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