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ISBN 9781119776796 (Cloth)
ISBN 9781119804901 (ePub)
ISBN 9781119804918 (ePDF)
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About the Authors
JOSHUA ROSENBAUM is a Managing Director and Head of the Industrials & Diversified Services Group at RBC Capital Markets, where he also serves on the Management Committee for the U.S. Investment Bank. He originates, structures, and advises on M&A, corporate finance, and capital markets transactions. Previously, he worked at UBS Investment Bank and the International Finance Corporation, the direct investment division of the World Bank. He received his AB from Harvard and his MBA with Baker Scholar honors from Harvard Business School. He is also the co-author of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.
JOSHUA PEARL is the Founder and Chief Investment Officer of Hickory Lane Capital Management, a long/ short equity asset manager. He focuses on public equity investments and special situations utilizing a fundamentalsbased approach. From 2011 to 2020, he served as a Managing Director and Partner at Brahman Capital. Previously, he structured high yield financings, leveraged buyouts, and restructurings as a Director at UBS Investment Bank. Prior to UBS, he was an investment banker at Moelis & Company and Deutsche Bank. He received his BS in Business from Indiana University’s Kelley School of Business. He is also the co-author of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.
Please contact JOSHUA ROSENBAUM and JOSHUA PEARL with any questions, comments, or suggestions for future editions at josh@investmentbankingbook .com
About the Authors
JOSEPH GASPARRO is a Vice President in the Industrials & Diversified Services Group at RBC Capital Markets, where he advises on and executes M&A, corporate finance, and capital markets transactions. Previously, he worked in the Investment Banking Division and Global Markets Division of Credit Suisse. Prior to Credit Suisse, he worked at BofA Securities and UBS Investment Bank. He received his BA from Gettysburg College and his MBA from Rutgers Business School. He is a two-time recipient of the President’s Volunteer Service Award, bestowed by the President of the United States. He is also an editor of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.
RAYMOND AZIZI is a Portfolio Manager at Weiss Multi-Strategy Advisers where he manages a long/short equity portfolio. Previously, he was an investment professional at Lehman Brothers Merchant Banking where he focused on leveraged buyouts and growth capital investments. Prior to his private equity role, he worked in the Investment Banking Division at Lehman Brothers. He received his BS in Business from Rutgers University and his MBA from The Wharton School of the University of Pennsylvania. He is also an editor of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.
Investment Banking Workbook
Introduction
This workbook is designed for use both as a companion to our book, Investment Banking: Valuation, LBOs, M&A, and IPOs, Third Edition, as well as on a standalone basis. Investment Banking focuses on the primary valuation methodologies currently used on Wall Street—namely, comparable companies analysis, precedent transactions analysis, discounted cash flow (DCF) analysis, leveraged buyout (LBO) analysis, mergers & acquisitions (M&A) analysis, and initial public offering (IPO) valuation from both a sell-side and buy-side perspective. Our workbook seeks to help solidify knowledge of these core financial topics as true mastery must be tested, honed, and retested over time. We envision the workbook being used as a self-help tool for students, job seekers, and existing finance professionals, as well as in formal classroom and training settings.
The workbook provides a mix of multi-step problem set exercises, as well as multiple choice and essay questions. We also provide a comprehensive answer key that aims to truly teach and explain as opposed to simply identify the correct answer. Therefore, the answers themselves are an effective learning tool. The level of difficulty for these exercises and questions ranges from basic to advanced. The format of the workbook is designed to optimize mastering the critical financial tools discussed in Investment Banking and therefore corresponds to its chapters, as shown below:
■ Chapter 1: Comparable Companies Analysis
■ Chapter 2: Precedent Transactions Analysis
■ Chapter 3: Discounted Cash Flow Analysis
■ Chapter 4: Leveraged Buyouts
■ Chapter 5: LBO Analysis
■ Chapter 6: Sell-Side M&A
■ Chapter 7: Buy-Side M&A
■ Chapter 8: Initial Public Offerings
■ Chapter 9: The IPO Process
TARGET AUDIENCE
We are confident that this workbook will enable users to take their learning to the next level in terms of understanding and applying the critical financial tools necessary to be an effective finance professional. Consequently, our target audience for the workbook overlaps with Investment Banking—namely current and aspiring investment bankers, students, career changers, private equity and hedge fund professionals, sell-side research analysts, and finance professionals at corporations (including members of business development, finance, and treasury departments). We also believe our workbook is highly beneficial to those attorneys, consultants, and accountants focused on M&A, corporate finance, capital raising, and other transaction advisory services.
