Delta Sigma Pi Spring 2008

Delta Sigma Pi Beta Nu Chapter

Project Wombat

!
Time is like cleavage, squeeze and you will get some!
If you have 8 rst-round interviews and 4 second-rounds, thats only 10 hours of interviewing. That totals less than an entire day. Dont stress out. Be productive.

Every interview you go for is a FIT INTERVIEW!

Does your brain t? Are you competent? Does your personality t? Are you sociable? Are you smart when you are having fun? Are you fun when you are being smart?

Getting the answer right is 50% of the challenge; the other 50% is how you choose to deliver it!

Dont bring the Vault Guide to your interviews, and if you do, dont let them see it. It is such a faux pas!

Use the following pages to organize daily WSJ headlines:

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Company Proles
Use the following pages to organize information about the companies you are interviewing with:
Company: Date/ time of interview: Who interviewed you: Industry/ product groups: Three recent transactions (include dates): 1. CEO Name: Company: Date/ time of interview: Who interviewed you: Industry/ product groups: Three recent transactions (include dates): 1. CEO Name:

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Company Proles
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Company Proles
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I Valuing a Company

The core of corporate nance and one of the most critical areas in investment banking and advisory.

Discounted Cash Flow

Denition: This method takes the projected cash ows of a company, discounts them back at a relevant discount rate, taking into consideration the companys capital structure and how one may want to treat leverage.

Discounting cash ows isnt difcult, its deriving the free cash ows that can be challenging. The method which you use to discount these cash ows is another headache in itself. Then, nding the appropriate discount rate can be problematic. Make sure you understand the various techniques used in DCFs.

Six easy steps 1. Derive adjusted EBIT 2. Arrive at free cash ows 3. Decide how to discount free cash ows 4. Determine discount rate 5. Decide how to calculate terminal value 6. Apply discount rate and nd net present value

Step 2: Arrive at free cash ows Adjusted EBIT (+) Non-cash Operating Expenses (D&A, ESO) (-) Cash Tax Payments (-) Increase in Operating Working Capital (-) Capital Expenditures = Free Cash Flow D&A can be found in the Cash Flow Statement ESO may be embedded into SG&A (FASB 123)

Step 1: Derive adjusted EBIT Reported EBIT (-) Non-Recurring Charges = Adjusted EBIT Common examples of non-recurring charges are legal settlement fees, restructuring charges and asset impairment charges. Adjusting for these gives a more organic and accurate perspective on EBIT.

Step 4: Determine discount rate If using WACC... apply CAPM using given asset beta

If using APV... apply CAPM to relevered equity beta

Discounted Cash Flow, Contd

Step 5: Determine how to calculate terminal value Continuing Value Method Assumes constant growth rate after projected period

Exit Multiple Method Assumes multiple of free cash ows after projected period

Step 6: Apply discount rate and nd NPV

Discounted Cash Flow, Contd

Why add D&A to EBIT?

Note: You might get a variety of questions on the DCF, which are designed to evaluate your intuition behind the technique.

D&A is a non-cash operating expense. Hence, to make sure that free cash ow is derived only from cash-related items, D&A must be added back to EBIT.

Why subtract the increase in operating working capital? Working Capital = Net Current Assets - Net Current Liabilities When working capital increases, it means one of two things (or both): (i) Your net current assets are increasing Accounts Receivable (not converting recorded sales to cash quickly enough) + Inventory (not converting goods to cash quickly enough) (ii) Your net current liabilities are decreasing Accounts Payable (payables are met using cash = cash outow) Hence, it is apparent that an increase in working capital corresponds to lower levels of cash, and must be subtracted to reect the appropriate movement of cash in/ out of the company.

Discounted Cash Flow, Contd

What are debt tax shields and why do they matter? Debt tax shields (DTS) provide tax advantages by reducing income taxes. Interest on debt is tax-deductible, as can be seen on the Income Statement: EBIT - Interest Expense = Taxable Income - Income Taxes = Net Income Hence, taking on debt is like having a shield against taxes. Bankers tend to self-glorify. Its a way for compensating for spending that much time behind a computer screen. DTS matters when you value a company that is levered (has debt).

