Table of Contents Series Page Title Page Copyright Dedication Preface How This Book Is Structured Introduction Overview of Major Divisions Standard Hierarchy About the Author Part One: Introduction to Investment Banking Chapter 1: Investment Banking Recruiting Networking and Interviewing Part Two: Financial Statements Chapter 2: Financial Statements Overview The Income Statement Revenue Cost of Goods Sold Operating Expenses Other Income Depreciation and Amortization Interest Taxes Nonrecurring and Extraordinary Items Distributions Shares The Cash Flow Statement Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities The Balance Sheet Assets Liabilities Depreciation Straight-Line Depreciation Accelerated Depreciation Deferred Taxes Working Capital Debt Schedule Chapter 3: Financial Statements Questions Practice Questions Answers Part Three: Valuation Chapter 4: Valuation Overview Book Value Market Value Enterprise Value Multiples Three Core Methods of Valuation Chapter 5: Valuation Questions Practice Cases Answers Part Four: Mergers and Acquisitions Chapter 6: Mergers and Acquisitions Overview The M&A Process Accretion/Dilution Analysis Step 1: Obtaining a Purchase Price Step 2: Estimating Sources and Uses of Funds Step 3: Creating a Pro-Forma Analysis Summary Drivers Chapter 7: Mergers and Acquisitions Questions Practice Questions Practice Cases Answers Part Five: Leveraged Buyouts Chapter 8: Leveraged Buyouts Overview Cash Availability, Interest, and Debt Pay-Down Operations Improvements Multiple Expansion What Makes A Good Leveraged Buyout? Exit Opportunities Leveraged Buyout Technical Analysis Purchase Price Sources and Uses of Funds IRR Analysis Chapter 9: Leveraged Buyouts Questions Practice Questions Practice Cases Answers Conclusion About the Companion Website Index End User License Agreement List of Illustrations Chapter 6: Mergers and Acquisitions Overview Figure 6.1: GroceryCo Sources and Uses of Funds Figure 6.2: Pro-Forma Analysis (Combining Two Entities Before Additional Transaction Adjustments) Figure 6.3: Pro-Forma GroceryCo Figure 6.4: Accretion/Dilution Analysis Complete with Transaction Adjustments Figure 6.5: Pro-forma GroceryCo Accretion/Dilution Analysis with Transaction Adjustments List of Tables Chapter 2: Financial Statements Overview Table 2.1 Most Common Income Statement Line Items Table 2.2 Declining Balance Example Table 2.3 Sum of the Year's Digits Example Table 2.4 3-, 5-, 7-, 10-, 15-, and 20-Year Property Half-Year Convention Table 2.5 3-, 5-, 7-, 10-, 15-, and 20-Year Property Mid-Quarter Convention Placed in Service in First Quarter Table 2.6 Modified Accelerated Cost Recovery System Table 2.7 Income Statements for GAAP and Tax Purposes Chapter 4: Valuation Overview Table 4.1 Business Comparison Table 4.2 Multiples Chapter 6: Mergers and Acquisitions Overview Table 6.1 Types of Acquisitions Table 6.2 Transaction Fee Table Example Table 6.3 Sample Balance Sheet Before and After LBO Chapter 8: Leveraged Buyouts Overview Table 8.1 Example of Leveraged Buyout Capital Structure Table 8.2 ShipCo Sources and Uses Table 8.3 Consolidated Statements of Cash Flows (in US$ millions) Table 8.4 Consolidated Statements of Cash Flows—Unlevered and Free Table 8.5 ShipCo Unlevered Free Cash Flow The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more For a list of available titles, visit our Web site at www.WileyFinance.com Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding The Technical Interview Guide to Investment Banking PAUL PIGNATARO Copyright © 2017 by Paul Pignataro All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of 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should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762–2974, outside the United States at (317) 572–3993 or fax (317) 572– 4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data is available: ISBN 978-1-119-16139-4 (Hardcover) ISBN 978-1-119-16141-7 (ePDF) ISBN 978-1-119-16140-0 (ePub) Cover Design: Wiley Cover Image: © Mikhail Zahranichny/Shutterstock This book is dedicated to every investor in the pursuit of enhancing wealth—those who have gained, and those who have lost—this continuous struggle has confounded the minds of many This book should be one small tool to help further this endeavor; and if successful, the seed planted will contribute to a future of more informed investors and smarter markets Preface Investment banks perform two major functions First, they act as intermediaries between investors, or suppliers of capital, and entities that request capital such as corporations Second, investment banks advise corporations on mergers, acquisitions, restructurings, and other major corporate actions Jobs within the investment banking industry vary widely; some roles can be very lucrative and as a result be highly sought after and competitive This book seeks to give any student or professional interested in the investment banking industry the technical tools to ace an investment banking interview Having worked in the investment banking industry, I will give my personal perspective on what the investment banking interview process is like I will provide advice and strategy on how to best navigate such an interview process The book will contain a series of standard investment banking and interview preparation questions that increase in difficulty We will also go through a series of case studies important for later-stage investment banking and private equity interviews This book is the ideal go-to guide for anyone who is looking to break into the industry F Fair values Final debt balance Final EBITDA Financial parameters, basis Financial sponsor Financial statements answers explanation practice questions questions Financing activities, cash flow Firm-wide policy Friendly acquisition Full-scale LBO model, LBO analysis (contrast) Full-scale model, building Funds categories, uses refinancing/raising sources equivalence estimation leveraged buyout, relationship total uses uses estimation G Generally accepted accounting principles (GAAP) income statements, usage U.S rules Goodwill calculation value Gross profit H High yield debt aggressiveness Historical analysis Hook Horizontal transaction vertical transaction, contrast Hostile acquisition Human resources (HR) contacts I Income statement absence asset acquisition, impact asset purchase debt raise, impact dividends effects explanation impact line items usage Initial public offering (IPO) Intangible assets amortization example amortization per year, calculation calculation fair value goodwill new intangible assets purchase price over book value Interest adjustment, explanation application impact income, effects (ignoring) Interest expense calculation effects, ignoring new interest