FINANCECAPCI Flashcards
What is the value of a company?
Value of Assets = Debt + Equity
What is the Value of Debt?
Value of debt = the book value of debt (or… if its market value if the debt is traded)
What are the four most commonly used valuation techniques?
- Discounted Cash Flow Analysis
- Multiples Method
- Market Valuation
- Comparable Transactions Method
==> this is valuation of equity.
What are the four basic financial statements?
- Balance Sheet
- Income Statement
- Cash flow statement
- Retained Earnings statement
What is the equation of the balance sheet?
Assets = Liabilities + Shareholder’s equity
What are the three ways in which a company can obtain the economic resources necessary to operate its business?
- Obtain debt (debt)
- Seek new investors (equity)
- Operations (profit)
When is something an asset vs. expense?
Asset;
- Future value or economic benefit to the company.
Expense;
- Relate only to the current period.
What does the statement of retained earnings show?
Essentially the amount of profit that is re-invested into the company and hence not used to pay back debt or distribute to shareholders as dividend.
Why is the cash flow statement important?
Liquidity.
Profit / Net income is not necessarily meaning positive cash flows.
How is the cash flow statement divided?
- Cash flow from operating activates (income statement included here)
- Cash flow from investing activities (balance sheet included here with investments, accounts payable, accounts receivable and other asset and liability accounts)
- Cash flows from financing activities (retained earnings also included)
How does the technique of “market valuation” work?
The value of publicly traded firms is easy to calculate.
==>
Company’s stock price * Number of shares
P * Q
(Market capitalization)
What is an acquisition premium?
The premium price paid per stock / per share of equity while acquiring a company.
A premium is paid due to demand/supply factors.
Acquisition Premiums are decided by the perception of synergies resulting from the purchase or meger.
What are the two different DCF method ways?
The most thorough valuation model.
TWO WAYS;
- Adjusted present value method (APV)
- Weighted average cost of capital method (WACC)
What is NPV?
Net present value of cash flows at a given discount rate
Time value of money = A dollar today is worth more than a dollar tomorrow.
Why is a dollar today worth more than a dollar tomorrow?
- You can invest that dollar at a risk-free interest rate (US government bonds)
- Inflation diminishes value
What is the difference between opportunity cost and discount rate?
Opportunity cost = a measure of the opportunity lost
Discount rate = a measure of the risk
What is CAPM?
Capital Asset Pricing Model
==> Calculating the appropriate discount rate)
Re = Rf + Beta*(Rm –Rf)
Re = discount rate
Beta = the relative volatility of the given investment with respect to market.
Rf = risk-free rate (treasury bill)
Rm = market return
Rm – Rf = excess market return
In CAPM, how volatile is the investment if Beta = 0.5?
Half as volatile as the market
In CAPM, how volatile is the investment if Beta = 1.2?
More volatile than the market
How can you easily explain beta in CAPM?
Volatility of the investment with respect to the market.
Hence, if the crypto market goes up or down 20 % tomorrow, but Bitcoin is expected to go up or down only 10 %, then Beta < 1.
How do you find a company’s beta?
If publicly traded, check “Value Line” or “Yahoo! Finance” etc.
If not publicly traded, find a company with similar balance sheet and income statement that is publicly traded.
EQUITY BETA – not asset beta
What if you have only been given the Asset Beta? (CAPM)
Equity Beta can be calculated as
Beta equity = Beta Asset * (D + E) / E
Due to…
What is EBIT?
Earnings Before Interest and Taxes
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation and Amortization
What is Free Cash flows (FCF)?
For an ALL EQUITY FIRM è FCF = the cash flows
What is terminal year?
The terminal year represents the year (usually 10 years in the future) when the growth of the company is considered stabilized
In other words….
The cash flows of the first 10 years are determined by company management and financial analysts = predictions and forecasts.
After the terminal year, the cash flow is assumed to have a constant growth rate “g”.
What are the methods to calculate discount rate?
- WACC = Weighted Average Cost of Capital
- APV = Adjusted Present Value
What is the key difference between WACC and APV?
WACC = discount rate for leveraged equity (reL) using CAPM
Vs.
APV = discount rate for an all-equity firm (reU)
Which discount rate is used in APV and how is it calculated?
ReUnleveraged
Which discount rate is used in WACC and how is it calculated?
ReLeveraged
- RdWACC = Find WACC
- Use ReLeveraged from CAPM
What must you remember when using APV method?
When you calculate a discount rate using Adjusted Present Value (APV), you calculate ReUnleveraged.
Hence, you have not taken the tax shield on debt into account in your valuation.
Thus, you must add the “debt tax shield” DTS into your valuation;
APV + DTS
Where
DTS = (tax rate) * (average interest rate on debt, Rd) * (Debt amount)
What is tricky about DTS?
The Debt Tax Shield (DTS) value must also be discounted due to risk
The discount rate that should be used depends on the perceived risk involved with DTS.
What is a good BOE way to calculate DTS? (debt tax shield value)
DTS = (APV without DTS) * (Leverage ratio; D/(D+E)) * (tax rate)
APV = Average present value
Leverage ratio = D/(D+E) = Long-term debt rate (L)
What is the long-term debt rate?
A synonym for Leverage ratio.
Simply, D/(D+E)
What are the names for D/(D+E)?
Long-term debt rate (L)
Leverage ratio
What is the academic issue with WACC?
It takes a “target” debt-to-equity ratio to calculate the discount rate and this “target” debt-to-equity ratio is not reached until a few years in the future.