How is beta treated in the APV method? Simply put, you must unlever current beta because you are assuming an all-equity rm: Unlevered Beta =

Use the CAPM to arrive at the new cost of capital, which is your discount rate. DTS are then valued at the cost of debt, and added back.

How does the continuing value method treat terminal value like a perpetuity? Terminal Value =

Discounted Cash Flow, Contd

Case Study: M&T stud and resident tycoon Alan Hsieh really likes Mexican and Korean food, and decides that he wants to buy Kim Jong Burritos, a national Korean-Mexican cafe chain jointly owned and operated by Bohea Suh, who is actually not Mexican at all. Alan has come to you, asking you for a preliminary valuation of Boheas company. You project to reach $73.9 million in revenues in FY 20008. You have also decided to do a ve-year projection, after which you will use a continuing value method to derive terminal value.

Projected Financials - Income Statement

Income Statement ($ in millions) Revenues Cost of Goods Sold Gross Prot Selling, General & Administrative Costs EBIT Interest Expense/ (Income) Earnings Before Taxes Income Taxes Net Income 2008E $73.9 40.0 33.9 12.5 21.4 5.1 16.3 5.7 $10.6 Projected FYE December 31, 2009E 2010E $80.1 45.0 35.1 14.9 20.2 5.7 14.5 5.1 $9.4 $85.2 47.9 37.3 16.2 21.1 6.6 14.5 5.1 $9.4 2011E $93.6 53.7 39.9 18.2 21.7 7.1 14.6 5.1 $9.5 2012E $99.4 59.3 40.1 19.1 21.0 7.4 13.6 4.8 $8.8

Usually, you do a ve-year revenue projection based on: (i) management expectations; and/or (ii) slightly increasing growth rate Key drivers for growth include: (i) revenue enhancement (ii) improved cost management In a DCF youre really just interested up to the EBIT line.

Projected Financials - Selected Cash Flow Statement Items

Selected Cash Flow Statement Items ($ in millions) Cash Flows from Operations Depreciation & Amortization Cash Flows from Investing Purchases of PP&E

2008E

Projected FYE December 31, 2009E 2010E

2011E

2012E

$5.7

$5.7

$5.7

$5.7

$5.7

$10.1

$9.9

$7.5

$12.8

$6.3

The cash ow statement is used to nd D&A and capex for a basic DCF. For more complex DCFs, you may have to look into details in Operating Cash Flows to nd minute changes in working capital or adjustments to EBITDA.

Discounted Cash Flow, Contd

Projected Financials - Selected Balance Sheet Items & Working Capital Calculations
Selected Balance Sheet Items ($ in millions) Cash Short-term Investments Accounts Receivables Inventory Total Current Assets Accounts Payable Accrued Expenses Total Current Liabilities Working Capital Calculations Total Current Assets (-) Cash = Net Current Assets (-) Net Current Liabilities = Working Capital Increase/ (Decrease) in Working Capital $85.4 29.1 56.3 54.2 $2.1 $0.4 $90.6 33.7 56.9 53.0 $3.9 $1.8 $98.7 38.7 60.0 56.7 $3.3 -$0.6 $96.8 41.5 55.3 61.3 -$6.0 -$9.3 $109.6 43.7 65.9 62.3 $3.6 $9.6 Projected FYE December 31, 2009E 2010E $33.7 4.6 23.6 28.7 $90.6 44.2 8.8 $53.0 $38.7 5.7 26.4 27.9 $98.7 44.3 12.4 $56.7

2008E $29.1 6.0 20.1 30.2 $85.4 45.1 9.1 $54.2

2011E $41.5 6.2 23.1 26.0 $96.8 47.8 13.5 $61.3

2012E $43.7 7.7 30.1 28.1 $109.6 48.1 14.2 $62.3

This is the working capital calculation. Note that there is no debt on Boheas company, so that this is technically an all-equity rm.

