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Wombat
Project
Delta Sigma Pi Spring 2008
Delta Sigma Pi
Beta Nu Chapter
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!
Time is like cleavage, squeeze and you will get some!
If you have 8 first-round interviews and 4 second-rounds, thats only 10 hours of interviewing. That totals less than an entire day. Dont stress out. Be productive.
Every interview you go for is a FIT INTERVIEW!
Does your brain fit? Are you competent?
Does your personality fit? Are you sociable?
Are you smart when you are having fun?Are you fun when you are being smart?
Getting the answer right is 50% of the challenge; the other 50% is how you choose to deliver it!
Dont bring the Vault Guide to your interviews, and if you do, dont let them see it. It is such a faux pas!
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Use the following pages to organize daily WSJ headlines:
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Use the following pages to organize information about the companies you are interviewing with:
Company: CEO Name:
Date/ time of interview:Who interviewed you:Industry/ product groups:
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Company Profiles
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Company: CEO Name:
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Company: CEO Name:
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I Valuing a Company The core of corporate finance and one of the mostcritical areas in investment banking and advisory.
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Discounted Cash Flow
Six easy steps
1. Derive adjusted EBIT2. Arrive at free cash flows
3. Decide how to discount free cash flows4. Determine discount rate5. Decide how to calculate terminal value6. Apply discount rate and find net present value
Step 1: Derive adjusted EBIT
Reported EBIT
(-) Non-Recurring Charges= Adjusted EBIT
Common examples of non-recurring charges arelegal settlement fees, restructuring charges andasset impairment charges. Adjusting for thesegives a more organic and accurate perspectiveon EBIT.
Discounting cash flows isnt difficult, its deriving the free cash flows that can be challenging. The method which you use to discount these cash flows is anotherheadache in itself. Then, finding the appropriate discount rate can be problematic. Make sure you understand the various techniques used in DCFs.
Definition: This method takes the projected cash flows of a company, discountsthem back at a relevant discount rate, taking into consideration the companyscapital structure and how one may want to treat leverage.
Step 2: Arrive at free cash flows
Adjusted EBIT(+) Non-cash Operating Expenses (D&A, ESO)
(-) Cash Tax Payments(-) Increase in Operating Working Capital(-) Capital Expenditures
= Free Cash Flow
D&A can be found in the Cash Flow StatementESO may be embedded into SG&A (FASB 123)
Step 4: Determine discount rate
If using WACC... apply CAPM using given asset beta
If using APV... apply CAPM to relevered equity beta
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Discounted Cash Flow, Contd
Step 5: Determine how to calculate terminal value
Continuing Value MethodAssumes constant growth rate after projected period
Exit Multiple MethodAssumes multiple of free cash flows after projectedperiod
Step 6: Apply discount rate and find NPV
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Discounted Cash Flow, Contd
WhyaddD&A to EBIT?
D&A is a non-cash operating expense. Hence, to make sure that free cash flow is derived only from cash-related items, D&A must be added back toEBIT.
Why subtract theincrease in operating working capital?
Working Capital = Net Current Assets - Net Current Liabilities
When working capital increases, it means one of two things (or both):
(i) Your net current assets are increasing
Accounts Receivable (not converting recorded sales to cash quickly enough)+ Inventory (not converting goods to cash quickly enough)
(ii) Your net current liabilities are decreasing
Accounts Payable (payables are met using cash = cash outflow)
Hence, it is apparent that an increase in working capital corresponds to lower levels of cash, and must be subtracted to reflect the appropriatemovement of cash in/ out of the company.
Note: You might get a variety of questions on the DCF, whichare designed to evaluate your intuition behind the technique.
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Discounted Cash Flow, Contd
What are debt tax shields and why do they matter?
Debt tax shields (DTS) provide tax advantages by reducing income taxes. Interest on debt is tax-deductible, as can be seen on the Income Statement:
EBIT- Interest Expense= Taxable Income- Income Taxes= Net Income
Hence, taking on debt is like having a shield against taxes. Bankers tend to self-glorify. Its a way for compensating for spending thatmuch time behinda computer screen.
DTS matters when you value a company that is levered (has debt).
How is beta treated in the APV method?
