additional technical interview notes (from all guides)_7dec15

7/25/2019 Additional Technical Interview Notes (From All Guides)_7Dec15

1/9

Breaking into Wall Street

Concept Explanation

Cost of equity Alternative formula to CAPM:

Cost of equity = (Dividends per Share / Share Price) !ro"th #ate

of Dividends

!enerally not used as not all companies issue dividends$ %seful forcompanies in industries such as %tilities that issue and &ro" dividends atsta'le predicta'le rates$

hat impacts a DC*analysis more +chan&e in discountrate or terminal value,

-. increase/decrease in Discount rate maes far more of an impact that-. increase/decrease in revenue revenue &ro"th or 0123 mar&ins'ecause Discount rate affects everythin& in the analysis$

A Discount rate difference of -. impacts analysis far more than a -.increase or decrease in 3erminal 4alue 'ecause 3erminal 4alue is a lar&enum'er and -. is tiny$

#easons for M5A Consolidation + e& four ma6or players in the industry no$ 7 "ants to

mer&e "ith no$ 8 to tae on no$ - and 9 more effectively !eo&raphical epansion %ndervaluation of seller;s 'usiness

0conomies of scale

4ie" seller as a threat

!ain access to patents technolo&y etc

1uildin& a Mer&er orAccretion/Dilutionmodel

Determine purchase price

Determine purchase method (cash stoc de't)

Pro6ect financial profiles and statements of 'oth 'uyer and seller

4aluation

3a rates

#evenue

et income

Shares outstandin& and 0PS

Com'ine 'uyer and sellers; income statements

Calculate !ood"ill and allocate purchase price

Com'ine 'alance sheets and ad6ust for acquisition effects

Ad6ust the com'ined income statement for acquisition effects

Calculate accretion/dilution and create sensitivity ta'les

-??. Stoc Deals andP/0

2n an allstoc deal if 'uyer has hi&her P/0 than seller deal is accretive@ if'uyer has lo"er P/0 it "ill 'e dilutive$

0&$ 2f seller has P/0 -? you &et ?$-? for each dollar you pay

(inverse of -?)$ 2f seller has P/0 of B you &et ?$-9 for each dollaryou pay$

Determinin&Accretion / Dilution forall Deals

*irst determine a fe" ey varia'les:

Cost of cash = *ore&one 2/# on cash(- + 1uyer;s ta rate)

Cost of de't = 2/# on de't(- + 1uyer;s ta rate)

Cost of stoc = #eciprocal of 1uyer;s P/0 multiple

Eield of seller = #eciprocal of seller;s P/0 multiple

3ae "ei&hted avera&e of each of 'uyer;s FcostG e&$ 2f -??. stoc or ?? stoc/cash or 777777 stoc/cash/de't/ then compare to Eield ofseller$ 2f it is less "ill 'e accretive$

>ote that syner&ies ne" D5A etc are not 'een accounted for in thisformula so this is really 6ust a rou&h "ay of calculatin& accretion/dilution$


2/9

Also does not account for premium paid for seller$

*If buyer is confident about realising synergies, they will use more

cash than stock in the acuisition as they want all synergies to

themsel!es rather than to share with target"

Acquisition effects and

syner&ies

#oregone interest on cash: 'uyer loses interest it "ould have

other"ise earned if it uses cash for acquisition reducin& pretaincome net income and 0PS$

$dditional interest on debt: 'uyer pays additional interest epense

if it uses de't reducin& preta income net income and 0PS$ $dditional shares outstanding: if 'uyer pays "ith stoc it must

issue additional shares reducin& 0PS$ Combined financial statements: after acquisition seller;s financial

statements are added to 'uyer;s "ith fe" ad6ustments Creation of goodwill % other intangibles: these 'alance sheet

items represent the premium that 'uyer paid over the seller;sshareholders; equity to ensure 1/S 'alances$

&&E and #ixed asset write'up: you may "rite up values of theseassets in an acquisition under the assumption that the maret valueseceed the 'oo values

(eferred tax liabilities: normally you "rite off seller;s eistin& D3Hs

and then create ne" ones 'ased on 1uyer;s ta rate(PP0 and fiedasset "riteup and ne"ly created intan&i'les)

(eferred tax assets: in most deals you "rite these off completely

dependin& on seller;s ta situation )ransaction and financing fees: you epense le&al and advisory

fees and deduct them from cash and retained earnin&s at the time ofthe transaction 'ut you capitalise financin& fees and then amortisethem over -? years or as lon& as ne"ly issued De't remains on

1/S$ Inter'company accounts recei!able and accounts payable you

may eliminate some of the com'ined A# and AP 'alances 'ecausethe 'uyer mi&ht o"e the seller money and vice versa$


3/9

Iuic 2## calculations Dou'lin& money in years = -. 2## 3riplin& money in years = 9. 2## Dou'lin& money in 7 years = 9J. 2## 3riplin& money in 7 years = 88. 2##

%se of 'an de't in H1


4/9

Common 2ndustryMultiples


5/9

)echnical Inter!iew Cheat Sheet

Concept Explanation

ays to value acompany

DC* (intrinsic value) 3radin& Comps Acquisition comps (relativevaluation) H1< in some cases if sponsor is assumed to 'e 'acin& the deal

determine if capital structure supports hi&h de't level sets floor price invaluin& a company$ e use Sumoftheparts to value companies "ith different 'usinessse&ments$ 0ach se&ment is valued usin& the same valuationmethodolo&ies a'ove$

