Investment Banking Quiz 1

Impact of change in NWC of Cash Flows

- when Change in NWC decreases, cash flow increases - when change in NWC increases, cash flow decreases

Intel Example

Intel wants to spinoff its foundry business shares went up 9% after announcement

Investment Banks

advises buyers and sellers together in complex financial transactions ex: IPO, LBOs, etc do not have teller pages, consumer loans, mortgages that is a commercial and consumer banking

finding risk free rate to use

use treasuries long - 10 year is good or also use avg of !0+30 year if 20 year is available use that use going forward rate

when leverage increases does beta increase?

yes beta increases as leverage increases

Bloomberg adjusted beta

(2/3* current beta) + (1/3*1.0) Bloomberg beta is higher than regular beta

Roles of Investment Bank

- Investment Banking (also called Corporate Finance) - M&A, IPO, restructuring - Sales, Trading, Research

Advantages of DCF

-if all inputs are correct, it gives you the true value -focuses on cash, not accounting earnings -accounts for TMV and risk directly -self sufficient e.g. don't need good comps -market independent -flexible -> different cases, sensitivity analysis

3 Company Valuation Techniques

1. DCF 2. Comparable Company Analysis 3. Precedent Transaction

Terminal Value valuation methods

1. Perpetuity Method 2. Multiple Method

5 Steps of a DCF

1. Study the target and determine key performance drivers 2. Project Free Cash Flows 3. Calculate WACC 4. Determine Terminal Value 5. Calculate Present Value and Determine Valuation

Cost of Debt Methods

1. Use yields on long term debt (10+ years) of company - good method but hard to find 2. Use current credit rating of a company and use comparable yields - also a good method 3. income statement method interest expense/debt - bad method

Cava Example

2008: Cava bought Zoe's kitchen for 300 million USD 2021: Series FVC (private financing) 2023: IPO for 14.4m shares valued at $22 per share totaling at 318 million USD for a total valuation at 2.45 billion USD 2023 event shows how IPO's are usually done as a percentage of a company's total value Oct 2023: research from Morgan Stanley overweights meaning buy stock currently trading at $125 a share

Case Study

Active Gear wants to buy Mercury division from West Coast synergies include higher revenue, better negotiating power with distributors and retailers

Top Golf Callaway Example

Callaway might spin off Top Golf early next year Callaway and Top Golf merged 3.5 years ago, Topgolf is struggling, higher prices for food, hampering customer satisfaction, etc. the spinoff is set at 80.1% for tax reasons

Enterprise Value

Combined discounted FCF + Net Debt Net Debt = Debt - excess cash also add any non operating assets such as land, securities, etc from enterprise value also subtract any non operating liabilites or future ones such as fines or lawsuits from enterprise value

Calculating DDA growth formula

DDAt = (90% DDA t-1) + (10% Capex t-1)

Importance of an Investment Bank

It demonstrates how important it is in growth of a company

Reddit Example

Reddit IPO at $34 a share with total market value of 6.4 billion USD

FCF

Revenues -cost of goods sold =Gross Profit -S,G+A =Operating Cash Flow (EBITDA) -DDA =Operating Income -taxes +dda -capex -^NWC =Free Cash Flow

Verizon Frontier Example

Verizon buys Frontier communications for 20 billion USD in all cash for $38.50 a share, which was 37.3% over the market trading price on September 3rd Centerview and Morgan Stanley advised Verizon while Barclays advised Frontier

Half Year Convention

method used in DFC, cash flows come in at middle of year and discount period adjusts for that FCF2025/(1+WACC)^0.5 + FCF/(1+WACC)^1.5

formula for treasury share method number of shares

shares o/s + ( #option shares hitting strike price - (market cap of options with strike price/ current share price)

what to exclude from FCF

short term debt and current portion of long term debt from NWC also exclude interest expense these are accounted for in WACC

Treatment of subsidiaries >50%

subtract percent of the company value owned

spinoff

taking one company and creating two or more companies (opposite of M&A)

DCF

forecast future cash flows and discount back to present value to find a value

Disadvantages of DCF

- Difficult to estimate FCF - Valuations are often sensitive to minor changes in TV and WACC assumptions - Terminal value often a big driver of value -not market based

Treatment of subsidiaries of <20% and >20% <50%

add percent of company value owned

Mars Example

Mars buys out Kellanova (Kellog's) for 36 Billion USD

Paramount example

Paramount was controlled by National Amusement (owners were Shari Redstone family) May: Sony and Apollo (LBO PE firm) demonstrated interest buying out National Amusment's shares in Paramount but did not make high enough offer July: Skydance (Ran by David Ellison) made a better offer and ended up purchasing for 8 Billion USD Barry Diller and Edgar Broatman were also interested in the company but each did not make high enough bid offers

corporations, governments, HNW individuals

clients of investment bank