Investment Banking 101

Market Trends

A description of the current economic environment and trends in financial markets

Valuation Methods

The different methods of valuation

DCF Analysis

A detailed description of how to perform a Discounted Cash Flow (DCF) analysis

Comparable Company Analysis

The process of comparing a company’s financial metrics to those of similar companies in the same industry to assess its value

Precedent Transaction Analysis

A method of valuation based on analyzing the pricing of similar past transactions in the market

Leveraged Buyout (LBO)

The process of acquiring a company using a significant amount of debt

Capital Structure

A breakdown of a company’s capital structure

Enterprise Value (EV)

The total value of a company

EV = Equity Value + Debt - Cash + Minority Interest + Preferred Equity

Equity Value

The total value of a company attributable to shareholders

Free Cash Flow

Cash generated by the company’s operations after capital expenditures

Free Cash Flow = Operating Cash Flow - Capital Expenditures

EBITDA

Earnings Before Interest

Depreciation & Amortization

Non-cash expenses that reflect the gradual write-off of the cost of tangible and intangible assets over time

Capex (Capital Expenditures)

Investments a company makes in physical assets such as property

Working Capital

The difference between a company’s current assets and current liabilities

Working Capital = Current Assets - Current Liabilities

Return on Investment (ROI)

A profitability ratio that measures the return generated on an investment relative to its cost

ROI = (Net Profit / Cost of Investment) * 100

Discount Rate

The interest rate used in DCF analysis to discount future cash flows to their present value

WACC (Weighted Average Cost of Capital)

The average rate of return a company is expected to pay to its security holders

WACC = (E/V) * Re + (D/V) * Rd * (1-Tc)

Risk-Free Rate

The theoretical return on an investment with zero risk

Beta

A measure of a stock’s volatility relative to the market

Mergers & Acquisitions (M&A)

The process of combining two companies through merger or acquisition and the considerations involved

Synergies

The potential cost savings or revenue enhancements that can result from merging two companies

Due Diligence

The process of investigating and evaluating a company prior to an investment or acquisition

Covenant-Lite Loans

Loans with fewer restrictions or covenants

Pitchbook

A presentation used by investment bankers to pitch investment opportunities or strategies to potential clients

Fairness Opinion

An assessment issued by an independent advisor to determine whether the terms of a transaction are fair from a financial perspective

Dividend Discount Model (DDM)

A valuation method that values a company based on the present value of its future dividends

DDM = Dividends per Share / (Discount Rate - Dividend Growth Rate)

Growth vs Value Stocks

A comparison between stocks expected to grow faster than the market (growth) versus stocks that are undervalued compared to their earnings or assets (value)

Structured Products

Investment products created by combining traditional securities like bonds or stocks with derivatives

Convertible Bonds

A type of bond that can be converted into a predetermined number of the company’s equity shares

PIPE (Private Investment in Public Equity)

A financing method where private investors buy shares of a public company at a discounted price

Debt Financing

The process of raising capital through borrowing

Equity Financing

The process of raising capital by issuing shares of stock in exchange for funds

IPO (Initial Public Offering)

The process through which a private company offers shares of stock to the public for the first time

Secondary Offering

The sale of additional shares by a company that is already publicly traded

Lock-Up Period

The period after an IPO during which major shareholders are restricted from selling their shares

Buy-side vs Sell-side

The difference between firms that manage investment portfolios and those that advise on selling or buying assets

Pitching a Deal

The process of presenting a deal to potential clients or investors

Private Equity

Investment funds that acquire companies

Venture Capital

A form of private equity investing in early-stage

Hedge Funds

Investment funds that employ various strategies to generate high returns for their investors

Risk Management

The identification

Liquidity

The ability to quickly convert an asset into cash without significant loss of value

Capital Markets

Markets in which long-term debt or equity securities are bought and sold

Fixed Income Securities

Debt instruments that pay a fixed amount of income

Equities

Stocks or shares representing ownership in a company

Market Makers

Firms or individuals that quote buy and sell prices for a financial instrument and facilitate trading

Arbitrage

The simultaneous purchase and sale of an asset in different markets to profit from differing prices

Short Selling

The practice of selling securities borrowed from another party in anticipation of a price decline

Private Placement

The sale of securities to a select group of investors rather than through a public offering

Shareholder Activism

The efforts by shareholders to influence a company’s management or operations through various methods

Bond Rating Agencies

Companies that assess the creditworthiness of issuers of debt

Credit Default Swap (CDS)

A financial derivative that allows one party to hedge against the default risk of a bond issuer

Sovereign Debt

The debt issued by a national government

Structured Finance

The use of complex financial products such as asset-backed securities (ABS) or collateralized debt obligations (CDOs) to meet financing needs

Assets Under Management (AUM)

The total market value of the assets that an investment firm or manager oversees on behalf of clients

Cash Flow Statement

A financial statement that shows the inflows and outflows of cash for a company over a specific period

Income Statement

A financial statement that shows a company’s revenues

Balance Sheet

A snapshot of a company’s financial position

Working Capital Cycle

The amount of time it takes for a company to convert its current assets into cash

Option Pricing Models

Models used to determine the theoretical value of options

Risk-Adjusted Return

A measure of return on an investment relative to the amount of risk taken

Alpha

A measure of an investment’s outperformance relative to a benchmark

Beta

A measure of an asset’s volatility relative to the market

Efficient Market Hypothesis (EMH)

The theory that asset prices reflect all available information and that markets are always in equilibrium

Modern Portfolio Theory (MPT)

The theory that an investor can construct a portfolio that maximizes returns for a given level of risk

Sharpe Ratio

A ratio used to measure the risk-adjusted return of an investment

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio Return

Debt-to-Equity Ratio

A measure of a company’s financial leverage

Debt-to-Equity = Total Debt / Total Equity

Current Ratio

A measure of a company’s ability to pay short-term obligations

Current Ratio = Current Assets / Current Liabilities

Quick Ratio

A more stringent version of the current ratio that excludes inventory from current assets

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Interest Coverage Ratio

A ratio used to determine how easily a company can pay interest on its outstanding debt

Interest Coverage Ratio = EBIT / Interest Expense

Leverage

The use of borrowed funds to increase the potential return on an investment

Cost of Capital

The cost of funds used for financing a business

Tax Shield

The reduction in taxable income due to deductions such as interest on debt

Financial Modeling

The process of creating a quantitative representation of a company’s financial performance to aid decision-making

Capital Budgeting

The process of evaluating potential investments or projects and determining which are most likely to add value

Operating Income

A measure of profitability that excludes non-operating income

Net Income

A company’s total profit after all expenses

Gross Margin

The difference between sales revenue and the cost of goods sold

Gross Margin = (Revenue - COGS) / Revenue * 100

EBIT

Earnings Before Interest and Taxes

EBITDA Margin

The ratio of EBITDA to total revenue

EBITDA Margin = EBITDA / Revenue * 100

Income Tax Expense

The amount of money a company owes in taxes for a given period

P/E Ratio

The price-to-earnings ratio

P/E = Price per Share / Earnings per Share

PEG Ratio

The price-to-earnings growth ratio

PEG = P/E Ratio / Earnings Growth Rate

Price-to-Book Ratio

A valuation ratio that compares the market value of a company’s stock to its book value

Price-to-Book = Market Value per Share / Book Value per Share