GS Flashcards
How does Goldman Sachs make money
Financial services company that provides advice, lends, invest money, make markets and manages risk. Advise on hundreds of M&A transactions every year and underwrite millions of stock and bond offerings.
Over half of JPM’s profits come from the consumer bank followed by CIB, AWM, then CB.
Goldman is more reliant on trading with the largest revenue division as Global Markets and Investment Banking but is growing its consumer business segment
Divisions of Goldman Sachs
Investment Banking, Global Markets, AM, Consumer Wealth Management
RLG
Driving the overall strategy around Goldman Sach’s retained lending book by optimizing the underwriting, structuring, executing, and principal contact on the loan product.
Most important metrics for RLG?
Return on Equity - Ratio that compares the net income generated by an asset and its capital reserves. JPM uses a hurdle rate of 15%.
Revenue Shortfall - Estimate of the amount of incremental revenue required to bring ROE up to 12%
Shareholder Value Add (SVA) - Illustrates the amount of money either gained or lost by shareholders due to JPM participating in the transaction. The difference between the net income generated by an asset and the cost of capital at 10%
Transaction Level Metrics:
Financing: pure lending returns (interest income, commitment fees, agency / arrangement fees)
Deal: bond underwriting fees, IPO fees, M&A fees
Client Level Metrics:
Current: existing firmwide profitability based on a two year annual average
Pro Forma: projected firmwide profitability given the impact of the credit ask and the potential future business over a two year period
Loan Return Calculator
Determines the projected returns of extending credit to client. Estimate returns and is not used to price loans, market and client appetite dictates pricing.
Loan Return Calculation
Determines the projected returns of extending credit to client. Estimate returns and is not used to price loans, market and client appetite dictates pricing.
Revolving Credit
Provides clients with certainty of funding, can be redrawn, and can be repaid at final maturity.
- syndicated
- committed via loan agreement
- various tenors
- used to finance working capital, provide extra liquidity, backstop
- balance sheet and capital impact ranges between minimal and high
Term Loan A
A term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication.
Bridge Loan
- “Club” deal with underwriters of the take-out
- short tenor (six months max)
- repayment from a particular source identified up front (equity or asset sale)
- often used where clients fund acquisitions or specific assets
- enables clients to receive timely funding and then manage the repayment source in an orderly manner
- Expensive
Letter of Credit
- unfunded guarantee of payment for obligations of our client to a third party
- tenor varies can be perpetually auto-renewed
- allows clients to evidence financial backing to third party and may save client from having to post collateral
- unconditional nature, provider may immediately seek repayment after disbursement
When should a company consider issuing debt instead of equity?
There are many reasons to issue debt instead of equity:
(1) It is a less risky and cheaper source of financing
(2) provides the benefit of tax shields
(3) If the firm has immediately steady cash flows and is able to make their interest payments
(4) higher financial leverage helps maximize the return on invested capital
5) when issuing debt yields a lower weighted cost of capital (WACC) than issuing equity.
What makes a good financial model?
The best financial models are clearly laid out, identify all the key drivers of the business, are accurate and precise yet not overly complicated, can handle dynamic scenarios, and have built-in sensitivity analysis and error checking.
IBD
Acts as an intermediary for capital raising, and as an advisor on M&A transactions and other major corporate actions. As an intermediary, it connects companies that need capital with investors who have capital to spend. It facilitates this through debt and equity offerings.
As an advisor, an investment bank counsels companies on such corporate actions as mergers, acquisitions, spinoffs, and restructurings.
Underwriting
an arrangement whereby investment bankers raise investment capital from investors on behalf of corporations and governments who issue public securities (“public offering”). These securities can come in the form of equity (IPO, secondary equity issuance) or debt (high-grade debt, high yield bonds, government securities, etc). Investment banks make money by securing underwriting fees (% of the capital raised) from the public offerings.