Market Data
Market Data Asset Beta () Risk-free Rate (rf) Market Return (rm) Discount Rate 0.85 5.0% 8.0% 7.6%

Market data is often provided to you, although the risk-free rate can be found online. Asset betas can be derived from comparables if not provided. The CAPM formula is: WACC = rf + (rm - rf) where (rm - rf) is also known as the market risk premium

Discounted Cash Flow, Contd

Adjusting for EBIT
Adjusting for EBIT 2008E Earnings Before Interest & Taxes (+) Non-Recurring Charges = Adjusted EBIT 21.4 0.0 21.4 Projected FYE December 31, 2009E 2010E 20.2 0.0 20.2 21.1 0.0 21.1 2011E 21.7 0.0 21.7 2012E 21.0 0.0 21.0

Here we do some adjustments to EBIT. Boheas company is assumed to be a vanilla company with no real problems, so there are no non-recurring charges to be added back.

Deriving Free Cash Flows

Deriving Free Cash Flows 2008E Adjusted EBIT (+) Non-cash Operating Expenses (-) Cash Tax Payments (-) Increase in Operating Working Capital (-) Capital Expenditures = Free Cash Flows Discounted to PV at WACC = 7.6% Terminal Value at g = 5.0%, Continuing Value TOTAL VALUATION $21.4 5.7 4.6 0.4 10.1 $12.0 $12.0 $215.2 $271.5 Projected FYE December 31, 2009E 2010E $20.2 5.7 4 1.8 9.9 $10.1 $9.4 $21.1 5.7 4 -0.6 7.5 $15.8 $13.7

2011E $21.7 5.7 4.1 -9.3 12.8 $19.8 $15.9

2012E $21.0 5.7 3.8 9.6 6.3 $7.0 $5.2

Market Data Asset Beta () Risk-free Rate (rf) Market Return (rm) Discount Rate 0.85 5.0% 8.0% 7.6%

The total valuation is the sum of all the PV-ed cash ows and the terminal value. Here we have valued Boheas company at a cool $271.5 million.

Discounted Cash Flow, Contd

Advantages
Forward-looking and incorporates growth strategy

Disadvantages
Highly sensitive to assumptions used, such as WACC, long-term growth rate and terminal value

Capital markets volatility has little impact on the analysis Forecasted cash ows are uncertain

Recognizes time value of money

Useful when there are not many comparable companies

Trading Comps

Denition: This method looks at market values to derive price multiples used to measure a companys value based on a specied metric, such as Sales or EBITDA

Narrow it down If in retail, is it in the luxury sector? If in auto parts, is it in the OEM or aftermarket sector? If in aerospace, is it in the engine or aircraft construction sector?

Nature of business Retailers are different from wholesalers, manufacturers and distributors, even within the same broad industry Example: Diageo plc, an international alcoholic beverages manufacturer, is not a great comp if you are valuing a soft drinks retailer

Customer demographic Factors to consider include age, gender, socioeconomic status, geography Example: Saks Fifth Avenue, a high-end luxury chain retailer, is not a good comp if you are valuing a discount apparel chain, such as Dress Barn

Similar growth stories and concepts Niche brands may be the only existing company in its specic space and can be hard to nd comps for Example: Seven for All Mankind and Under Armour are good comps for Crocs if looking at novel growth strategy and niche concept

Trailing vs. forward multiples LTM = Last Twelve Months - used for historical analysis NTM = Next Twelve Months - used to forecast numbers (get from Thomson, Bloomberg, general analyst consensus, etc.)