Hence, it is essentially wrong in the beginning but it makes a super small difference.
Most investment banks use the WACC method anyway.
What is the method to calculate value of a company with APV?
- Assumptions
- Find cash flows; FCF = EBIT (1-t) + Depreciation – CAPex – Change in NWC
- Calculate discount rate ==> APV
- Calculate Beta unleveraged using Beta leveraged
- Use Beta unleveraged to calculate ReUnleveraged
- Calculate Terminal Value
- Take NPV of all cash flows
- Remember to add TY FCF to the last Year FCF
- Add DTS (BOE method) = (APV without DTS) * (Leverage ratio D/(D+E)) * tax rate
What is the method to calculate value of a company with WACC?
- Assumptions
- Find cash flows; FCF = EBIT (1-t) + Depreciation – CAPex – Change in NWC
- Calculate discount rate è APV
- Calculate Beta Leveraged using beta unleveraged
- Use Beta leveraged to calculate ReLeveraged = Rf + Beta leverage *(Rm – Rf)
- Use ReLeverage to calculate R-WACC = E/(D+E)*ReLeveraged + D/(D+E)*(1-t)*(Rd)
- Calculate Terminal Value
- Take NPV of all cash flows
- Remember to add TY FCF to the last Year FCF
How does the “Comparable Transactions” method work?
You use the multiples and ratios from previous transactions that have taken place in the industry.
What are important factors when using the Comparable Transactions method?
Were the companies valued as a multiple of EBIT, EBITDA, revenue or some other parameter?
How does the “multiples method” work?
Quite often, there is not enough information to determine the valuation using the comparable transactions method.
In these cases, we value companies using available information online such as;
- Price/Earning ratios
- EBITDA multiples
- Revenue multiples
Say you knew a company’s net income. How would you figure out its “free cash flow”?
Net Income + Depreciation and Amortization
– CapitalExpenditures
– Increase (or + decrease) in net working capital
= Free Cash Flow (FCF)
What is the formula for CAPM? Capital Asset Pricing Model
How do you calculate the terminal value of a company?
If all else is equal, why can the P/E multiples of a company in U.K. be different than that of an equal company in USA?
Explained by difference in the way earnings are recorded.
What are the different multiples that can be used to value a company?
P/E
EBITDA or EBIT (heavy industry)
Revenue (especially in tech)
How do you get the discount rate for an all-equity firm?
You use the Capital Asset Pricing Model, or CAPM.
Can you apply CAPM in Asia?
CAPM is developed for the U.S. markets.
BUT… it is presently the best known tool for calculating discount rates and is used globally.
What is the difference between the APV and WACC?
WACC incorporates the effect of tax shields into the discount rate used to calculate the present value of cash flows. WACC is typically calculated using actual data and numbers from balance sheets for companies or industries.
APV adds the present value of the financing effects (most commonly, the debt tax shield) to the net present value assuming an all-equity value, and calculates the adjusted present value. The APV approach is particularly useful in cases where subsidized costs of financing are more complex, such as in a leveraged buyout.
What is Beta?
Beta is the value that represents a stock’s volatility with respect to overall market volatility.
What is the risk of a portfolio in a nutshell?
The standard deviation of the portfolio’s expected returns.
So… volatility of the expected returns.
How is correlation used in the stock market?
If two stock’s move in similar patterns, they have a high correlation
Correlation coefficient = -1 to 1
- High correlation = close to 1 (1 = identical)
- No correlation = 0
- Opposite patterns = -1
How is diversification used in investing?
Portfolio management
Having different asset classes decreases risk + within same asset class fx stocks in both tech, biomedicine, industry, airlines etc.
Especially stocks and bonds because they have a low correlation or rather inverse correlation.
What is technical vs. fundamental analysis?
- Technical ==> Looking at charts and patterns of a stock
- Fundamental ==> Focusing on the fundamentals of the business, its growth opportunities, financials, growth and balance sheet,
How do you value stocks?
- Essentially as valuing a company ==> Multiples + DCF analysis is classical AND
- Financial ratio analysis
- Solvency:
- Quick ratio
- Current ratio
- Cash ratio
- Debt to equity
- Current liabilities to inventory
- Total liabilities to net worth
- Solvency:
Efficiency ratios
- Collection period
- Inventory turnover
- Sales to assets
- Sales to net working capital
- Gross profit margin
- Return on assets
- Return on equity
Gotham Energy just released second quarter financial results. Looking at its balance sheet you calculate that it’s Current Ratio went from 1.5 to 1.2. Does this make you more or less likely to buy the stock?
Less likely. This means that the company is less able to cover its immediate liabilities with cash on hand and other current assets than it was last quarter.
Current Assets (cash, account receivable etc.) / Current liabilities (accounts payable and other short-term liabilities)
Is the book value of equity and the market value the same?
No. most often not.
Market value = Price per stock * #Shares outstanding
Is there any difference TAX-wise for preferred and common stock?
- Preferred stockholders are only taxed on 30 % of the dividend received
- Common stockholders are taxed on 100 % of the dividend received
Why does price increases of stocks happen at stock buybacks?
- P/E is expected to go up as the number of shares decreases ==> earnings are divided between fewer stocks
- Signal effect ==> The management know the company the best. Hence, if they invest in their own company by buying back shares, they must expect that the stock is undervalued
- Debt Tax Shield is the third reason as the net debt increases (net debt = debt – cash) and cash goes down when buying back shares.
Why does the price of stock decrease at new issuances?