Simply put, you must unlever current beta because you are assuming an all-equity firm:
Unlevered Beta =
Use the CAPM to arrive at the new cost of capital, which is your discount rate.DTS are then valued at the cost of debt, and added back.
How does the continuing value method treat terminal value like a perpetuity?
Terminal Value =
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Discounted Cash Flow, Contd
Projected Financials - Income Statement
Income Statement Projected FYE December 31,
($ in millions) 2008E 2009E 2010E 2011E 2012E
Revenues $73.9 $80.1 $85.2 $93.6 $99.4
Cost of Goods Sold 40.0 45.0 47.9 53.7 59.3
Gross Profit 33.9 35.1 37.3 39.9 40.1
Selling, General & Administrative Costs 12.5 14.9 16.2 18.2 19.1
EBIT 21.4 20.2 21.1 21.7 21.0
Interest Expense/ (Income) 5.1 5.7 6.6 7.1 7.4
Earnings Before Taxes 16.3 14.5 14.5 14.6 13.6
Income Taxes 5.7 5.1 5.1 5.1 4.8
Net Income $10.6 $9.4 $9.4 $9.5 $8.8
Projected Financials - Selected Cash Flow Statement Items
Selected Cash Flow Statement Items Projected FYE December 31,($ in millions) 2008E 2009E 2010E 2011E 2012E
Cash Flows from Operations
Depreciation & Amortization $5.7 $5.7 $5.7 $5.7 $5.7
Cash Flows from Investing
Purchases of PP&E $10.1 $9.9 $7.5 $12.8 $6.3
Case Study: M&T stud and resident tycoon Alan Hsieh really likes Mexican and Korean food, and decides that he wants to buy Kim Jong Burritos, a national Korean-Mexican cafechain jointly owned and operated by Bohea Suh, who is actually not Mexican at all. Alan has come to you, asking you for a preliminary valuation of Boheas company. You projectto reach $73.9 million in revenues in FY 20008. You have also decided to do a five-year projection, after which you will use a continuing value method to derive terminal value.
Usually, you do a five-year revenueprojection based on:
(i) management expectations; and/or(ii) slightly increasing growth rate
Key drivers for growth include:
(i) revenue enhancement(ii) improved cost management
In a DCF youre really just interested upto the EBIT line.
The cash flow statement is used to find
D&A and capex for a basic DCF. Formore complex DCFs, you may have tolook into details in Operating CashFlows to find minute changes in
working capital or adjustments toEBITDA.
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Discounted Cash Flow, Contd
Projected Financials - Selected Balance Sheet Items & Working Capital Calculations
Selected Balance Sheet Items Projected FYE December 31,
($ in millions) 2008E 2009E 2010E 2011E 2012E
Cash $29.1 $33.7 $38.7 $41.5 $43.7
Short-term Investments 6.0 4.6 5.7 6.2 7.7
Accounts Receivables 20.1 23.6 26.4 23.1 30.1
Inventory 30.2 28.7 27.9 26.0 28.1
Total Current Assets $85.4 $90.6 $98.7 $96.8 $109.6
Accounts Payable 45.1 44.2 44.3 47.8 48.1
Accrued Expenses 9.1 8.8 12.4 13.5 14.2
Total Current Liabilities $54.2 $53.0 $56.7 $61.3 $62.3
Working Capital Calculations
Total Current Assets $85.4 $90.6 $98.7 $96.8 $109.6
(-) Cash 29.1 33.7 38.7 41.5 43.7
= Net Current Assets 56.3 56.9 60.0 55.3 65.9
(-) Net Current Liabilities 54.2 53.0 56.7 61.3 62.3
= Working Capital $2.1 $3.9 $3.3 -$6.0 $3.6
Increase/ (Decrease) in Working Capital $0.4 $1.8 -$0.6 -$9.3 $9.6
Market Data
Market Data
Asset Beta () 0.85
Risk-free Rate (rf) 5.0%
Market Return (rm) 8.0%Discount Rate 7.6%
This is the working capital calculation.Note that there is no debt on Boheascompany, so that this is technically an
all-equity firm.