Choosing your metrics TEV/ EBITDA TEV/ Sales

Trading Comps, Contd

The example below is for Quiksilver, a pubicly-traded company. These comps also apply if Quiksilver were private.
Company Name Abercrombie & Fitch Co. Aeropostale Inc. American Eagle Outtters Inc. Bebe Billabong International Ltd. Callaway Golf CROCS Inc Fortune Brands Gildan Activewear Guess? Inc. Hanesbrands Inc. Jones Apparel Group Inc. Jos. A Bank Clothiers Inc. Liz Claiborne Inc. Nike Inc. Oxford Industries Inc. Pacic Brands Ltd Pacic Sunwear of California Phillips-Van Heusen Corp. Polo Ralph Lauren Corp. Sequa Corp. Timberland Co. Under Armour, Inc. Volcom Inc Warnaco Group Inc. Quiksilver Market Cap. $7,211.8 1,509.3 5,351.2 1,356.5 2,956.6 1,195.8 5,468.6 12,883.4 4,784.4 4,952.2 2,686.8 2,325.9 597.1 3,477.5 30,807.2 507.5 1,406.7 1,136.8 2,912.6 7,706.6 1,941.7 1,243.9 2,896.6 951.4 1,849.2 $1,865.2 Total Ent. Value $6,831.5 1,305.3 4,716.6 964.1 3,186.6 1,204.7 5,383.3 19,137.7 4,829.6 4,777.5 4,963.9 3,239.3 554.2 4,088.4 28,583.1 670.3 2,131.0 1,094.6 2,945.8 7,633.0 2,585.0 1,146.4 2,876.4 866.6 2,062.9 $2,863.8 Sales LTM $3,549.1 1,479.3 2,985.2 670.9 1,104.5 1,088.3 590.5 8,289.5 944.7 1,473.4 4,509.8 4,722.8 577.4 4,981.8 16,786.9 1,128.9 1,634.3 1,498.4 2,269.6 4,412.1 2,189.7 1,551.7 507.9 226.1 1,941.1 $2,547.4 EBITDA LTM $855.6 224.5 714.0 125.0 245.5 120.3 179.7 1,751.7 189.8 293.6 583.2 421.7 95.0 581.8 2,495.7 125.3 194.2 90.2 328.8 822.6 233.8 165.6 76.1 46.1 257.4 $220.8 Median Mean TEV as a Multiple of Sales EBITDA 1.92x 0.88 1.58 1.44 2.88 1.11 9.12 2.31 5.11 3.24 1.10 0.69 0.96 0.82 1.70 0.59 1.30 0.73 1.30 1.73 1.18 0.74 5.66 3.83 1.06 1.12x 1.3x 2.1x 8.0x 5.8 6.6 7.7 13.0 10.0 30.0 10.9 25.4 16.3 8.5 7.7 5.8 7.0 11.5 5.4 11.0 12.1 9.0 9.3 11.1 6.9 37.8 18.8 8.0 13.0x 9.3x 12.1x Gross Profit LTM $2,363.7 505.9 1,426.9 321.8 567.7 466.9 346.4 3,615.5 299.1 660.4 1,498.5 1,656.5 359.2 2,371.3 7,398.3 447.8 681.0 427.1 1,130.0 2,396.7 381.1 728.2 252.8 111.8 808.0 $1,159.1 Gross Margin 66.6% 34.2% 47.8% 48.0% 51.4% 42.9% 58.7% 43.6% 31.7% 44.8% 33.2% 35.1% 62.2% 47.6% 44.1% 39.7% 41.7% 28.5% 49.8% 54.3% 17.4% 46.9% 49.8% 49.4% 41.6% 45.5%

Transaction Comps
Ann. Date Target Acquirer

Denition: This method examines similar precedent transactions and their valuation characteristics to derive price multiples used to value a company

These precedent transactions may be used if valuing a alcoholic beverages manufacturer...

Total Tx Value LTM EBITDA Tx Value/ LTM EBITDA 9.0x 10.8 12.0 14.8 15.1 10.3 14.3 9.5 15.1x 11.4x 12.0x 9.0x Stock Premium

5/25/07 2/1/07 8/11/06 7/5/06 6/15/06 6/1/06 4/2/06 12/21/05

Fort Garry Brewing Co. Ltd. Lakeport Brewing Income Fund Sleeman Breweries Ltd. Bouvet-Ladubay Hardys & Hansons plc Taittinger S.A. Vincor International Inc. Marie Brizard et Roger International

Russell Breweries Inc. Labatt Brewing Company Limited Sapporo Breweries Limited United Spirits Ltd. Greene King plc Caisse Rgionale Constellation Brands Inc. Belvdre

$4.20 163.5 345 17.7 500.8 1841.1 1375.7 384.6 Max Median Mean Min

$0.50 15.1 28.7 1.2 33.3 179 95.9 40.3

36.5% 36.3% 13.3% -45.0% -16.0% 30.0% 45.0% 33.1% 29.5% 13.3%

Nature of acquisition Hostile takeovers - higher valuation due to opposing management board

Acquirer type Corporate acquirers - higher valuation due to projected synergies

Timing of acquisition Industry booms - bubble (tech boom, real estate boom) numbers may be inated Credit situation - less leverage may mean depressed valuations

Transaction structure Stock-swap deals - higher valuation due to increased stock risk

What drives variations in price multiples?