expense removal Interest payments cushion making Interest rate IRR variable LBO analysis variable Internal rate of return (IRR) determination Interviewing hook introductions irrelevant experience, explanation past experience, explanation questions Inventory calculations increase/decrease working capital Investing activities, cash flow Investment analysis, example opportunity Investment bank, analyst example Investment banking entry, reasons fees interview example interview questions recruiting Investor rate of return (IRR) assessment, example calculation, method example expected IRR, determination variables Investor rate of return (IRR) analysis assumptions calculation Investor return, steps Irrelevant experience, explanation L Legal fees Leveraged buyout (LBO) answers balance sheet, sample capital structure, example debts, raising (types) exit opportunities exit strategies explanation financing, advantages funds, sources investment, IRR determination opportunity, analysis (example) practice cases practice questions process, illustration quality, determination questions seller note, purpose success, components technical analysis Leveraged buyout (LBO) analysis explanation full-scale LBO model, contrast purpose retail company steps variables Leverage, usage (advantage) Liabilities Long-term debt (LTD) current portion raising LTM EBITDA M Maintenance CAPEX, growth CAPEX (contrast) Management buyout (MBO) Market capitalization Market capitalization/net income Market data assumptions MM Market multiple, purchase multiple (contrast) Market risk premium Market value book value, contrast calculation purchase price, relationship Market value/EBITDA, multiple (problem) Merger categorization consolidation, contrast Mergers and acquisition (M&A) answers practice cases practice questions process questions transaction, example Mezzanine lending Mezzanine securities Model projections Modified Accelerated Cost Recovery System (MACRS) method, usage schedule, simplification usage Multiple expansion Multiples N Negotiations, impact Net debt cash removal, importance subtraction Net income cash flow, difference interest, inclusion/exclusion report shares, impact Net operating loss (NOL) applications carryback example Networking New intangible assets New interest expense Newly allocated intangible assets, amortization Newly identified intangible assets, amortization New shares New shares raised Noncurrent assets Noncurrent liabilities Nonrecurring items O Open market purchase Operating expenses incurring payment Operating working capital (OWC) working capital, contrast Operation improvements Operations performance IRR variable LBO analysis variable Other income inclusion Overhead costs, incurring P Paid-in-kind (PIK) security Past experience, explanation Payables collection payment Perpetuity growth rate, assumption method, formula Post-merger cost savings Precedent transactions analysis advantages/disadvantages purpose Premium, inclusion Prepaid expense Present value (PV) equation usage Private business, acquisition example Private company purchase, public company purchase (contrast) Private entity, impact Private equity firm, analyst example Pro-forma analysis accretion/dilution analysis, transaction adjustments (inclusion) adjustments, application creation example initiation results Pro-forma EPS, obtaining Pro-forma net income, tax adjustment Pro-forma transaction adjustments Property half-year convention mid-quarter convention, service placement purchase, example valuation Property, plant, and equipment (PP&E) assets increase Proxy contest Public company acquisition example book value/market value, contrast evaluation, example purchase, private company purchase (contrast) Purchase multiples Purchase premium, negotiation example Purchase price answers cash, uses (calculation) components EBITDA basis example IRR variable LBO analysis variable market value, relationship obtaining premium, inclusion results total purchase price, level Purchase price over book, allocation Purchases, deferral R Receivables, collection Rent bill, receiving (example) Research and development (R&D) expenses Residual value, absence Restructurings examples Retail company, LBO analysis Return, calculation Revenue (sales) Rf, usage Rm, usage Rollover equity S Sales, cash (usage) Sales on credit Seller notes purpose Selling, general, and administrative (SG&A) expenses Shareholder's equity (SE) representation Shareholders, number (determination) Shares cash, combination new shares new shares raised outstanding price raising receiving Short-term debt (STD) Spin-off, occurrence Stepped-down valuation Stepped-up valuation Stock acquisition Straight-line depreciation calculation impact subtraction Strategic alternative, discussion Strategic sale Sum of the year's digits example Synergies example T Tangible assets fair value Taxes adjustment calculation purposes, income statements (usage) rates, assumption Tender offer Terminal value (TV) calculations methods present value 338(h)(10) election Time frame IRR variable LBO analysis variable Time horizon Time management, importance Total debt, raising Total diluted share count Total liabilities, subtraction Total purchase price, level Total working capital, estimation Transaction adjustments example inclusion name Transaction fees example expenses purchase price Transactions, purchase price U Unexpected expenses, incurring United States, market risk premium Unlevered free cash flow (UFCF) buildup support calculation formula changes, usage completion components example exit calculation projections LBO analysis variable table, completion (example) Useful life, assumption V Valuation answers category methods practice cases questions Value, creation methods Vertical transaction horizontal transaction, contrast Votes, usage W Weighted average cost of capital (WACC) formula calculation usage Weighted average cost of capital (WACC) percentage Working capital (WC) addition formula, usage operating working capital, contrast ranking total working capital, estimation usage Working capital schedule WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley's ebook EULA ... in the investment banking industry the technical tools to ace an investment banking interview Having worked in the investment banking industry, I will give my personal perspective on what the investment. .. includes the CEO, CFO, and others who run the entire firm Investment Banking Investment Banking is a group within the investment bank itself The investment banking group is typically broken up into... include their resume in the to be interviewed” pile This is a very important category, which relates to the need for everyone looking to get into the investment banking industry to make themselves