Investment Banking Skill Assessment Vocabulary

This set of vocabulary flashcards covers core accounting principles, three-statement financial modeling, valuation methodologies (Comparable Companies, Precedent Transactions, DCF), M&A fundamentals, and essential Excel assessment terminology.

Income statement

Measures profitability over a period by starting with revenue and subtracting operating and non-operating expenses to arrive at net income.

Revenue

Sales generated during the period.

COGS

Direct costs required to produce the product or service.

Gross profit

Revenue remaining after direct costs, calculated as $\text{Revenue} - \text{COGS}$.

Operating expenses

Selling, general and administrative costs, research and development, and other recurring operating costs.

EBITDA

Earnings before interest, taxes, depreciation, and amortization.

EBIT

Operating profit after depreciation and amortization, also known as Operating Income.

Net income

Profit attributable after interest, taxes, and other non-operating items.

Cash flow statement

Explains the change in cash during the period, divided into operating, investing, and financing activities.

Cash flow from operations (CFO)

Net income plus noncash expenses and working-capital adjustments.

Cash flow from investing (CFI)

Capital expenditures, acquisitions, and purchases or sales of investments.

Cash flow from financing (CFF)

Debt issuance or repayment, stock issuance or repurchase, and dividends.

Balance sheet

Financial statement summarizing the accounting equation: $\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$.

Net working capital (NWC)

Generally measures short-term operating assets minus short-term operating liabilities, calculated as $\text{Current Operating Assets} - \text{Current Operating Liabilities}$.

Sign rule

An increase in an operating asset decreases cash flow, whereas an increase in an operating liability increases cash flow.

Equity value

Represents the value attributable to common shareholders, calculated as $\text{Diluted Shares Outstanding} \times \text{Share Price}$.

Enterprise value (EV)

Represents the value of the company’s core operations available to all capital providers, calculated as $\text{Equity Value} + \text{Debt} + \text{Preferred Stock} + \text{Noncontrolling Interest} - \text{Cash}$.

Treasury stock method

Assumes in-the-money options are exercised and proceeds are used to repurchase shares at the current market price to calculate diluted shares.

Incremental Option Shares

The number of shares added via options, calculated as $\text{Options} \times \frac{\text{Share Price} - \text{Strike Price}}{\text{Share Price}}$.

Comparable companies analysis

Values a business using the trading multiples of similar publicly traded companies based on industry, size, and other factors.

Precedent transactions analysis

Values a company using multiples paid in prior acquisitions of similar businesses, often reflecting control premiums and synergies.

Discounted cash flow (DCF) analysis

Values a company based on the present value of projected unlevered free cash flow plus the present value of terminal value.

Unlevered Free Cash Flow (UFCF)

\text{EBIT} \times (1 - \text{Tax Rate}) + \text{D&A} - \text{CapEx} - \text{Increase in NWC}.

WACC

Weighted average cost of capital, calculated as $(\frac{E}{D+E}) \times \text{Cost of Equity} + (\frac{D}{D+E}) \times \text{Cost of Debt} \times (1 - \text{Tax Rate})$.

Cost of Equity

Calculated using CAPM as $\text{Risk-Free Rate} + \text{Beta} \times \text{Equity Risk Premium}$.

Perpetuity Growth TV

Terminal value calculated as $\frac{\text{Final-Year FCF} \times (1 + g)}{\text{WACC} - g}$.

Accretion

A transaction characteristic where the buyer’s pro forma EPS is higher than its standalone EPS.

Dilution

A transaction characteristic where the buyer’s pro forma EPS is lower than its standalone EPS.

Goodwill

The value not assigned to identifiable tangible or intangible assets, calculated as $\text{Purchase Equity Value} - \text{Fair Value of Identifiable Net Assets Acquired}$.

Leveraged buyout (LBO)

The acquisition of a company using significant debt, where returns are driven by EBITDA growth, debt paydown, and exit multiples.

MOIC

Multiple of Invested Capital, calculated as $\frac{\text{Exit Equity Value}}{\text{Initial Equity Investment}}$.

IRR

Internal Rate of Return, approximately calculated as $(\frac{\text{Exit Equity}}{\text{Entry Equity}})^{(\frac{1}{\text{Years}})} - 1$.

DIV/0!

Excel error caused by dividing a value by zero or a blank denominator.

REF!

Excel error occurring when a formula refers to a deleted or invalid cell.