Growth , Price multiple Risk , Price multiple Reinvestment , Price multiple Earnings sustainability , Price multiple Protability , Price multiple

Leveraged Buyouts

Denition: LBO models help analysts see how a nancial sponsor may evaluate a company. It is a useful valuation technique that backs out entry/ exit multiples given a required IRR.

A company is purchased at a multiple of its EBITDA, of which a certain % is nanced by debt. The companys future cash ows (usually 5 years) are used to pay down debt. In this process, the original equity value is increased, and upon exit, nancial sponsors pay down remaining debt and extract prots from the amplied equity value.
Key drivers Cash - How much cash can this company generate going forward? Can it convert revenues to income to cash effectively? Debt - How much debt can you layer onto this company? How fast can it pay back debt? What kinds of debt can it sustain?

Tranches of debt Revolving credit facility... (this is like Penn Bursar) plus Senior debt (secured, Term Loan A) Junior debt (subordinate, Term Loan B) Mezzanine debt (high-yield, junk)

Typical leverage multiples Some deals are 80% nanced by debt; current credit situations have made lenders much more cautious, so 50-50% deals may be more common nowadays

Why is there circularity in a LBO model? There can be inherent circularity in a LBO model because to nd cash available for debt repayment (ending cash balance), you need net income (beginning cash balance), but you cant unless you have interest expense, but you cant do that unless you nd debt outstanding, which you cant nd unless you nd cash available for debt repayment to determine exactly how much debt you can pay down. In short, its one big vicious cycle and bankers solve it (or pretend to) by setting their Excel spreadsheets to manual, and allow Excel to iterate the calculations 10,000 times.

What advantages or disadvantages do LBO shops have over corporates? LBO shops are believed to have more nancial muscle, but potential lack of veteran industry knowledge (especially when having to deal with labor unions, think Cerberus and Chrysler deal of summer 2007).

Basic Leveraged Buyout

You are a buyout shop and you have decided to buy Alex Good, a renowned male lingerie company. The transaction closed on the last day of 2007, and at the time, Alex Good was making $10.0 million in EBITDA. The buyout was conducted at a 10.0x LTM EBITDA multiple, the median you derived from your trading comps on the lingerie industry.

Enter in 2007 EBITDA: $20.0 million Entry Multiple: 5.0x LTM EBITDA Transaction Value: $100.0 million Leverage: 3.0x LTM EBITDA Debt: $60.0 million Sponsor Equity: $40.0 million

During the Holding Period.... Through a series of operational enhancements and working capital improvements, Alex Goods EBITDA grew steadily over the years, leading to high levels of free cash ow. Debt was paid down at $5.0 million a year.

Exit in 2012 EBITDA: $25.0 million Exit Multiple: 5.0x LTM EBITDA Transaction Value: $125.0 million Outstanding Debt: $35.0 million Sponsor Equity: $90.0 million

Sponsor Equity $150.0

Debt

$112.5

$75.0

$37.5

$0

2007PF

2008E

2009E

2010E

2011E

2012E

Valuation Football Field

The football eld shows the full spectrum of basic valuation techniques, and serves as a basis for your rms reference range.