Market data is often provided to you, al though the
risk-free rate can be found online. Asset betas can bederived from comparables if not provided. The CAPMformula is:
WACC = rf + (rm - rf)
where (rm - rf) is also known as the market risk premium
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Discounted Cash Flow, Contd
Adjusting for EBIT
Deriving Free Cash Flows
Adjusting for EBIT Projected FYE December 31,2008E 2009E 2010E 2011E 2012E
Earnings Before Interest & Taxes 21.4 20.2 21.1 21.7 21.0(+) Non-Recurring Charges 0.0 0.0 0.0 0.0 0.0
= Adjusted EBIT 21.4 20.2 21.1 21.7 21.0
Deriving Free Cash Flows Projected FYE December 31,2008E 2009E 2010E 2011E 2012E
Adjusted EBIT $21.4 $20.2 $21.1 $21.7 $21.0
(+) Non-cash Operating Expenses 5.7 5.7 5.7 5.7 5.7
(-) Cash Tax Payments 4.6 4 4 4.1 3.8
(-) Increase in Operating Working Capital 0.4 1.8 -0.6 -9.3 9.6(-) Capital Expenditures 10.1 9.9 7.5 12.8 6.3
= Free Cash Flows $12.0 $10.1 $15.8 $19.8 $7.0
Discounted to PV at WACC = 7.6% $12.0 $9.4 $13.7 $15.9 $5.2
Terminal Value atg = 5.0%, Continuing Value $215.2
TOTAL VALUATION $271.5
Market Data
Asset Beta () 0.85
Risk-free Rate (rf) 5.0%
Market Return (rm) 8.0%
Discount Rate 7.6%
Here we do some adjustments to EBIT.Boheas company is assumed to be a
vanilla company with no real problems,so there are no non-recurring chargesto be added back.
The total valuation is the sum ofall the PV-ed cash flows and theterminal value. Here we havevalued Boheas company at acool $271.5 million.
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Discounted Cash Flow, Contd
Forward-looking and incorporates growth strategy
Capital markets volatility has little impact on the analysis
Recognizes time value of money
Useful when there are not many comparable companies
Highly sensitive to assumptions used, such as WACC, long-termgrowth rate and terminal value
Forecasted cash flows are uncertain
Advantages Disadvantages
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Trading Comps Definition: This method looks at market values to derive price multiples used tomeasure a companys value based on a specified metric, such as Sales orEBITDA
Narrow it downIf in retail, is it in the luxury sector? If in auto parts, is it in the OEM or aftermarket sector? If in aerospace, is it in the engine or aircraft construction sector?
Nature of businessRetailers are different from wholesalers, manufacturers and distributors, even within the same broad industry
Example: Diageo plc, an international alcoholic beverages manufacturer, isnota great comp if you are valuing a soft drinks retailer
Customer demographic
Factors to consider include age, gender, socioeconomic status, geography
Example: Saks Fifth Avenue, a high-end luxury chain retailer, is nota good comp if you are valuing a discount apparel chain, such as Dress Barn
Similar growth stories and conceptsNiche brands may be the on ly existing company in its specific space and can be hard to find comps fo r
Example: Seven for All Mankind and Under Armour are good comps for Crocs if looking at novel growth strategy and niche concept
Trailing vs. forward multiplesLTM = Last Twelve Months - used for historical analysisNTM = Next Twelve Months - used to forecast numbers (get from Thomson, Bloomberg, general analyst consensus, etc.)