- Issuing new shares dilutes earnings per share ==> earnings are divided between more stocks
- Signal effect ==> they issue equity rather than debt. Hence, management may believe that the stock price is too high/inflated
- Debt Tax Shield ==> Equity to finance investments means less debt to do so. Hence net debt decreases and the value of DTS decreases
What kind of stocks would you issue for a startup?
A startup typically has more risk than a well-established firm. The kind of stocks that one would issue for a startup would be those that protect the downside of equity holders while giving them upside. Hence the stock issued may be a combination of common stock, preferred stock and debt notes with warrants (options to buy stock).
When should a company buy back stock?
When it believes the stock is undervalued, has extra cash, and believes it can make money by investing in itself. This can happen in a variety of situations. For example, if a company has suffered some decreased earnings because of an inherently cyclical industry (such as the semiconductor industry), and believes its stock price is unjustifiably low, it will buy back its own stock. On other occasions, a company will buy back its stock if investors are driving down the price precipitously. In this situation, the company is attempting to send a signal to the market that it is optimistic that its falling stock price is not justified. It’s saying: “We know more than anyone else about our company. We are buying our stock back. Do you really think our stock price should be this low?”
Why would an investor buy preferred stock?
1) An investor that wants the upside potential of equity but wants to minimize risk would buy preferred stock. The investor would receive steady interest-like payments (dividends) from the preferred stock that are more assured than the dividends from common stock. 2) The preferred stock owner gets a superior right to the company’s assets should the company go bankrupt. 3) A corporation would invest in preferred stock because the dividends on preferred stock are taxed at a lower rate than the interest rates on bonds.
You are on the board of directors of a company and own a significant chunk of the company. The CEO, in his annual presentation, states that the company’s stock is doing well, as it has gone up 20 percent in the last 12 months. Is the company’s stock in fact doing well?
Another trick stock question that you should not answer too quickly. First, ask what the Beta of the company is. (Remember, the Beta represents the volatility of the stock with respect to the market.) If the Beta is 1 and the market (i.e. the Dow Jones Industrial Average) has gone up 35 percent, the company actually has not done too well compared to the broader market.
What is the face value of a bond?
This is the total amount the bond issuer will commit to pay back at the end of the bond maturity period (when the bond expires).
What is default risk associated with bonds?
The risk that the company issuing the bond may go bankrupt, and default on its loans
What is the default premium associated with bonds?
The difference between the promised yields on a corporate bond and the yield on an otherwise identical government bond. In theory, the difference compensates the bondholder for the corporation’s default risk.
What are some major bond types?
- Government bonds (US treasury bills, notes etc.)
- Investment grade bonds (think Microsoft, Apple, GE)
- Junk bonds (poor credit rating. Relatively high interest rates)
How much is a bond worth?
What is HPR?
Holding Period Return (with bonds)
The income earned over a period as a percentage of the bond price at the start of the period, assuming that the bond is sold at the end of the period.
How can a national bank change the money supply?
- Open market operations ==> the national bank buys securities and thus increases money supply by buying back government bonds in the market
- Changing interest rates ==> Lower interest rate = more money will be borrowed
- Lower Reserve requirements (the requirements of banks to have a minimum balance in a reserve account at the national bank).
How is bond prices affected by interest rates and economic events?
Interest rate up = Bond prices down.
Inverse relationship between bond prices and interest rates.
What is the relationship between a bond’s price and its yield?
They are inversely related. That is, if a bond’s price rises, it’s yield falls, and vice versa. Simply put, current yield = interest paid annually / market price * 100%.
What major factors affect the yield on a corporate bond?
The short answer: 1) interest rates on comparable U.S. Treasury bonds, and 2) the company’s credit risk.
If the price of the 10-year Treasury note rises, does the note’s yield rise, fall or stay the same?
Since bond yields move in the opposite direction of bond prices, if the price of a 10-year note rises, its yield will fall.
If you believe interest rates will fall, should you buy bonds or sell bonds?
Since bond prices rise when interest rates fall, you should buy bonds.
How would you value a perpetual zero coupon bond?
The value will be zero. A zero coupon doesn’t pay any coupons, and if that continues on perpetually, when do you get paid? Never – so it ain’t worth nothing!
What does CME mean?
Capital market equilibrium
What does Capital Market Equilibrium say?
That there should be equilibrium in the currency markets all over the world so that there is not arbitrage opportunity in shifting between two currencies.
No arbitrage in currencies essentially.
What is the effect on earnings, inflation and interest rates of the US dollar strengthening?
What is the effect on earnings, inflation and interest rates of the US dollar weakens?
What is the effect on a currency when 1) domestic interest rate increases and 2) domestic inflation increases?
- Domestic interest rate increase ==> Stronger currency
- Domestic inflation rate increase ==> Weaker currency
When the currencies in countries like Thailand, Indonesia, and Russia fell drastically in 1998, why were U.S. and European-based investment banks hurt so badly?
I-banks were hurt on trading losses in Asia and Russia. If banks held either currency or bonds in the currencies that dropped, these assets suddenly turned non-performing, in other words, essentially worthless. (In fact, Russia’s government defaulted on its government-backed bonds, so firms weren’t just hurt by dropping currencies but also by loan defaults.)
If the U.S. dollar weakens, should interest rates generally rise, fall or stay the same?
Rise. A weak dollar means that the prices of imported goods will rise when measured in U.S. dollars (i.e., it will take more dollars to buy the same good). Rising prices of imported goods contributes to higher inflation, which raises interest rates.
What are some of the main factors that govern foreign exchange rates?