DCF

$71.2 - $151.3 million

Trading Comps (LTM EBITDA)

$43.8 - $79.9 million

Transaction Comps (LTM EBITDA)

$50.6 - $87.4 million

LBO

$52.1 - $137.2 million

DSP Reference Range

$84.6 - $146.1 million

$0

$50

$100

$150

$200

Accretion/ Dilution Analysis

Accretion/ Dilution Analysis is used as part of merger analysis. It is primarily focused on Earnings per Share (EPS): EPS = Net Income / Shares Outstanding If EPS = accretive If EPS = dilutive

In a 100% stock deal, if Acquirer P/E > Target P/E, the deal is accretive to the acquirer. Example I Acquirer P/E: 12.0x Share price: $60.00 EPS: $5.00 # of Shares: 1,000.0 Net Income: $5,000.0 Target P/E: 10.0x Share price: $30.00 EPS: $3.00 # of Shares: 4,000.0 Net Income: $12,000.0 Example II (share price, # of shares are the same) Acquirer P/E: 12.0x Share price: $60.00 EPS: $5.00 # of Shares: 1,000.0 Net Income: $5,000.0 Target P/E: 10.0x Share price: $60.00 EPS: $6.00 # of Shares: 1,000.0 Net Income: $6,000.0

Pro-forma Total Net Income: $5,000.0 + $12,000.0 = $17,000.0 1 share of Acquirer is worth: $60.00/ $30.00 = 2 shares of Target # of Shares Issued: 4,000.0/ 2 = 2,000.0 New Total # of Shares: 1,000.0 + 2,000.0 = 3,000.0 New EPS: $17,000.0 / 3,000.0 = $5.67 vs. Old EPS of $5.00, accretion % = 13.3%

Pro-forma Total Net Income: $5,000.0 + $6,000.0 = $11,000.0 1 share of Acquirer is worth: $60.00/ $60.00 = 1 share of Target # of Shares Issued: 1,000.0/ 1 = 1,000.0 New Total # of Shares: 1,000.0 + 1,000.0 = 2,000.0 New EPS: $11,000.0 / 2,000.0 = $5.50 vs. Old EPS of $5.00, accretion % = 10.0%

Accretion/ Dilution Analysis, Contd

What drives accretion? assuming Targets statistics are constant...

Acquirer P/E

- Higher P/E means lower standalone EPS - Accretion based on difference between standalone EPS and pro-forma EPS - Larger difference = more accretion!

Acquirer Share Price

- Higher share price means fewer shares issued to buy target - Fewer issued shares means smaller number of pro-forma shares - Smaller number of pro-forma shares means higher pro-forma EPS - Accretion based on difference between standalone EPS and pro-forma EPS - Larger difference = more accretion!

# of Acquirer Shares

- Fewer standalone acquirer shares means means smaller number of pro-forma shares - Smaller number of pro-forma shares means higher pro-forma EPS - Accretion based on difference between standalone EPS and pro-forma EPS - Larger difference = more accretion!

Practice Questions
How do you derive Free Cash Flows?

Why do you subtract the increase in net working capital?

What is net working capital? How do you get to it?

What are the two ways to calculate terminal value?

What is this equation

and why does it matter?

What are the disadvantages of using the WACC method?

Practice Questions, Contd

If you are valuing a private company and do not have access to full nancials, what might you use? What factors do you consider when selecting your trading comps?

You are valuing a private company with no directly related comparables. What can you do?

What factors might lead to inated transaction values in your transaction comps?

What are debt tax shields? Why do they matter?

Which is more accretive: a transaction nanced by stock, or by cash? Why?

What is a leveraged buyout?

Practice Questions, Contd

Name three successful recent leveraged buyouts.

What does the recent credit situation mean for leveraged buyout shops?

What are the key drivers of a LBO?

If you could value a company using only one method, which would you choose?
(This is a question that has no right or wrong answer, unless you say something like Im going to put some numbers in a hat, close my eyes and pick one at random. As long as you set up the correct scenario and defend your choice logically, you will be ne. Bankers ask this question to see how analytical and quick you can be.)

II Financial Statements Analysis

Must be completely understood before performing a valuation analysis.

SEC Filings Overview

10-K This contains the companys nancial performance over the last scal year, as well as some rather lofty descriptions of the companys operations.

10-Q This contains the companys nancial performance over the last scal quarter, as well as year-to-date and LTM statistics.

Proxy Statement (DEF 14-F) This contains shareholder and ownership data, which can also be found on Bloomberg.

8-K This is the current report, and is used by companies to le current reports on events like entry/ termination of a denitive material agreement, material impairments, etc.

20-F This is the same as the 10-K, but for non-U.S. companies.