Choosing your metricsTEV/ EBITDA
TEV/ Sales
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Trading Comps, Contd
Company Market Total Sales EBITDA TEV as a Multiple of Gross Profit Gross
Name Cap. Ent. Value LTM LTM Sales EBITDA LTM Margin
Abercrombie & Fitch Co. $7,211.8 $6,831.5 $3,549.1 $855.6 1.92x 8.0x $2,363.7 66.6%
Aeropostale Inc. 1,509.3 1,305.3 1,479.3 224.5 0.88 5.8 505.9 34.2%
American Eagle Outfitters Inc. 5,351.2 4,716.6 2,985.2 714.0 1.58 6.6 1,426.9 47.8%
Bebe 1,356.5 964.1 670.9 125.0 1.44 7.7 321.8 48.0%
Billabong International Ltd. 2,956.6 3,186.6 1,104.5 245.5 2.88 13.0 567.7 51.4%Callaway Golf 1,195.8 1,204.7 1,088.3 120.3 1.11 10.0 466.9 42.9%
CROCS Inc 5,468.6 5,383.3 590.5 179.7 9.12 30.0 346.4 58.7%
Fortune Brands 12,883.4 19,137.7 8,289.5 1,751.7 2.31 10.9 3,615.5 43.6%
Gildan Activewear 4,784.4 4,829.6 944.7 189.8 5.11 25.4 299.1 31.7%
Guess? Inc. 4,952.2 4,777.5 1,473.4 293.6 3.24 16.3 660.4 44.8%
Hanesbrands Inc. 2,686.8 4,963.9 4,509.8 583.2 1.10 8.5 1,498.5 33.2%
Jones Apparel Group Inc. 2,325.9 3,239.3 4,722.8 421.7 0.69 7.7 1,656.5 35.1%
Jos. A Bank Clothiers Inc. 597.1 554.2 577.4 95.0 0.96 5.8 359.2 62.2%
Liz Claiborne Inc. 3,477.5 4,088.4 4,981.8 581.8 0.82 7.0 2,371.3 47.6%
Nike Inc. 30,807.2 28,583.1 16,786.9 2,495.7 1.70 11.5 7,398.3 44.1%
Oxford Industries Inc. 507.5 670.3 1,128.9 125.3 0.59 5.4 447.8 39.7%
Pacific Brands Ltd 1,406.7 2,131.0 1,634.3 194.2 1.30 11.0 681.0 41.7%
Pacific Sunwear of California 1,136.8 1,094.6 1,498.4 90.2 0.73 12.1 427.1 28.5%
Phillips-Van Heusen Corp. 2,912.6 2,945.8 2,269.6 328.8 1.30 9.0 1,130.0 49.8%Polo Ralph Lauren Corp. 7,706.6 7,633.0 4,412.1 822.6 1.73 9.3 2,396.7 54.3%
Sequa Corp. 1,941.7 2,585.0 2,189.7 233.8 1.18 11.1 381.1 17.4%
Timberland Co. 1,243.9 1,146.4 1,551.7 165.6 0.74 6.9 728.2 46.9%
Under Armour, Inc. 2,896.6 2,876.4 507.9 76.1 5.66 37.8 252.8 49.8%
Volcom Inc 951.4 866.6 226.1 46.1 3.83 18.8 111.8 49.4%
Warnaco Group Inc. 1,849.2 2,062.9 1,941.1 257.4 1.06 8.0 808.0 41.6%
Quiksilver $1,865.2 $2,863.8 $2,547.4 $220.8 1.12x 13.0x $1,159.1 45.5%
Median 1.3x 9.3x
Mean 2.1x 12.1x
The example below is for Quiksilver, a pubicly-traded company. These comps also apply if Quiksilver were private.
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Ann. Date Target Acquirer Total Tx Value LTM EBITDA Tx Value/ LTM EBITDA
Stock Premium
5/25/07 Fort Garry Brewing Co. Ltd. Russell Breweries Inc. $4.20 $0.50 9.0x 36.5%
2/1/07 Lakeport Brewing Income Fund Labatt Brewing Company Limited 163.5 15.1 10.8 36.3%
8/11/06 Sleeman Breweries Ltd. Sapporo Breweries Limited 345 28.7 12.0 13.3%
7/5/06 Bouvet-Ladubay United Spirits Ltd. 17.7 1.2 14.8 --
6/15/06 Hardys & Hansons plc Greene King plc 500.8 33.3 15.1 45.0%
6/1/06 Taittinger S.A. Caisse Rgionale 1841.1 179 10.3 --
4/2/06 Vincor International Inc. Constellation Brands Inc. 1375.7 95.9 14.3 16.0%12/21/05 Marie Brizard et Roger International Belvdre 384.6 40.3 9.5 30.0%
Max 15.1x 45.0%
Median 11.4x 33.1%
Mean 12.0x 29.5%
Min 9.0x 13.3%
Transaction Comps Definition: This method examines similar precedent transactions and theirvaluation characteristics to derive price multiples used to value a company
Nature of acquisitionHostile takeovers - higher valuation due to opposing management board
Acquirer type
Corporate acquirers - higher valuation due to projected synergies
Timing of acquisitionIndustry booms - bubble ( tech boom, real estate boom) numbers may be inflatedCredit situation - less leverage may mean depressed valuations
Transaction structureStock-swap deals - higher valuation due to increased stock risk
These precedent transactions may be used if valuing a alcoholic beverages manufacturer...
