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General > IB/PE Recruiting > Flashcards

IB/PE Recruiting Flashcards

1
Q

What are the four ways to value a company?

A

Public comps, precedent transactions, DCF, LBO

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2
Q

What kind of valuation is public comps and precedent transactions?

A

Relative

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3
Q

What kind of valuation is DCF?

A

Intrinsic

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4
Q

How do you value a company using public comps? (3)

A

Using multiples. P/E ratio, Enterprise value/EBITDA, EV/sales

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5
Q

Three criteria when using public comps

A

Need to be comparable companies, need 4-7 companies, find correct multiple to use

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6
Q

Walk me through a DCF

A
  1. You start by projecting free cash flows for the forecast period, typically 5-10 years
  2. Calculate the terminal value to account for the cash flows after the forecast period
  3. Discount the cash flows to the present values
  4. Sum the present value of cash flows and terminal value to get the enterprise value
  5. Calculate equity value by subtracting the netdebt
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7
Q

How do you project free cash flows?

A
  1. Choose the forecast period, typically 5-10 years
  2. Revenue - operating expenses to get to EBIT
  3. Apply tax rate
  4. Add back depreciation and amortization (non-cash expenses)
  5. Subtract capital expenditures (CapEx) and changes in working capital to arrive at the free cash flow
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8
Q

What are two ways to calculate the terminal value?

A
  1. The Gordon Growth Model (assuming perpetual growth at a constant rate
  2. Exit multiple (applying a valuation multiple, for example EV/EBITDA to the EBITDA in the final year of the forecast
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9
Q

How do you discount cash flows to the present value?

A

You discount both the free cash flows and the terminal value using the WACC.

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10
Q

How do you calculate the WACC

A

Cost of E x E/E+D + Cost of D x D/E+D

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11
Q

How do you get the enterprise value?

A

Sum the discounted cash flows and add the terminal value

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12
Q

How do you get from enterprise value to equity value?

A

Subtract the net debt from the enterprise value to get the equity value.

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13
Q

How do you get the intrinsic share price?

A

Divide the equity value by total number of oustanding shares

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14
Q

How do you get from equity value to enterprise value?

A

Add debt subtract cash

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15
Q

Walk me through the Income Statement

A

The income statement shows a company’s revenues, expenses and profits over a specific period. It provides insight into a company’s operational performance and helps the investors and analysts evaluate a company’s profitability and overall financial health

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16
Q

What are the main parts of the IS?

A

Revenues, COGS, gross profit, operating expenses, and net income

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17
Q

What is the connection between the IS and CFS?

A

The net income from the IS becomes the top line in the cash flow from operations in the CFS

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18
Q

What are the three parts of the CFS?

A

Cash flow from operations, investments, and financing

19
Q

How does the CFS and BSWhat is the connection between the CFS and BS?

A

The change in cash flow from the CFS becomes the change in cash in the BS

20
Q

What is the CFS?

A

The cash flow statement shows a company’s ability to generate free cash, it tracks the movement of cash through the company, and shows the liquidity of the company

21
Q

What is the BS?

A

The balance sheet is a snapshot of a company’s financial position at a specific point in time. It outlines a company’s assets, liabilities, and shareholders’ equity, showing how the company finances its operations

22
Q

Explain the beta of a stock

A

The beta measures a stock’s volatility compared to the overall market. A beta of 1 means the stock moves with the market, greater than 1 means it’s more volatile, and less than 1 means it’s less volatile. It helps investors assess a stock’s risk level relative to market fluctuations.

23
Q

Explain the three main financial statements

A

he three main financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows. The Income Statement shows a company’s revenues, costs, and expenses, which together yield net income. The Balance Sheet shows a company’s assets, liabilities, and equity and is a representation of the company’s financial health/position on one particular day in time. The Cash Flow Statement starts with net income from the Income Statement; then it shows adjustments for noncash expenses, non-expense purchases such as capital expenditures, changes in working capital, or debt repayment and issuance to calculate the company’s ending cash balance.

24
Q

What is included in COGS?

A

All direct costs associated with producing or purchasing the goods a company sells, for example direct material, direct labor, manufacturing overhead and shipping and handling

25
Q

Walk me through the income statement

A

Income Statement represents revenues or sales - COGS = gross profit- operating expenses, depreciation and amortization = operating income - interest expense and any other expenses (or add other income) = pre-tax income. - tax payments = net income.

26
Q

What is Common Stock and Additional Paid in Capital

A

The market value of the shares of stock when they were issued by the company, not the market value at the current time.

27
Q

What is treasury Stock

A

This is the total value of shares that the company has repurchased from investors, at the value for which they were repurchased, not their current value.

28
Q

What is Retained Earnings

A

This is the company’s cumulative net income minus any dividends that have been paid to equity investors.

29
Q

If you could only use one financial statement to evaluate a company, which would you choose?

A

Cash flow statement to see the liquidity position of the company. The IS can be misleading due to non-cash expenses not truly affecting the operations of the company. The BS shows a snapshot in a point in time, which does not fully show how the company is performing.

30
Q

If you can see two financial statements, which would you choose?

A

IS and BS, because from there I could create a CFS. The CFS begins with net income, and is then adjusted up or down for non-cash and non-operating expenses. Then using the BS we can calculate the change in working capital, and any changes in assets, liabilities and equity.

31
Q

Why are depreciation and amortization added back to the CFS?

A

Because they are not actually cash expenses and do not affect the cash flow

32
Q

What is net working capital?

A

Current assets - current liabilities

33
Q

What is EBITDA?

A

BITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a good high-level indicator of a company’s financial performance. Since it removes the effects of financing and accounting decisions such as interest and depreciation, it’s a good way to compare the performance of different companies. It serves as a rough estimate of free cash flow, and is used in the EV/EBITDA multiple to quickly establish a company’s high-level valuation.

34
Q

What is enterprise value?

A

Market Value of Equity + Debt + Preferred Stock + Minority Interest – Cash

35
Q

What is net debt?

A

Debt minus cash

36
Q

What is an LBO?

A

An acquisition mainly using a higher than normal amount of debt. Then using the cash flow to pay off the debt and thereby increasing the value of the company’s equity.

37
Q

Which valuation technique results in the highest valuation?

A

Precedent transactions, DCF, market comps, market valuation

38
Q

How do you calculate free cash flow?

A

Free cash flow is EBIT times 1 minus the tax rate plus Depreciation and Amortization minus Capital Expenditures minus the Change in Net Working Capital.

39
Q

What is arbitrage?

A

Inefficiency in the markets, information isymetry, creating arbitrage windows that last seconds or milliseconds

40
Q

What is you view of the market today?

A

Explain using labor, unemployment rates, inflation, interest rates, GBP

41
Q

What is CAPM?

A

Capital asset pricing model, links the expected return on a security to the volatility of the market

42
Q

How do you calculate the CAPM?

A

Determine the risk free rate, usually using the yield on 10 year bonds, market risk premium, beta

43
Q

When do you use levered vs. unlevered beta?

A

Use levered when you want to find the volatility considering the equity and debt, and unlevered when you want to consider without debt

44
Q

When would a company issue debt instead of equity?

A

To avoid dilution

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