Chiefly: interest rates, inflation, and capital market equilibrium.
What are derivatives?
Financial instruments that derive their value out of or have their value contingent upon the values of other assets like stocks, bonds, commodity prices or market index values.
What is a call option?
An agreement that gives the holder the right to purchase an asset/stock for a specified price (on or before) the specified expiration date.
Buy IBM at $5 on April 1.
You are not forced. If the price of Ripple is $3 on April 1 you do not buy IBM, BUT you will have lost the “fee” you paid to buy the call option.
What is a put option?
An agreement that gives the holder the right to sell an asset for a specified exercise price (on or before) a specified expiration date.
Hence, sell APPLE at $20,000 on April 1.
You are not forced. If the price of APPLE is $30,000 on April 1 you do not sell bitcoin, BUT you will have lost the “fee” you paid to buy the put option.
What determines option prices?
It is quite complex but….
- Price of the underlying security
- Exercise price / STRIKE price you want to buy at (call option) or sell at (put option)
- Volatility of underlying security ==> More volatile, more valuable option
- Time to expiration
- Interest rates ==> Higher interest rate = lower present value of exercise price
- Dividends
What are forwards?
A forward contract is an agreement that calls for future delivery of an asset at an agreed-upon price. Let’s say a farmer grows a single crop, wheat. The revenue from the entire planting season depends critically on the highly volatile price of wheat.
What are futures?
The futures contract is a type of forward that calls for the delivery of an asset or its cash value at a specified delivery or maturity date for an agreed upon price
How does forwards and futures differ?
The main difference between forward and futures contracts is that futures contracts are traded on exchanges and forwards are traded over-the-counter. Because of this distinction, you can only trade specific futures contracts that are traded on the exchange. Forward contracts are more flexible because they are privately negotiated, and can represent any assets and can change settlement dates should both parties agree.
What is a Swap?
It is essentially a simple exchange of future cash flows.
A swap is an exchange of future cash flows. The most popular forms include foreign exchange swaps and interest rate swaps. They are used to hedge volatile rates, such as currency exchange rates or interest rates.
Why do companies merge?
- To gain foothold in new markets (product or market-wise)
- Coveted brand recognition
- Lower costs by consolidating operations + Economies of scale
- To gain market share = dominance
What are the two types of buyers in the M&A space?
- Strategic buyers;
- Corporations who acquire another company for strategic reasons
- Financial buyers;Buyers who acquire purely as financial investments
- This is typically Leveraged Buyout Funds and other PE
Strategic buyers tend to be willing to pay more (projected cash flows will be higher)
What are the two options corporate financiers have for financing when structuring M&As?
- Stock swaps
- Happens a ton when the stock market is strong as now
- Benefit is that no tax is paid before the acquired company sells the stock they receive
- Cash offers
- The acquired company is immediately taxed on the cash received
What is a tender offer?
Associated with a hostile takeover.
You pay super high prices for the stocks of the company you want to acquire in order to get 51 % = majority.
Used when company A wants to acquire company B, but company B refuses, company A can issue a tender offering.
When is a merger accretive and when is it dilutive?
- Accretive when the earnings per share of the acquiring company increases
- Dilutive when the acquiring company’s earnings fall after a merger
What is an accretive merger?
The type of merger in which the acquiring company’s earnings per share increase. With regard to P/E ratio, this happens when a company with a higher P/E ratio acquires a company with a lower P/E ratio. The acquiring company’s earnings per share should rise following the merger.
Company A is considering acquiring Company B. Company A’s P/E ratio is 55 times earnings, whereas Company B’s P/E ratio is 30 times earnings. After Company A acquires Company B, will Company A’s earnings per share rise, fall, or stay the same?
Company A’s earnings per share will rise, because of the following rule: When a higher P/E company buys a lower P/E company, the acquirer’s earnings-per-share will rise. The deal is said to be accretive, as opposed to dilutive, to the acquirer’s earnings.
What is a leveraged buyout? How is it different than a merger?
A leveraged buyout occurs when a group, by refinancing a company with debt, is able to increase the valuation of the company. LBOs are typically accomplished by either financial groups such as KKR or company management, whereas M&A deals are led by companies in the industry.
What is a commercial bank?
A bank that lends, rather than raises money. For example, if a company wants $30 million to open a new production plant, it can approach a commercial bank like Bank of America or Citibank for a loan. (Increasingly, commercial banks are also providing investment banking services to clients.)
What is float?
The number of shares available for trade in the market times the price. Generally speaking, the bigger the float, the greater the stock’s liquidity.
What is money market securities?
The market for securities maturing within one year.
These include short-term CDs, Repurchase Agreements, Commercial Paper (low-risk corporate issues), among others. These are low risk, short-term securities that have yields similar to Treasuries.
What is underwriting?
Most commonly, the valuing of a pre-IPO stock performed by investment banks when they help companies issue securities to investors. Technically, the investment bank buys the securities from the company and immediately resells the securities to investors for a slightly higher price, making money on the spread.
What is a bulge bracket firm?
“Bulge bracket” is a term that loosely translates into the largest full service brokerages/investment banks as measured by various league table standings. Goldman Sachs, Morgan Stanley, and Merrill Lynch are considered the ultimate examples (sometimes called the “Super Bulge Bracket”) Of late, Citigroup/Salomon Smith Barney, CSFB and, increasingly, J.P. Morgan Chase are considered to have joined the U.S. bulge bracket. Globally, J.P. Morgan Chase, Deutsche Bank and UBS Warburg/PaineWebber are typically thrown in with the U.S. top five to form the so-called “Global Bulge Bracket.” (Outside of the U.S., Deutsche Bank, J.P. Morgan and UBS frequently outrank Goldman in the league tables, for example.)