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What drives variations in price multiples?
Growth , Price multiple
Risk, Price multiple
Reinvestment , Price multiple
Earnings sustainability , Price multiple
Profitability , Price multiple
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Leveraged Buyouts Definition: LBO models help analysts see how a financial sponsor may evaluatea company. It is a useful valuation technique that backs out entry/ exit multiplesgiven a required IRR.
A company is purchased at a multiple of its EBITDA, of which a certain % is financed by debt. The companys future cash flows (usually 5 years) are used to paydown debt. In this process, the original equity value is increased, and upon exit, financial sponsors pay down remaining debt and extract profits from the amplifiedequity value.
Key driversCash - How much cash can this company generate going forward? Can it convert revenues to income to cash effectively?
Debt - How much debt can you layer onto this company? How fast can it pay back debt? What kinds of debt can it sustain?
Tranches of debt
Revolving credit facility... (this is like Penn Bursar)
plus
Senior debt (secured, Term Loan A)Junior debt (subordinate, Term Loan B)Mezzanine debt (high-yield, junk)
Typical leverage multiplesSome deals are 80% financed by debt; current credit situations have made lenders much more cautious, so 50-50% deals may be more common nowadays
Why is there circularity in a LBO model?There can be inherent circularity in a LBO model because to find cash available for debt repayment (ending cash balance), you need net income (beginning cash
balance), but you cant unless you have interest expense, but you cant do that unless you find debt outstanding, which you cant find unless you find cash available fordebt repayment to determine exactly how much debt you can pay down. In short, its one big vicious cycle and bankers solve it (or pretend to) by setting their Excelspreadsheets to manual, and allow Excel to iterate the calculations 10,000 times.
What advantages or disadvantages do LBO shops have over corporates?LBO shops are believed to have more financial muscle, but potential lack of veteran industry knowledge (especially when having to deal with labor unions, think Cerberusand Chrysler deal of summer 2007).
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Basic Leveraged Buyout
$0
$37.5
$75.0
$112.5
$150.0
2007PF 2008E 2009E 2010E 2011E 2012E
Sponsor Equity Debt
You are a buyout shop and you have decided to buy Alex Good, a renowned male lingerie company. The transaction closed on the last day of 2007, and at the time, Alex Goodwas making $10.0 million in EBITDA. The buyout was conducted at a 10.0x LTM EBITDA multiple, the median you derived from your trading comps on the lingerie industry.
Enter in 2007
EBITDA: $20.0 millionEntry Multiple: 5.0x LTM EBITDA
Transaction Value: $100.0 millionLeverage: 3.0x LTM EBITDA
Debt: $60.0 millionSponsor Equity: $40.0 million
During the Holding Period....
Through a series of operational enhancementsand working capital improvements, Alex Goods
EBITDA grew steadily over the years, leading tohigh levels of free cash flow. Debt was paid
down at $5.0 million a year.
Exit in 2012
EBITDA: $25.0 millionExit Multiple: 5.0x LTM EBITDA
Transaction Value: $125.0 millionOutstanding Debt: $35.0 million
Sponsor Equity: $90.0 million
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Valuation Football Field
The football field shows the full spectrum of basic valuation techniques, and serves as a basis for your firms reference range.
DCF
Trading Comps (LTM EBITDA)
Transaction Comps (LTM EBITDA)
LBO
DSP Reference Range
$0 $50 $100 $150 $200
$71.2 - $151.3 million
$43.8 - $79.9 million
$50.6 - $87.4 million
$52.1 - $137.2 million
$84.6 - $146.1 million
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Accretion/ Dilution Analysis
Accretion/ Dilution Analysis is used as part of merger analysis. It is primarily focused on Earnings per Share (EPS):
EPS = Net Income / Shares Outstanding
If EPS = accretiveIf EPS = dilutive
In a 100% stock deal, i f Acquirer P/E > Target P/E, the deal is accretive to the acquirer.