At the same time, our workbook is designed to serve as the ultimate teaching tool for finance professors, instructors, and trainers. The multiple choice questions are complemented by rigorous multi-step exercises designed to ensure mastery of key modeling conventions and financial calculations. It is the perfect complement to classroom or online instruction, as well as core course reading materials. In fact, Investment Banking and this workbook are designed in an integrated manner so as to provide a foundation around which a professor, instructor, or trainer can build an entire course.
CONTENT AND APPLICATIONS
The multi-step exercises are instrumental for learning the calculations and modeling skills behind the core valuation, LBO, M&A, and IPO tools. Once mastered, these exercises provide a solid foundation for financial modeling (including crafting financial projections), and performing comparable companies, precedent transactions, DCF analysis, LBO analysis, merger consequences analysis (including the creation of pro forma financial statements), and IPO valuation. They also provide a sound understanding of more complex calculations and nuances involving accretion/ (dilution) analysis, exchange ratios, premiums paid, treasury stock method (TSM), capital asset pricing model (CAPM), weighted average cost of capital (WACC), goodwill, tangible and intangible write-ups, deferred tax liabilities, and numerous other critical topics.
The multiple choice questions are designed to be used on both an individual as well as collective basis. In other words, individual questions from each chapter can be mixed and matched to accommodate any testing, learning, or training format. At the same time, taken collectively for a given financial topic, the questions and exercises provide an integrated and multidimensional approach that can be used to teach and learn the material, whether individually, in the classroom, or for a training program.
Comparable Companies Analysis
1) Using the information provided for Gasparro Corp., complete the questions regarding fully diluted shares outstanding
a. Calculate Gasparro Corp.’s in-the-money options/warrants
b. Calculate proceeds from in-the-money options/warrants
c. Calculate net new shares from the options/warrants
d. Calculate fully diluted shares outstanding
2) Using the prior answers and information, as well as the balance sheet data below, calculate Gasparro’s equity value and enterprise value
except per share data) Assumptions
Balance Sheet Data
Balance Check
a. Calculate equity value
b. Calculate enterprise value
3) Using the information provided for Gasparro, complete the questions regarding non-recurring items Non-recurring Items
$25.0 million pre-tax gain on the sale of a non-core business in Q4 2018
$30.0 million pre-tax inventory valuation charge in Q2 2019 related to product obsolescence
$15.0 million pre-tax restructuring charge in Q3 2019 related to severance costs
Fiscal Year Ending December 31,
a. Calculate adjusted LTM gross profit for Gasparro, assuming the $30.0 million inventory charge is added back to COGS
b. Calculate adjusted LTM EBIT
c. Calculate adjusted LTM EBITDA
d. Calculate adjusted LTM net income
4) Using the prior answers and information, complete the questions regarding Gasparro’s LTM return on investment ratios
a. Calculate return on average invested capital
b. Calculate return on average equity
c. Calculate return on average assets
d. Calculate implied annual dividend per share
5) Using the prior answers and information, complete the questions regarding Gasparro’s LTM credit statistics
a. Calculate debt-to-total capitalization
b. Calculate total debt-to-EBITDA
c. Calculate net debt-to-EBITDA
d. Calculate EBITDA-to-interest expense
e. Calculate (EBITDA – capex)-to-interest expense
f. Calculate EBIT-to-interest expense
6) Using the prior answers and information, calculate Gasparro’s trading multiples
($ in millions, except per share data)
a. Calculate Gasparro Corp.’s LTM enterprise value-to-sales
b. Calculate 2019E enterprise value-to-EBITDA
c. Calculate 2020E enterprise value-to-EBIT
d. Calculate 2021E P/E
e. Calculate 2021E FCF yield
Trading Multiples
7) Using the prior answers and information, calculate Gasparro’s growth rates
a. Calculate Gasparro’s historical one-year sales growth
b. Calculate historical two-year EBITDA compounded annual growth rate
c. Calculate estimated one-year FCF growth
d. Calculate estimated two-year EPS CAGR
8) Using the information provided for ValueCo’s peers, complete the questions regarding LTM profitability margins
a. Calculate BuyerCo’s gross profit margin
b. Calculate Sherman Co.’s EBITDA margin
c. Calculate Pearl Corp.’s EBIT margin
d. Calculate Kumra Inc.’s net income margin
e. Calculate the mean EBITDA margin
f. Calculate the median EBIT margin
9) Using the information below, calculate the LTM leverage and coverage ratios for ValueCo’s peers
$2, 200. 0$2, 480. 0$400. 0$142.