Walk me through the....

Income Statement

This is a warm-up question. It is, in fact, an open lay-up. You may answer it in 2 steps:

I. Function of I/S
- Summary of an entity's results of operation is revealed in the income statement - Provides information about revenues generated and expenses incurred - Differences between revenues and expenses are identied as net income or net loss

II. Structure of I/S

Revenues + Other Revenues = Total Revenues - Cost of Goods Sold = Gross Prot -Selling, General and Administrative Costs (SG&A) - Non-recurring Expenses (Restructuring, Legal, etc) = Operating Income - (+) Interest Expense (Income) = Taxable Income - Income Tax Expense = Net Income

Walk me through the....

Balance Sheet

I. Function of B/S
- Reveals economic resources owned and claims against those resources (liabilities and owners' equity) - Prepared as of a specic date, whereas the I/S and Statement of Retained Earnings cover a period of time

II. Structure of B/S

ASSETS Cash & Cash Equivalents + Short-term Investments + Accounts Receivables + Merchandise Inventories = Current Assets + PP&E, Net + Goodwill, Net + Intangibles, Net + Other Assets, Net = TOTAL ASSETS LIABILITIES Current Portion of Long-term Debt + Accounts Payable + Accrued Expenses + Income Taxes Payable = Current Liabilities + Long-term Debt + Deferred Income Taxes + Other Non-current Liabilities =TOTAL LIABILITIES SHAREHOLDERS EQUITY ... you dont have to break this down, but know that Retained Earnings are subtracted here.

Stockholders Equity is complex....

Which is why its highly doubtful that you will be asked to break it down.

Source: Liz-Claiborne 10-K Filings, FY 2006

Walk me through the....

Cash Flow Statement

I. Function of C/F Statement

- Presents change in cash in a period of time pertaining to Operating, Investing and Financing activities

II. Structure of C/F Statement

You only have to know the main components of each section... Cash Flows from Operating Activities Net Income Depreciation & Amortization This is your Beginning Cash Balance!

Cash Flows from Investing Activities Purchases of PP&E (a.k.a. capital expenditures) Purchases of Investment Instruments Cash Flows from Financing Activities Short-term Borrowings Any debt-related stuff... issuance/ repayment of notes Effect of Exchange Rate Changes on Cash Net Change in Cash & Cash Equivalents Ending Cash Balance

Very impressive if you mention this! Say, if this were a multinational company, then realistically, it will be effected by cross-border exchange rates.

The C/F is complex....

To the right you will see exactly why you dont have to know EVERYTHING on the C/F Statement. Chances are, most bankers dont know. There are only two things that are important in basic valuation: - Depreciation & Amortization from CFO - Capital Expenditures from CFI

Source: Liz-Claiborne 10-K Filings, FY 2006

Walk me through the....

Fill in the relevant information:

Income Statement

I. Function of I/S

II. Structure of I/S

Walk me through the....

Fill in the relevant information:

Balance Sheet

I. Function of B/S

II. Structure of B/S

Walk me through the....

Fill in the relevant information:

Cash Flow Statement

I. Function of C/F Statement

II. Structure of C/F Statement

So, uhh, how are the 3 nancial statements linked?

Classic douchebag question. Many people trip up on this because it is difcult to remember on the spot! .... But not you. You are intelligent and understand how this works! 5 main themes: 1. Long-term Debt on the Opening B/S determines Interest Expense on the I/S 2. PP&E on the B/S determines D&A on the C/F 3. Net Income on the I/S determines Beginning Cash Balance on the C/F 4. Net Income on the I/S ows into Ending Retained Earnings, which ows into Shareholders Equity in the Ending B/S 5. Ending Cash Balance on the C/F determines Cash on the Ending B/S

Draw it here:

Opening Balance Sheet

Income Statement

Cash Flow Statement

Ending Balance Sheet

So, D&A increases by $100 and t = 40.0%....