AcquirerP/E: 12.0xShare price: $60.00EPS: $5.00# of Shares: 1,000.0
Net Income: $5,000.0
TargetP/E: 10.0xShare price: $30.00EPS: $3.00# of Shares: 4,000.0
Net Income: $12,000.0
Pro-forma
Total Net Income: $5,000.0 + $12,000.0 = $17,000.01 share of Acquirer is worth: $60.00/ $30.00 = 2 shares of Target# of Shares Issued: 4,000.0/ 2 = 2,000.0New Total # of Shares: 1,000.0 + 2,000.0 = 3,000.0New EPS: $17,000.0 / 3,000.0 = $5.67
vs. Old EPS of $5.00, accretion % = 13.3%
AcquirerP/E: 12.0xShare price: $60.00EPS: $5.00# of Shares: 1,000.0
Net Income: $5,000.0
TargetP/E: 10.0xShare price: $60.00EPS: $6.00# of Shares: 1,000.0
Net Income: $6,000.0
Pro-forma
Total Net Income: $5,000.0 + $6,000.0 = $11,000.01 share of Acquirer is worth: $60.00/ $60.00 = 1 share of Target# of Shares Issued: 1,000.0/ 1 = 1,000.0New Total # of Shares: 1,000.0 + 1,000.0 = 2,000.0New EPS: $11,000.0 / 2,000.0 = $5.50
vs. Old EPS of $5.00, accretion % = 10.0%
Example I Example II (share price, # of shares are the same)
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Accretion/ Dilution Analysis, Contd
What drives accretion?
assuming Targets statistics are constant...
Acquirer P/E - Higher P/E means lower standalone EPS- Accretion based on difference between standalone EPS and pro-forma EPS
- Larger difference = more accretion!
Acquirer Share Price
- Higher share price means fewer shares issued to buy target
- Fewer issued shares means smaller number of pro-forma shares- Smaller number of pro-forma shares means higher pro-forma EPS- Accretion based on difference between standalone EPS and pro-forma EPS- Larger difference = more accretion!
# of Acquirer Shares
- Fewer standalone acquirer shares means means smaller number of pro-forma shares
- Smaller number of pro-forma shares means higher pro-forma EPS- Accretion based on difference between standalone EPS and pro-forma EPS- Larger difference = more accretion!
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Practice Questions
How do you derive Free Cash Flows?
Why do yousubtracttheincrease in net working capital?
What is net working capital? How do you get to it?
What are the two ways to calculate terminal value?
What is this equation and why does it matter?
What are the disadvantages of using the WACC method?
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Practice Questions, Contd
If you are valuing a private company and do not have access to full financials, what might you use?
What factors do you consider when selecting your trading comps?
You are valuing a private company with no directly related comparables. What can you do?
What factors might lead to inflated transaction values in your transaction comps?
What are debt tax shields? Why do they matter?
Which is more accretive: a transaction financed by stock, or by cash? Why?
What is a leveraged buyout?
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Practice Questions, Contd
Name three successful recent leveraged buyouts.
What does the recent credit situation mean for leveraged buyout shops?
What are the key drivers of a LBO?
If you could value a company using only one method, which would you choose?(This is a question that has no right or wrong answer, unless you say something like Im going to put some numbers in a hat, close my eyes and pick one at random. As long as you set upthe correct scenario and defend your choice logically, you will be fine. Bankers ask this question to see how analytical and quick you can be.)
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II Financial Statements Analysis Must be completely understood before performing avaluation analysis.
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SEC Filings Overview
10-K This contains the companys financial performance over the last fiscalyear, as well as some rather lofty descriptions of the companys
operations.
10-QThis contains the companys financial performance over the last fiscalquarter, as well as year-to-date and LTM statistics.
Proxy Statement (DEF 14-F) This contains shareholder and ownership data, which can also befound on Bloomberg.
8-K This is the current report, and is used by companies to file currentreports on events like entry/ termination of a definitive materialagreement, material impairments, etc.
20-FThis is the same as the 10-K, but for non-U.S. companies.
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Walk me through the....