Co 3, 150. 02,359. 0649. 076.
Corp. 1, 500. 02,559. 6868.
Kumra Inc. 891. 22,687. 6481. 360.
a. Calculate BuyerCo’s debt-to-total capitalization
b. Calculate Sherman Co.’s debt-to-EBITDA ratio
c. Calculate Pearl Corp.’s net debt-to-EBITDA ratio
d. Calculate Kumra Inc.’s EBITDA-to-interest expense ratio
e. Calculate Kumra Inc.’s (EBITDA – capex)-to-interest expense ratio
f. Calculate Kumra Inc.’s EBIT-to-interest expense ratio
g. Calculate the mean debt-to-EBITDA leverage ratio
h. Calculate the median EBITDA-to-interest expense ratio
10) Using the information below, calculate the LTM valuation multiples for ValueCo’s peers ($ in millions, except per share data)
a. Calculate BuyerCo’s enterprise value-to-sales multiple
b. Calculate Sherman Co.’s enterprise value-to-EBITDA multiple
c. Calculate Pearl Corp.’s enterprise value-to-EBIT multiple
d. Calculate Kumra Inc.’s P/E multiple
e. Calculate the mean enterprise value-to-EBITDA multiple
f. Calculate the median P/E ratio
11) Using the information below, calculate ValueCo’s implied valuation ranges using the company’s LTM EBITDA
($ in millions, except per share data)
a. Calculate ValueCo’s implied enterprise value range
b. Calculate ValueCo’s implied equity value range
c. Calculate ValueCo’s implied share price range
12) Using the information below, calculate ValueCo’s implied valuation ranges using the company’s LTM net income
($ in millions, except per share data)
a. Calculate ValueCo’s implied equity value range
b. Calculate ValueCo’s implied share price range
13) Which of the following is the correct order of steps to complete comparable companies analysis?
I. Locate the necessary financial information
II. Select the universe of comparable companies
III. Spread key statistics, ratios, and trading multiples
IV. Determine valuation
V. Benchmark the comparable companies
A. II, I, III, V, IV
B. I, II, III, IV, V
C. II, I, III, IV, V
D. III, I, IV, V, II
14) All of the following are business characteristics that can be used to select comparable companies EXCEPT
A. Products and services
B. Distribution channels
C. Return on investment
D. Sector
15) All of the following are financial characteristics that can be used to select comparable companies EXCEPT
A. Credit profile
B. Growth profile
C. Profitability
D. Geography
16) Which of the following are key business characteristics to examine when screening for comparable companies?
I. Sector
II. Return on investment
III. End markets
IV. Distribution channels
V. Return on assets
A. I and III
B. II and IV
C. I, III, and IV
D. I, II, III, IV, and V
17) Which of the following are key financial characteristics to examine when screening for comparable companies?
I. Customers
II. Profitability
III. Growth profile
IV. Credit profile
V. End markets
A. II and III
B. II, III, and IV
C. I, II, and IV
D. II, III, and V
18) End markets refer to the
A. Market into which a company sells its products and services
B. Medium through which a company sells its products and services to the end user
C. End users of a product or service
D. Stores that distribute a company’s product or service
19) Distribution channels refer to the
A. Market into which a company sells its products and services
B. Medium through which a company sells its products and services to the end user
C. End users of a product or service
D. Stores that distribute a company’s product or service
20) Which of the following is NOT a financial statistic to measure the profitability of a company?
A. Gross profit
B. EBITDA margin
C. EBIT margin
D. Equity value
21) Which of the following is NOT a source for locating financial information for comparable companies?
A. 10-K
B. 13-D
C. Investor Presentations
D. Equity Research
22) Which of the following is the correct calculation for fully diluted shares outstanding when used in trading comps?
A. “Out-of-the money” options and warrants + “in-the-money” convertible securities
B. Basic shares outstanding + “in-the-money” options and warrants + “inthe-money” convertible securities
C. “In-the-money” options and warrants + “in-the-money” convertible securities
D. Basic shares outstanding + “out-of-the money” options and warrants
23) Which methodology is used to determine additional shares from “in-themoney” options and warrants when determining fully diluted shares?