What is “junk”?
High-yield bonds with low investment grades (below BB (S&P) or Ba (Moody’s)
Tell me what the repeal of Glass-Steagall means to me as a capital markets participant.
Repealing the Glass-Steagall act has made it possible for “Universal Banks” / “Bankassurance firms” to exist again in the U.S. and Japan (always been legal in Europe).
Universal banks such as CITIgroup.
What are universal banks?
Banks that are both investment banks AND insurance companies AND full-fledged commercial banks.
Tell me four major investment banking industry trends and describe them briefly (CEDT)
- Consolidation = firms are taming up. Fx CITIbank + SSB
- Expansion in Europe = US firms increasingly use capital markets to raise financing along with pension reform leading to greater growth opportunities for their European-based businesses
- Demographic shift:
- Baby-boomers are retiring. Big wealthy generation that will demand investment-services during their retirement.
- Technology:
- ECN = Electronic Communication netwrosk to route and execute trades è Markets are commoditizing + high-frequency and algorithm trading
- Information distribution through technologies
- When will Blockchain/Tangle make an impact?
What is disintermediation?
- Cutting out the middelman” = eBay fx = Removing intermediaries from the trading process
- A reduction in the use/role of banks and savings institutions as intermediaries between lenders and borrowers = threat of crowdfunding and blockchain
If you worked for the finance division of our company, how would you decide whether or not to invest in a project?
PROFITABILIITY
3 classic Methods
- NPV and IRR
- Accounting wise… If ROC (Return on Capital) is > than COC after tax (Cost of capital after tax), the project is good.
- Calculate Economic Value Added
How does the yield curve work? What does it mean when it is upward sloping?
Yield to maturity on bonds is UPWARD-sloping as long-term bonds are more risky (time) and thus has higher yields/rates.
Upward-sloping yield-curve also means that the economy is expected to do well in the future.
What is a convertible bond?
A bond where you have the OPTION (not obligation) to convert the bond into a number of shares.
What is operating leverage?
Percentage of costs that are fixed vs. variable.
What are some ways to determine if a company might be a credit risk?
- Check credit rating agencies
- Do some Due Diligence yourself by calculating relevant ratios; Current Ratio, Quick Ratio etc.
What is duration?
Duration is a measure of the sensitivity of the price – the value of principal – of a fixed-income investment to a change in interest rates.
When interest rate increases, bond prices decrease = Inverse relationship
- Measure of interest rate sensitivity
- Important to know duration to match assets with liabilities
What is convexity?
As bond prices rise and fall along with interest rate changes, they do not do so in the linear way assumed by duration.
Convexity is generally considered desirable in a bond, since the greater the curvature the more prices will increase when yields decrease and fall less when yields increase.
What is the breakup value of a firm?
The breakup value of the firm is determined by analyzing the liquidation value of all tangible assets (A) and liabilities (L).
These are netted (i.e., A - L) and the result is the residual value accruing to shareholders.
How can a company raise its stock price?
Many ways fx.
- Announce an organizational restructuring that will cut costs
- Structural changes including M&A and divestures
- Stock repurchases – signal value etc.
- Announce Increase in dividends
What are some defensive tactics management can take against a hostile takeover?
- Change the bylaws of the corporation such that a smaller proportion of the board is elected each year OR require supermajority to approve M&As
- Give Golden Parachutes = stock options etc. to top management making the cost of acquiring higher
- Employee stock option plan = hope that low-level employees will purchase shares and support management in a defense against a hostile takeover
- Shareholder stock purchase program = give existing shareholders the option to buy more shares at a low price.
Why is a firm’s credit rating important?
Important when trying to raise more cash in the equity markets.
How do you calculate an equity beta?
You can perform a linear regression of the historical stock returns against market returns. The slope of the regression line is beta. Value Line, S&P and so on are data providers of equity beta. If you can’t get beta (for example, if the company is private), use the beta of a comparable company as an estimate.
Why do you unlever beta?
The beta of a firm is supposed to be an unbiased measure of the firm’s risk. The firm value should be independent of the amount of financial leverage so you unlever out any miscellaneous debt.
Since beta is a mathematical average of where the risk of the firm is concentrated among the creditors and shareholders, if the firm looks risky, is it risky because of the nature of the business or the nature of the financing? If the latter, you unlever beta to get at the business risk.
How would you calculate WACC for a private company?
If the company is not publicly traded, you would try to find comparable companies but include a control premium.
What are some functions of an investment banker?
- Helps provide financing for a company by bringing new issues public. This involves performing due diligence and valuation analysis in order to price the issue.
- Acts as an intermediary between the investing public and security issuers.
- Provides advice and guidance to security issuers through and subsequent to offerings.
- May provide temporary stabilization of bid price during offering and distribution period.
What are some great tips for dealing with guesttimates?
- Start by asking questions to your interviewer to see if they will help you with assumptions or not. If not, make reasonable assumptions yourself
- Focus is on showing your analytical ability
- When you make the numbers, make them ROUND so you can easily calculate
- Do not forget the “extra step” è Lowering your number as spheres do not pack perfectly / less block on Manhatten because of Central Park
What are some great tips for dealing with brainteasers?
- They assess creativity, composure and ability to deconstruct a problem AND ASK directed and relevant questions
- Take notes when you are given the brainteaser = especially numbers
- Think out loud so the interviewer can hear your thought process
What is a Term Loans?
