal Origination
• Experience

Question 17

Common Exit Opportunities:* The skills and experience developed in investment banking can open a lot of doors

Answer 17

1. Private Equity / Pension Fund
2. Corporate Executive / Corporate Development
3. Asset Management / Hedge Fund
4. Top MBA Program
5. Operations / Start-up
6. Law

Question 18

key income statement items investment bankers typically focus on​:

Answer 18

1. Revenue
2. EBITDA
3. Earnings (Net Income)
4. Free Cash Flow

Question 19

Revenue:

Answer 19

• Revenue from the sale of the company’s goods and services

Question 20

EBITDA:

Answer 20

• EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization
• The most common performance measure used by investment bankers; commonly reported by companies in their financial statements
• Serves as a pre-tax proxy for cash generated by the business

Question 21

Earnings ( Net Income):

Answer 21

• Earnings after depreciation & amortization and the payment of interest and taxes

Question 22

Free Cash Flow:

Answer 22

• Free Cash Flow (FCF) = Cash from Operations less Capital Expenditures
• Unlevered (before interest) vs. levered (after interest) free cash flow

Question 23

EBITDA, earnings and free cash flow should be adjusted to exclude any:

Answer 23

1. non-recurring expenses or
2. nonoperating gains/losses

Question 24

Key Balance Sheet Items that Investment Bankers typically focus on:

Answer 24

1. Cash & Cash Equivalents
2. Total Debt
3. Net Debt
4. Minority or Non-Controlling Interest

Question 25

Cash & Cash Equivalents:

Answer 25

* Includes cash and any cash equivalents such as marketable securities * Should exclude any cash on the balance sheet deemed restricted by the company

Question 26

Total Debt:

Answer 26

* Includes notes payable, commercial paper, lines of credit, bank overdrafts, current portion of long-term debt and capital leases and long-term debt and capital leases * If calculating leverage or valuation metrics, total debt should include operating leases only if EBITDA is before rent expense (IFRS 16 changes)

Question 27

Net Debt:

Answer 27

* Net Debt = Total Debt less Cash & Cash Equivalents

Question 28

Minority or Non-Controlling Interest

Answer 28

* Represents the portion of a subsidiaries equity that is not owned by the company (however 100% of the earnings from that subsidiary are captured on the income statement)

Question 29

Key Operating Metrics:

Answer 29

* Growth rates (revenue, EBITDA, FCF, etc) * Profitability (EBITDA margin, FCF margin, etc.) * Capex intensity (Capex / Revenue) * Return on Equity * Return on Invested Capital * Business mix * Seasonality & cyclicality

Question 30

Key Capital Structure Metrics:

Answer 30

Leverage Metrics * Total Debt / EBITDA * Net Debt / EBITDA * Debt / Capitalization Return of Capital Metrics * Dividend Yield (Dividends Per Share / Share Price) * Payout Ratio (Dividends Per Share / Free Cash Flow or Earnings Per Share)