Himitations of valuationtechniques

DC*: dependent on assumptions especially around terminal value (ifmore than L. of entire valuation too dependent on assumptions)does not reflect actual maret price "hich 'uyer is "illin& to pay 3radin& comps: i) findin& &ood comps ii) does not reflect control orsyner&y premium Acquisition comps: i) may 'e difficult to find &ood comps ii)determinin& a suita'le time frame to search for &ood acquisition comps

al me throu&h a DC*analysis

Pro6ect unlevered free cash flo"s into the future ( year period onavera&e or till a steady state) Determine the terminal value of the company at end of pro6ectionperiod usin& eit multiple or perpetuity method Determine tar&et capital structure in order to arrive at a suita'leACC Discount all future cash flo"s and terminal value to present day e arrive at 0nterprise value of the company

%nlevered free cash flo" 0123(-t) D5A + Cape + Chan&es in >et "orin& capital 0123DA + 3aes + Cape + Chan&es in >et "orin& capital >et income (-t)2nterest epense D5A + Cape + Chan&es in>et "orin& capital

et De't or 04 = M4 of 0quity M4 Preferred 0quity M4 Minority 2nterest >etDe't %nfunded pension lia'ilities and other de'tlie provisions

ACC ACC = (D/4)After ta cost of de't (0/4)Cost of equityCost of de't = ris free rate corporate credit spread o'serva'le frommaret price of de't or chec "ith DCM teamsCost of equity relies on CAPM ACC represents the opportunity cost of capital or "hat investors

could earn on another investment "ith similar ris profile$ Commonlyseen as internal hurdle rate$ 2nterest is ta deducti'le so the overall cost of de't is actually lo"er As levera&e increases ACC "ith taes lo"ers until it &oes 'eyondthe optimal capital structure after "hich costs of financial destressout"ei&h 'enefits of ta shield resultin& in hi&her ACC (hi&her costof equity demanded 'y equity holders hi&her de't 'eta)$

CAPM 0pected return on equity = #is free Hevered 1eta(Maret #isPremium)

1eta Measure of ho" much a stoc moves "ith the maret &iven acorrespondin& chan&e in the maret$ 2f 1eta of a stoc is -$Jmovement in the maret 'y -. results in a -$J. chan&e in movement

of the stoc price #e&ression coefficient of stoc price a&ainst maret%nleverin& 'eta Commonly used in findin& out 'eta for private companies


6/9

1eta unlevered = 1eta levered / -(-t)(D/0)N3reasury stoc method ay to calculate diluted no$ of shares outstandin&

Assumes that all potentially dilutive inthemoney options areeercised resultin& in an increase in num'er of 'asic sharesoutstandin& Proceeds from eercisin& these inthemoney options are used to

repurchase outstandin& shares from the maret Calculate net increase in no$ of shares outstandin&

Common multiples 04/0123DA: commonly used independent of capital structure main&companies compara'le 'ut does not tae into account intensity ofinvestment (cape depreciation) 04 / #evenue: revenue does not translate into profita'ility nor cashflo"s 04 / 0123: differences in cape policies potential acquisitionrelatedamortisation chan&es distortin& use of this multiple P/0: easy to understand and "idely used used to value financialcompanies 'ut distorted 'y differences in accountin& treatment (!AAPvs 2*#S) and also levera&e

P/1: for 'ans as M4 of equity almost equal to 14$ P/0#


7/9

lia'ilities D3A created "hen assets are 'ein& "ritten do"n less depreciation or amortisation epense hi&her taes paid (on 'oo)$ et calendar year sales = (Month Current fiscal year actualsales)N/-9 (-9 + Month )(>et fiscal year sales)N/-9

#easons to en&a&e inM5A

Commercial syner&ies / &ro"th opportunities Cost syner&ies / savin&s Strate&ic concerns

Tey M5A considerations Shareholder value *inancial considerations: accretion/dilution transaction structure

capital structure ta implications Strate&ic consideration

Qostile taeoverdefences

Poison pill(or shareholders; ri&hts plan): plan "hich &ives

shareholders ri&ht to 'uy shares at a discount if one shareholder(acquirer) 'uys a certain . or more of company;s shares dilutin&acquirer;s share o"nership

Staggered board of directors: &roups of directors elected at

different times for multiyear terms main& it difficult for acquirer to&et ma6ority vote

Greenmail: 'uy shares 'ac from acquirer at a price it is "illin& to

sell Increase leverageand spend all cash (special dividend)

Golden parachute Provides eecutives "ith a si&nificant

severance paca&e if he/she loses 6o' throu&h firin& restructurin&


8/9

or even retirement$Purchase A&reement eyterms

Purchase Price: Stated as a pershare amount for pu'lic

companies$ *orm of Consideration: Cash Stoc De'tU

3ransaction Structure: Stoc Asset or 77B(h)(-?)

3reatment of oShop / !oShop: Can the seller FshopG this offer around and try

to &et a 'etter deal or must it stay eclusive to this 'uyer,#


9/9

M5A process

additional technical interview notes (from all guides)_7dec15

Documents