You lend a fixed amount of money that requires annual principal repayments.
Whate are Bridge Loans?
Quick financing until a more permanent funding source can be originated. In some cases, a financial sponsor might use this resource after a bond offering is launched and before the proceeds are raised.
What are Revolvers?
Client pays a commitment fee for access to a credit line that can be drawn from as needed; often used to meet short-term borrowing needs if expenses or mandatory debt repayments are higher than usual. Sort of like a “credit card” for a company.
What is a Letters of Credit?
A written agreement in which the bank backs payment in case the borrowing company defaults.
What are Facilities – Asset-Based Loans (ABLs)?
Use inventories or receivables to ensure payment is made;
What courses did you do the best/worse in?
- Best;
- Accounting, Corporate Finance, Real Estate and Macro + Finance and Financial Institutions in Society
- Worst;
- Macroeconomics (lack of interest. Very theoretical to me + surprisingly hard exam. Almost 1/3 didn’t turn in the exam).
- Chinese Business course = focus was on creating a small NGO school project in Hong Kong. Didn’t quite catch my attention at that scale.
What appeals to you about this position?
- Opportunity to get insights into Corporate Banking AND investment banking AS WELL AS other areas in banking by cooperating with other departments
- Steep learning curve. Applied finance on a high level. Not just theory and homework.
- Challenging myself by stepping into a high-pressure corporate environment
Why would you be a good choice for this position? Why should we hire you?
-
Financial interest and capabilities;
- work experience, VC fund, entrepreneurial gave experience with financial issues and accounting,
-
Analytical capabilities
- current employer is even a digital agency focused on DATA and analysis.
- Case competition; #2 in a case competition with Maersk
-
Business brain
- = always think in business and optimization. How to improve things. Solve issues. Innovate and drive change = INGENUITY.
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Communication skills and team-player
- cross-cultural understanding from GLOBE, traveling and work abroad
- Social person and former captain of both soccer and handball teams as well as sports coach, student mentor and substitute teacher.
What do you think this position requires, and how well do you match those requirements?
-
Financial interest and capabilities;
- work experience, VC fund, entrepreneurial gave experience with financial issues and accounting,
-
Analytical capabilities
- current employer is even a digital agency focused on DATA and analysis.
- Case competition; #2 in a case competition with Maersk
-
Business brain
- = always think in business and optimization. How to improve things. Solve issues. Innovate and drive change = INGENUITY.
-
Communication skills and team-player
- cross-cultural understanding from GLOBE, traveling and work abroad
- Social person and former captain of both soccer and handball teams as well as sports coach, student mentor and substitute teacher.
Give me an example where you came with a creative solution to a problem.
- Very controversial 4-day workweek to improve employee retention and satisfaction. Would obviously not be feasible in the financial world but in this digital marketing industry the people and rules of the game are so different.
- Publishing Topstudent ourselves as the commissions given to book-authors were to small. Almost failed to deliver on time to the biggest national book chain. Had to call one to get the boss, to get the boss’ boss and so forth till I got the CEO and explained my dumb situation.
Give me an example where you successfully persuaded others to think or do what you wanted.
- Topstudent late on printing. Call one to get boss to boss to get boss to get CEO and then persuade as the young entrepreneuer who bla bla bla.
- Topstudent with Arnold Busck purchasing manager
Give me examples of your leadership abilities.
- FLSmidth in SEA for the local managers with business plan development and regional analysis
- Captain in handball and soccer – in handball I was always in charge of the close games and usually took the last few shots = either you are the guy who gets blamed for losing the game or the team wins.
- Jonas story
Describe a project in which you went beyond what was expected of you.
- FLSmidth Was supposed to just making business plans for Thailand and The Phillippines è Ended up with SEA+HK+Taiwan AND a regional analysis
What events have had the most significant impact on your life?
- The 5 closest people around me and how we have pushed each other.
- Traveling and how that turned into studying and working abroad and thus creating a global network for myself
- GLOBE = the absolutely crazy steep learning curve
What motivates you?
- Personal development / learning
- Optimizing and innovating = Problem-solving of complex issues.
- Engagement with other intelligent and driven people as well as reading success stories on positive impact on the world by others (biographies + blogs)
- I love to challenge myself and prove that I can do things that sound slightly crazy at first such as running 48 kilometers at the age of 14 (two weeks training), starting first small company at 16 and publishing a book at age 19.
- Financial freedom and the ability to travel to get new perspectives on life
Discuss something about yourself that I cannot learn from your resume.
- Very social person. Love to engage with people and inspire others to take action and do the best with their lives that they possible can.
- In my free time I like to challenge myself to do things that I am very bad at such as playing music (piano + guitar)
What would you do if you did not have to work for money? How does that relate to this job opportunity?
I would still work a lot. I would focus on starting investing in/founding/working for ventures that I believe help solve the many issues humanity is facing.
Give examples of how you have used your greatest skills.
- Ingenuity and analytical capabilities for 4DWW
- People skills and persuasion to take on a hidden leadership role in SEA for the local managers with FLS
What is your major weakness?
- Family and friends have often complained that I am driving myself too hard. Wanted to do too many things at once and learn everything.
- Trying to influence others a little too much by wanting people to try new ways that they can optimize their time and/or performance. Some people simply are not interested. They like the current average state
What were your failures and what did you learn from them?
