Asset Classes
What is investment banking?
Investment banks are intermediaries that advise companies and governments on two things: transactions (M&A, LBOs) and capital raising (equity and debt issuances). They connect buyers and sellers, structure deals, and market offerings to investors.
What is the equation for discounting cash flows?
C/(1+r)^n
Name the all the working capital items.
What is accounts receivable, prepaid expenses, inventory, accounts payable, accrued expenses, and deferred revenue?
Walk me from revenue to unlevered free cash flows.
EBIT (1-T) + D&A - capital expenditures - change in NWC
The three components of the CAPM formula.
What are the risk-free rate, levered beta, and the equity risk premium?
What is the difference between a bulge bracket and an elite boutique?
Bulge brackets are the largest global banks offering all services across all regions, with deals typically $1B+ (Goldman, JPMorgan, Morgan Stanley). Elite boutiques operate in multiple regions but specialize in 1-2 offerings like M&A or restructuring, with deals ranging from $100M to $1B+ (Evercore, Centerview, Moelis).
A seven-year, $1000 face value bond with a 7% annual coupon. Bond currently trades at $1000. What is the bond's ytm?
7%
What is the difference between accounts payable and accrued expenses?
Accounts payable is money owed to suppliers for goods or services you've already received and been billed for. Accrued expenses are costs you've incurred but haven't been billed for yet, like wages earned by employees but not yet paid, or interest that's accumulating on debt. Both are current liabilities, but the key distinction is whether an invoice exists.
Why do we deduct taxes from EBIT rather than from pretax income when calculating unlevered FCFs?
What is to exclude interest expense, since it is a capital structure-related item and unlevered FCFs should represent cash flows to all stakeholders (both debt and equity)?
The difference between systematic and non-systematic risk.
What is: systematic risk affects the entire market and cannot be diversified away (measured by beta), while non-systematic risk affects individual companies and can be diversified away in a large portfolio?
What is an IPO?
An Initial Public Offering is when a private company sells shares to the public for the first time to raise capital. Investment banks underwrite the offering. They set the price, structure the deal, and market it to investors.
For a $700 investment today, you will receive $850 in one year. If the discount rate is 6% per year, what is the NPV of the investment?
NPV = −700 + 850/(1.06) = −700 + 801.89 = $101.89
Walk me through a $10 increase in depreciation. Assume a 40% tax rate.
IS: Depreciation up 10, EBIT down 10, carries down to pre-tax income down 10, NI down 6
CFS: NI down 6, add back 10 for depr., CFO up by 4 (net change in cash was 4)
BS: Cash up 4, PP&E down 10; RE down 6
What is the WACC equation and what does it represent?
WACC = rd(1-T) × D/(D+E) + re × E/(D+E)
WACC is the opportunity cost of investing in the firm. It's the return an investor could earn elsewhere on an investment of similar risk. It's used to discount the firm's future cash flows to determine what they're worth today.
Should you use book values or market values for the WACC calculation and why?
Market value because WACC should always be forward-looking.
In an LBO, the private equity firm uses this to acquire a company without committing a lot of its own capital, and later uses the company's cash flow to repay it.
What is debt?
If the coupon rate is greater than the ytm, it is a ___ bond. If the coupon rate is less than the ytm, it is a ___ bond.
premium, discount
A company has a beginning balance of retained earnings of 80, issued 15 in dividends, and had an ending balance of 97. What was net income for the year?
32
The formula for Equity (Levered) Free Cash Flows, and the type of analysis where EFCFs are primarily used.
What is Net Income + D&A − CapEx − ΔNWC, and it is primarily used in LBO analysis for calculating IRRs?
You have a risk free rate of 4%, beta of 0.8, and market return of 9%. What is the company's cost of equity?
8%
These are the five product groups within investment banking mentioned in the handout.
What are M&A, Restructuring (RX), Leveraged Finance (LevFin), Equity Capital Markets (ECM), and Debt Capital Markets (DCM)?
Use the gordon growth formula. If your cash flows in year 0 were 1000, and your discount rate is 5% and growth rate is 3%, what is your present value?
1,009.8
If deferred revenue decreases by 20 (tax rate of 20%), walk me through the 3 statements. Assume a gross margin of 50%.
IS: Revenue up 20, Cogs (10), EBIT up 10, Pre-tax up 10, NI up 8
CFS: NI up 8, inventory up 10, DR down 20; net change in cash down 2
BS: assets: Cash down 2, inventory down 10
liabilities: DR down 20, RE up 8
The three steps required to calculate a new cost of equity when a company changes its capital structure.
What is: (1) unlever the old levered beta to get the unlevered beta, (2) relever the unlevered beta using the new/target D/E ratio, and (3) plug the new levered beta into CAPM to get the new re?
Walk me through a DCF.
A DCF is used to find the intrinsic value of a company by discounting its future cash flows back to today.
Step 1 — Project Free Cash Flows: Forecast unlevered FCFs (EBIT(1-T) + D&A − CapEx − ΔNWC) over a planning period, typically 5-10 years.
Step 2 — Calculate Terminal Value: Estimate the company's value beyond the projection period using either the Gordon Growth Model (perpetuity approach) or the Hybrid/Multiples approach (exit EBITDA multiple from comps).
Step 3 — Discount Everything Back: Discount the projected FCFs and the terminal value to present using WACC, and sum them to get enterprise value.