This is a warm-up question. It is, in fact, an open lay-up. You may answer it in 2 steps:
IncomeStatement
I. Function of I/S
- Summary of an entity's results of operation is revealed in the income statement- Provides information about revenues generated and expenses incurred- Differences between revenues and expenses are identified as net income or net loss
II. Structure of I/SRevenues+ Other Revenues
= Total Revenues
- Cost of Goods Sold
= Gross Profit
-Selling, General and Administrative Costs (SG&A)- Non-recurring Expenses (Restructuring, Legal, etc)
= Operating Income
- (+) Interest Expense (Income)
= Taxable Income
- Income Tax Expense
= Net Income
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Walk me through the....BalanceSheet
I. Function of B/S
- Reveals economic resources owned and claims against those resources (liabilities and owners' equity)- Prepared as of a specific date, whereas the I/S and Statement of Retained Earnings cover a period o f time
II. Structure of B/S
ASSETS
Cash & Cash Equivalents+ Short-term Investments+ Accounts Receivables
+ Merchandise Inventories= Current Assets
+ PP&E, Net
+ Goodwill, Net+ Intangibles, Net+ Other Assets, Net
= TOTAL ASSETS
LIABILITIES
Current Portion of Long-term Debt+ Accounts Payable
+ Accrued Expenses+ Income Taxes Payable= Current Liabilities
+ Long-term Debt
+ Deferred Income Taxes+ Other Non-current Liabilities
=TOTAL LIABILITIES
SHAREHOLDERS EQUITY
... you dont have to break this down, but know
that Retained Earnings are subtracted here.
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Stockholders Equity is complex....
Which is why its highly doubtful that you will be asked tobreak it down.
Source: Liz-Claiborne 10-K Filings, FY 2006
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Walk me through the....Cash FlowStatement
I. Function of C/F Statement
- Presents change in cash in a period of time pertaining to Operating, Investing and Financing activities
II. Structure of C/F StatementYou only have to know the main components of each section...
Cash Flows from Operating ActivitiesNet IncomeDepreciation & Amortization
Cash Flows from Investing ActivitiesPurchases of PP&E (a.k.a. capital expenditures)
Purchases of Investment Instruments
Cash Flows from Financing ActivitiesShort-term BorrowingsAny debt-related stuff... issuance/ repayment of notes
Effect of Exchange Rate Changes on Cash
Net Change in Cash & Cash Equivalents
Ending Cash Balance
This is your Beginning Cash Balance!
Very impressive if you mention this!
Say, if this were a multinationalcompany, then realistically, it will beeffected by cross-border exchangerates.
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The C/F is complex....
To the right you will see exactly why you dont have to knowEVERYTHING on the C/F Statement. Chances are, mostbankers dont know. There are only two things that areimportant in basic valuation:
- Depreciation & Amortization from CFO
- Capital Expenditures from CFI
Source: Liz-Claiborne 10-K Filings, FY 2006
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Walk me through the....Income
Statement
I. Function of I/S
II. Structure of I/S
Fill in the relevant information:
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Walk me through the....BalanceSheet
I. Function of B/S
II. Structure of B/S
Fill in the relevant information:
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Walk me through the....Cash FlowStatement
I. Function of C/F Statement
II. Structure of C/F Statement
Fill in the relevant information:
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So, uhh, how are the 3 financial statements linked?
Classic douchebag question. Many people trip up on this because it is difficult to remember on the spot!
.... But not you. You are intelligent and understand how this works!
5 main themes:1. Long-term Debt on the Opening B/S determines Interest Expense on the I/S
2. PP&E on the B/S determines D&A on the C/F
3. Net Income on the I/S determines Beginning Cash Balance on the C/F
4. Net Income on the I/S flows into Ending Retained Earnings, which flows into Shareholders Equity in the Ending B/S
5. Ending Cash Balance on the C/F determines Cash on the Ending B/S
IncomeStatement
Opening
BalanceSheet
Cash FlowStatement
Draw it here:
EndingBalanceSheet
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So, D&A increases by $100 and t= 40.0%....