- A disappointed first semester GPA. I was too focused on work and business. I forgot to spend time on studying. I also didn’t expect that the university exams would require as much preparation as it turned out. I also didn’t have a goal for the grade results – and I always have goals for all important things in my life.
- Promised the biggest book chain in Denmark that they would have our book in all of their stores by the official launch-date. Unfortunately we were 6 days late setting up the files for print and were told it was impossible. A solution had to be found so we ended up finding other printing houses. No one was able to do it in time so I started asking to speak to people’s bosses and ended up making an agreement with the CEO of a publishing house after kindly explaining the stupid situation I had put myself into.
What role do you usually take in a team?
A leadership role if possible – in other words, without pushing for it. I try to be in control or at least influence the one officially in control as much as possible with ideas and next step action plans. My focus is on getting the team to work together while keeping an overview to make sure that everyone is working on something they find interesting as well as creates the most value for the team’s project.
Tell me your biggest regret.
- That I spent time gaming in a young age instead of programming.
- Spending too much time on business and work during my 1st semester of university. I have had to work hard to improve my GPA afterwards – a GPA that in no way was adequate, which I then had to show to the GLOBE alumni and interviewers.
Tell me about your reasons for selecting this industry.
- I want to leverage my strengths in analytical thinking, ingenuity and my financial interest WHILE have the steepest possible learning curve, which I believe a ton of hours in the office surrounded by finance professionals can provide.
- Always been a business person. The financial industry and financial expertise is simply key to the economy. Some will argue that the financial industry is doing bad things for society. That discussion I am not bothered with. The financial industry is helping the economy for sure.
Whats the hardest thing you’ve ever had to do?
Being stranded in the Middle East on a flight to Bankok. Ended up taking 69 hours. I was with a friend and none of us got to sleep for 43 hours straight because we had to run around fixing flights + calling airline companies and terrible support offices.
Landed in Kuwait (supposed to be in Bahrain)
Learned a lot about how my friend tackled challenges. I constantly did my best to stay positive and laugh of the situation
- Kuwait, Bahrain, UAE, Bangkok
- Indian+ Pakistani migrant workers
- Got to know people from Bahrain, Kuwait, Sudan, Syria (refugees), Saudi Arabia, Qatar etc. – Very interesting
Can you give me an example of time when you came up with a creative solution?
- VA use in IIH Nordic ($4-5 an hour)
- Tracking and report creation
- Reminders
-
Sending our first draft of the book to the purchasing manager of the largest national book chain after finding out that she had kids in the target group age.
- She read the book and gave us her feedback. We didn’t agree with all her feedback but decided to anyway add an extra very soft chapter that she recommended. This way, the book kinda became her own work as well. That way she became a strong supporter of our book and did not only buy a ton of books from us to all their stores but also pushed for free marketing activities etc. from the book chain’s marketing department.
Why do you want to work in this industry? (less than 1 minute pitch on your story. Business school, finance, CITI – why?).
- Business person; always wanted to study business topics, super interested in finance and actually even started working in a consumer bank subsidiary at age 14.
- Interested in investing not just for the money but also the societal benefits finance is part of creating
- Obviously got an entrepreneurial background and is also helping a VC fund now in spotting trends, technologies and providing opinions and insights on investment opportunities.
- Optimal with CITI because I can both learn about corporate banking and investment banking at the same time.
What do corporate bankers do and why do you want to do corporate banking/investment banking?
Corporate banking = working with clients about their financing and capital structure. Managing and discussing their working capital as well as investments fx. In commercial real estate and other assets.
- Also working with people (+ negotiating)
- Advising about M&A
- Lending and capital structure
What exactly do investment bankers do?
Financial advisory services
Bond financing advise and help to big corporations and government
Assists in M&As
IPOs (underwriting or on commission)
Here’s a whiteboard. Stand in front of it and present a chapter from your favorite finance textbook. You have five minutes.
- Time value of money
- Compounded interest
Say you are supposed to meet your girlfriend for dinner but the MD asks you to stay late. What do you do? Can you give me an example of a similar situation you have faced before?
Fortunately I don’t have a girlfriend but lets say I had….
Would have to cancel the dinner and stay in late. I would obviously have to make it up with my girlfriend afterwards with some romantic date, flowers or whatever I come up with.
Why should we hire you?
-
Illustrate that you understand the position you are interviewing for
- I have the financial interest and knowledge needed to take on the steep learning curve up the mountain.
- I have the communication skills as well as presentation and negotiation skills that is required by a job as corporate banker/investment banker.
-
That you are hardworking, analytical and team-oriented
- Hardworker. Always had multiple jobs while studying in high school and university. Even elementary school I started working in a bank as 14-year old. Sure I were’t allowed to do that much haha. ALSO Entrepreneur. Know that hours are needed
- Analytical; currently doing an analytical project at work regarding our time registration. Now realized that the data is useless and management has realized it too. Hence, now a new structure and guidelines will be developed and given + training material. In fact, I found out that if we just change our time registrations slightly (specifically 15 minutes a day), we will just by getting time registrations right make a profit from this project alone that is higher than the annual profit we had in 2017.
- Case competition with Maersk that ended at home + Wilkins on the floor at first.
Why are you applying to this firm?
- Big corporation that I see as a trusted advisor and a company with a great culture
- This specific position and the structure of your corporate banking division including investment banking is what I find specifically interesting as I believe I can learn much more and I also think it is smarter from a business perspective that your corporate bankers/ investment bankers have a wider knowledge to bring to the table with clients
- CitiGroup is global which is very important to me as I see myself with expatriation sooner or later in my career. And then you have an office in Copenhagen that I can work in the first years.