Income Statement
What happens on the I/S? D&A is embedded in SG&A. So, an increase in D&A of $100 = decrease in pre-tax income of $100 Decrease in pre-tax income of $100 = decrease in post-tax net income of $60, because t = 40.0% Decrease in net income of $60 = decrease in beginning cash balance of $60, because net income from I/S ows to the C/F

Balance Sheet

What happens on the B/S? Increase in D&A of $100 = decrease in PP&E of $100 Decrease in net income of $60 = decrease in Retained Earnings of $60 .... there seems to be a gap of positive $40, lets look for it....

Cash Flow Statement

What happens on the C/F? Increase in D&A of $100 = increase in Cash Flows from Operations by $100, because D&A is added back in the C/F as a non-cash expense Recall the decrease in beginning cash balance of $60 ... here you nd the increase in ending cash balance of $40....

RECONCILE

Does this belong to the B/S? Increase in ending cash balance of $40 = Increase in cash of $40 ... the balance sheet balances!....

Draw it here:

Income Statement
Assets

Balance Sheet
Liabilities

Cash Flow Statement

Stockholders Equity

So, D&A decreases by $80 and t = 30.0%....

Income Statement
What happens on the I/S?

Balance Sheet

What happens on the B/S?

.... there seems to be a gap of

, lets look for it....

Cash Flow Statement

What happens on the C/F?

... here you nd the

in ending cash balance of $

....

RECONCILE

Does this belong to the B/S? ... the balance sheet balances!....

Draw it here:

Income Statement
Assets

Balance Sheet
Liabilities

Cash Flow Statement

Stockholders Equity

So, D&A increases by $20 and t = 50.0%....

Income Statement
What happens on the I/S?

Balance Sheet

What happens on the B/S?

.... there seems to be a gap of

, lets look for it....

Cash Flow Statement

What happens on the C/F?

... here you nd the

in ending cash balance of $

....

RECONCILE

Does this belong to the B/S? ... the balance sheet balances!....

Draw it here:

Income Statement
Assets

Balance Sheet
Liabilities

Cash Flow Statement

Stockholders Equity

III Fielding Interview Questions

Annoying Qualitative Questions

I see you have done your research on investment banking. What do you think is the worst thing about the job? This tests whether you understand the reality of the job. You can say the hours, watching a deal die or whatever you honestly believe is the worst part of the job. You can be honest, as long as you show that you understand that it is inherent and can be coped with. If you are interviewing with an associate, mention that part of an analysts job is to make the associates life easier. Also state that by being efcient (which you are) and a quick learner (which you also are), these problems can be easily mitigated.

What do you think about your GPA? Do you think you should be doing better? This tests your reaction to questions that are on the offense. Be honest and say that you could be doing better, but you are well-rounded and hence, satised with your performance. You are proud that you are involved in many extra-curricular activities and that if you were graded on them, you would probably have a 4.0 GPA. Mention that every semester is a new slate and that you always strive to allocate your time efciently.

If I could only write three words to remember you by, what would they be? I tend to answer this with two serious buzzwords and a funny, memorable one; example: driven, efcient and diet Coke fanatic. Answer this question at your discretion! Have a backup in case no laughter ensues. Some bankers suck.

What was on the Wall Street Journal today? They arent asking you this question because they dont know whats on the WSJ. They want to see how you answer this question. I always said, Usually I skim through the columns on the rst page between classes. What jumped out at me today were the news about <x>, <y> and <z>. Sometimes, Id have an extra something-something, such as an interesting, non-nancial article in the back pages. Again, use this only if you feel good rapport with your interviewer (which you should have!). It shows that you are interesting and that you actually read the WSJ, even if you dont. Anyone can spit out the top three headlines.. differentiate yourself!

Annoying Qualitative Questions

What are your greatest strengths? DING DING DING JACKPOT!!!!!!!!!!!!! Good for you if you get asked this question. Dont be corny, like you know, Ashley, Ive always felt that Excel is like an extension of my nervous system.... Say good, unique things. Back them up with tangible examples! List them here: 1. I am 2. I am 3. I am Example: Example: Example:

What is/ are your greatest weaknesses? The granddaddy of all bullshit. Change your weakness into something good. Self-deprecation can be humorous. List two (incl. one backup) here: 1. I can be 2. I can be BUT : BUT:

What sets you apart from the other applicants? 1. I am 2. I am 3. I am