What happens on the I/S?D&A is embedded in SG&A. So, an increase in D&A of $100 = decrease in pre-tax income of $100Decrease in pre-tax income of $100 = decrease inpost-taxnet income of $60, because t= 40.0%Decrease in net income of $60 = decrease in beginning cash balance of $60, because net income from I/S flows to the C/F
IncomeStatement
BalanceSheet
Cash FlowStatement
RECONCILE
IncomeStatement
BalanceSheet
Cash FlowStatement
Assets Liabilities
Stockholders Equity
Draw it here:
What happens on the B/S?Increase in D&A of $100 = decrease in PP&E of $100Decrease in net income of $60 = decrease in Retained Earnings of $60.... there seems to be a gap of positive $40, lets look for it....
What happens on the C/F?Increase in D&A of $100 = increase in Cash Flows from Operations by $100, because D&A is added back in the C/F as a non-cash expenseRecall the decrease in beginning cash balance of $60... here you find the increase in ending cash balance of $40....
Does this belong to the B/S?Increase in ending cash balance of $40 = Increase in cash of $40... the balance sheet balances!....
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So, D&A decreases by $80 and t= 30.0%....
What happens on the I/S?Income
Statement
BalanceSheet
Cash FlowStatement
RECONCILE
IncomeStatement
BalanceSheet
Cash FlowStatement
Assets Liabilities
Stockholders Equity
Draw it here:
What happens on the B/S?
.... there seems to be a gap of , lets look for it....
What happens on the C/F?
... here you find the in ending cash balance of $ ....
Does this belong to the B/S?
... the balance sheet balances!....
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So, D&A increases by $20 and t= 50.0%....
What happens on the I/S?Income
Statement
BalanceSheet
Cash FlowStatement
RECONCILE
IncomeStatement
BalanceSheet
Cash FlowStatement
Assets Liabilities
Stockholders Equity
Draw it here:
What happens on the B/S?
.... there seems to be a gap of , lets look for it....
What happens on the C/F?
... here you find the in ending cash balance of $ ....
Does this belong to the B/S?
... the balance sheet balances!....
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III Fielding Interview Questions
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Annoying Qualitative Questions
I see you have done your research on investment banking. What do you think is the worst thing about the job?
This tests whether you understand the reality of the job. You can say the hours, watching a deal die or whatever you honestly believe is the worst part of the job.You can be honest, as long as you show that you understand that it is inherent and can be coped with. I f you are interviewing with an associate, mention that part of ananalysts job is to make the associates life easier. Also state that by being efficient (which you are) and a quick learner (which you also are), these problems can beeasily mitigated.
What do you think about your GPA? Do you think you should be doing better?
This tests your reaction to questions that are on the offense. Be honest and say that you could be doing better, but you are well-rounded and hence, satisfied with your
performance. You are proud that you are involved in many extra-curricular activities and that if you were graded on them, you would probably have a 4.0 GPA. Mentionthat every semester is a new slate and that you always strive to allocate your time efficiently.
If I could only write three words to remember you by, what would they be?
I tend to answer this with two serious buzzwords and a funny, memorable one; example: driven, efficient and diet Coke fanatic. Answer this question at yourdiscretion! Have a backup in case no laughter ensues. Some bankers suck.
What was on the Wall Street Journal today?
They arent asking you this question because they dont know whats on the WSJ. They want to seehowyou answer this question. I always said, Usually I skimthrough the columns on the first page between classes. What jumped out at me today were the news about , and .
Sometimes, Id have an extra something-something, such as an interesting, non-financial article in the back pages. Again, use this only if you feel good rapport withyour interviewer (which you should have!). It shows that you are interesting and that you actually read the WSJ, even if you dont. Anyone can spit out the top threeheadlines.. differentiate yourself!
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Annoying Qualitative Questions
What are your greatest strengths?
DING DING DING JACKPOT!!!!!!!!!!!!! Good for you if you get asked this question. Dont be corny, like you know, Ashley, Ive always felt that Excel is like an extensionof my nervous system.... Say good, unique things. Back them up with tangible examples!
List them here:
1. I am Example:
2. I am Example:
3. I am Example:
What is/ are your greatest weaknesses?
The granddaddy of all bullshit. Change your weakness into something good. Self-deprecation can be humorous.
List two (incl. one backup) here:
1. I can be BUT :
2. I can be BUT:
What sets you apart from the other applicants?
1. I am
2. I am
3. I am