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|Valuation investment banking interview accounting||Free Exclusive Report: page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews. List the most common multiples used in a valuation. Login Self-Study Courses. How much of technical do you really need to know to pass your interviews? Valuation Questions Valuation and financial modelling will form a large part of what an analyst and associate is expected to do.|
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|Valuation investment banking interview accounting||Industry-Specific Modeling. When should you value a company using a revenue multiple vs. The second approach involves determining a comparable peer group data focus llc investment companies that are in the same industry with similar operational, growth, risk, and return on capital characteristics. Valuation Questions Valuation and financial modelling will form a large part of what an analyst and associate is expected to do. Are then any differences between the UK and the US? Move Comment.|
Purchase accounting adjustments handle such discrepancies, chiefly through adjustments to intangibles and goodwill. The trick behind question 3 is realizing the difference in pre-acquisition value and purchase price is irrelevant to calculating pro forma EV. Again, I think you are thinking too far beyond the scenario. The questions are asking for EV the moment each transaction has been effected. The debt tax shield will have no effect on EV at the time of transaction. The risk of bankruptcy and whether the target is "optimally leveraged" are also irrelevant.
JD-to-IB -- In your prior post's explanations to questions 1 and 2 you more or less explain how the MM theorem works in practice. Their work, and that of Sharpe and Markowitz, form the basis of most modern theoretical finance. For 3, you are absolutely right from an accounting perspective. I suppose that is something one ought to clarify in an interview setting. If I were the interviewer, I'd take either answer. I agree in part and disagree in part with your answer to 5.
Again, from an accounting perspective you're right, but from a valuation perspective, capital structure does impact value in a world with taxes. And if I were the interviewer, I would only ask the question about taxes to test whether you understood the valuation concept. When equity is issued, the company receives cash in the same amount that equity is increased on the balance sheet. The second question simply assumes that a dividend is issued right after the scenario in question 1 takes place.
Now, let's go through the acquisition scenario in question 3. The cash paid to the target fully pays down the target's debt, so zero debt, zero cash, and zero equity are added to the acquiror's balance sheet note, assets will be adjusted significantly, including the goodwill account, due to the excess in purchase price over the target's pre-acquisition value--but that doesn't affect the EV discussion.
The answer to question 4 is that nothing would change versus your previous answers: the cash raised fully offsets the debt raised when calculating EV in each scenario and nothing changes the outflow of cash to pay for the acquisition in question 3's scenario. In each case, debt is simply being increased rather than equity. The answer to question 5 is the same as question 4: no change. Normally, interest expense is tax deductible, true. However, this would have no impact on EV at the moment any of the transactions discussed have been effected.
Rather, the result would be future increases in earnings and cash flow compared to the same scenarios in a tax-free universe, which will only affect future EV. You would create a deferred tax liability in the acquisition scenario due to the amortization of the intangibles write-up, but that will have no effect on pro forma EV at the time of transaction.
Remember to keep things simple. Enterprise value is nothing but debt, plus equity, minus cash. It is a value at a given point in time. Taxes are expenses that take effect between reporting periods. The excess purchase price paid in the third question is a red herring as well: the excess would be accounted for in an intangibles write-up and new goodwill, and would not matter in the calculation of pro forma EV. Why does it not matter what the cap structure is?
Re-ib-ny, I was not assuming the pre-transaction value of the target company in question 3 is book value. Actually, whether the pre-transaction value is intrinsic, market-based, or book, is wholly irrelevant to pro forma enterprise value in an acquisition scenario. The only thing that matters is the amount paid. This is true from both an accounting and theoretical perspective, as actual value trumps inferred value any day.
As for question 5, delevering and relevering a company, then adjusting for the present value of tax shields and financial distress, is yet another attempt at inferring an intrinsic value of a company in place of calculating its actual value in a specific context. While you're at it, you could also run two different DCFs based on the given capital structure using two different tax rates zero versus whatever rate you assume for the question.
I guarantee you, this is not what the interviewer is driving at. Here's why: we are given the actual market value of equity to actual shareholders, the actual value of debt to actual debt holders, and the actual value of cash on the balance sheet. We do not need to infer anything on financial theory. The interviewer simply wants to see how well the OP understands the concept of enterprise value in conjunction with basic financial accounting.
I think our disagreement lies in how you interpret "worth" in the OP's post. I went with the opposite assumption that it was a value destructive deal. I would, however, like to clarify my answer. The post-transaction value of financial instruments can be impacted by capital structure. If the business were over-levered to begin with, then an increase in debt mix would increase the WACC , therefore reducing the value of the firm. Slide 16 illustrates the concept of being able to optimize WACC and consequently firm value by adjusting debt mix.