Give me an example of a project that you’ve done that involved heavy analytical thinking
FLS SEA business plan development and regional analysis
If you were the CEO of our bank, what three things would change?
- Make sure that the internal consulting team is big enough = those who optimize processes and providing the financiers with the optimal tools, training opportunities
- Would accelerate the innovation process in general. Especially, I would look into what Citigroup can do to mitigate the risk and or the opportunities coming with blockchain and tangle technologies
- Would analze incentive structures very carefully to see whether they align interest and ethical decisions.
What is your favorite website?
- Amazon
- Feedly
- Waitbutwhy
- Coinmarketcap
Tell me about the stock price of a company in your prior line of work
What is the most striking thing you’ve read recently in The Wall Street Journal
The off-shore profits American companies have in Europe that they can now bring back. I didn’t realize the amount of capital was that extensive – 3 trillion dollars.
Let’s say I give you this summer job. Now let’s move to the future and say that at the end of the summer, you find out that you did not get a full-time offer, or that six months into the job you are fired. Give me three reasons why this could happen, and what you can do to prevent this.
- Ingenuity and new ideas è Looking into something that someone find inappropriate
- Demotivating management
- …….
Tell me how you have modeled with equations in the past
- High school with 2 start-ups
- High school exams
- 2 jobs to make money for a 6-month trip
- Sports, family, friends and going out
What is a hedge fund?
- Investment fund focused on high net worth investors
- LEVERAGED = high returns = Aggressive
- LESS REGULATED than mutual funds and other investment funds because only high net worth invests in them – people that can afford to lose money according to the government
- Takes operation fees + performance fees
Which industries are you interested in? What are the multiples that you use for those industries?
- Consumer industry + Real Estate
- EBITDA
- High tech, high growth ==>
- PEG ratio; (Price/Earning)/(EPS growth rate for specified time period) = The lower the better
- Early stage ventures
- Revenue
Describe a typical company’s capital structure.
- Equity
- Common Stock
- Preferred stock
- Retained Earnings
- Debt
- Short-term
- Long-term
vAsk CITI questions in the end. “Do you have any questions?”.
- What do you expect me to achieve during the internship?
- What are the key traits of high performers in CITI?
What are the names of your previous interviewers?
- Petter Ledsaak (Norway)
- Andreas Kristoffersen (dansk but not sure)
Tell me a good joke that is neither sexist nor racist
- It is currently so cold in D.C……… - that you may even see politicans with hands in their own pockets
- What do you call a nun in a wheelchair? Virgin mobile
Describe a recent M&A transaction that you’ve read about + What were the reasons behind the M&A? Does the transaction make sense?
High-tech deals represent almost 30 % of all M&A deals
- Favorite of 2017; Amazon and Whole FoodsAmazon acquiring Whole Foods for $13.7 billion
-
Good for Amazon;
- gaining market share in traditional retail food services
- making them ready for Alexa direct purchases off both food and non-food products
- Good for Whole Foods;
- opportunity to modernize and innovate in an industry with a tough outlook as online takes over the world.
- Having the world’s possibly best digital partner is quite a strong card
-
Good for Amazon;
What is it about our company that interests you?
- An ideal work environment for me ==> the attributes from the GLOBE program + city being global and focusing on diversity
- Like Corporate banking + investment banking together. I see interesting work in both areas and would appreciate to work on both – especially as an intern.
-
Universal banking with many purposes and client types providing for a more varied work environment and an opportunity to gain a broader insight into finance on the inside
4.
Describe what would be an ideal environment for you?
Similar attributes to the GLOBE program
- Global mindset + the complexity associated with that
- Fast-paced (and long hours)
- Very challenging
- Steepest possible learning curve
- Intelligent people
- Diverse group of people preferably (also something CITI focuses on)
How did Citigroup get through the financial crisis?
It was quite bad for Citi. They lost substantial amounts of money from their balance sheet.
- Laid off tens of thousands of employees
- Took $45 billion in assistance from the U.S. government
- CEO Vikram Pandit famously vowed to take a salary of just $1 till the company regained profitability
SOLVED WITH:
- Citi Holdings subsidiary
- Laying off people + lower compensation
- Incentive structure has also later been changed to be focused on earnings per share of the company
What made Citibank recover from disaster in 2008?
- Citigroup’s share price dropped by an incredible 97 %
- Saved by U.S. government with $45 billion.
- By 2010, the U.S. Treasury had sold off all of its stock in CITIgroup
- +++ Paying back the US Government by issuing new common stock that diluted longtime shareholders
- Citi Holdings administered more than $800 billion = that alone made Citi Holdings the fifth largest US bank only on these toxic assets.
- Way too many subprime loans
- Made Citi Holdings Subsidiary to separate the results of toxic and non-core assets ==> FROM 2017, Citigroup has no longer used this method with Citi Holdings Subsidiary
What is the down jones and what level?
Dow Jones Industrial Average
$25,300
What is the 1 year treasury rate?
1.80 %
What is the 5 year treasury rate?
2.30 %
What is the 10 year treasury rate?
2.47 %
What is the 30 year treasury rate?
2.80 %
What is the price of gold?
$42.500 kg
What is the S&P 500?
$2,750
500 big American companies
How is the US Trade deficit going?
see graph
What is the current par rate / average interest rate banks charge for loans?
Euro area see graph.
Below 2 % or just around 2 %.
November 2017;
- Corporations: 1.71 %
- Consumer = new household = 1.87 %