He goes on to apply this to a case study of Disney. I apologize for the mis-guidance in my earlier post with the dividend impact to share price, I haven't dealt with equity values in EV in restructurings for quite some time given the under water nature of the debt for my deals. However, as for Q5, I think the right answer should address the interest tax shield effect of the incremental debt and the accretive value that has to the enterprise value of the firm.
I would think the interviwer, when explicitly adding taxes back to scenario 4 is trying to hint at the incremental EV the tax savings brings, which can be muted by the higher increase of financial distress given the higher amount of debt on the capital structure. When you go from enterprise value to equity value , would you add back "equity investments"? Why or why not? I would think you would add it back given that the income from an equity investment is below EBITDA and thus is not captured in the valuation of enterprise value.
I know it is a bit late, but I run into the same question a couple of weeks ago at work, hope it is useful for anyone:. You have to think about it the other way around: You substract the equity investments at market value, if possible when you go from equity value or market cap to EV , so as you can obtain a "clean" multiple when it comes to benchmark vs.
If we are considering it in market value terms, rule of thumb is assuming that equity investors are taking in consideration the value of those investments when it comes to price the stock. To make it apples to apples, you add minoirty interest when going from equity to EV. Likewise, with associates, it is Therefore when you go from EV towards equity, you would most certainly add. Would it be correct to add the remaining cash balance on the balance sheet after deal to enterprise value? This would also be the minimum cash balance.
What is your goal what number are you trying to get to? I'm confused because you are talking about adding cash to enterprise value. If you want to go from enterprise value to equity value , then you would add cash and subtract debt. If you want to get to enterprise value, then you would add up the value of all financial claims debt, equity, etc and subtract cash and other excess assets. When we are evaluating a business as an investment, we will do the latter [based on the price of the equity and the capital structure, what enterprise value are we paying, what price are we paying for the business operations].
A business requires some level of minimum cash to operate, and technically you should only subtract cash above that level. In practice, people typically subtract total cash because it's easier and it is not realistic to accurately estimate required cash levels for different businesses.
Think of the enterprise value as the theoretical "take over" price. If you were to buy the business and they had some cash, you could deduct the cash from the enterprise value thus making the "take over" price lower. However, it is sometimes difficult to determine a company's optimal cash amount, so for simplicity purposes, all cash is deducted from EV. WSO depends on everyone being able to pitch in when they know something.
Join Us. Already a member? Popular Content See all. The truth is, as one of the older posters still around, I'd given most all advice that I could think of as I rose through the IB ranks. However, this year I left invest…. Recently had a CEO blame other people for why he couldn't move things along in a transaction. Literally holding up a deal because he is not a good leader and trying to scapegoat everything.
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For example, consider DCF, comparable company analysis and precedent transactions. Precedent transactions are likely to give the highest valuation since a transaction value would include a premium for shareholders over the actual value. The DCF would likely rank next, but that would largely depend on the quality of the assumptions applied.
Financial analysts often look at comparable companies when making valuations. This is based on the theory that, if investors are willing to pay a certain amount for a company then they should also be willing the pay that same amount for a similar company. Often, publicly traded companies are used for comparable analysis.
To be successfully compared, the public comparable company should be similar to the company being valued in areas that include:. Public company comparables are useful for valuation as they usually operate within the stock market and, therefore, their financial statements are regulated in similar ways. They are also subject to the same economic conditions and market pressures. The downside of public company comparables is that analysing public companies does not give the full picture.
Valuations do not give anything away about the economic climate and the current state of the stock market. Stocks may not reflect the actual value of the company and analysis alone will not give much information about premiums paid in transactions.
It does not automatically follow that all accretive transactions are good and all dilutive deals are bad. During your investment banking interview, you will likely be asked questions about company valuations. You will need to demonstrate a basic understanding of key concepts and recall a fair amount of information. Therefore, take some time before your interview to review basic concepts and definitions around company valuations and build your knowledge.
If your undergraduate degree was not business or finance-related, you will need to ensure you have built up your knowledge by reading around the subject and having mastered technical terms and definitions. Practise your answers, write notes and practise speaking out loud.
Try recording your answers to time yourself. It is recommended that you keep answers to between one and two minutes so try to condense complicated topics down into their basic parts to keep your answers concise. Practising these top 10 valuation interview questions along with our comprehensive guide on investment banking interview questions will ensure you are on the road to success.
Company Valuation Interview Questions. How strong is your CV? Consider Three Main Valuation Methods. Final Thoughts. Report this Ad.
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