Strategic Thinking IB

What happens to PE deal flow if interest rates rise sharply?

Cost of debt increases → LBOs become less attractive → Deal flow slows → Lower PE exits.

If inflation rises sharply, what happens to DCF valuations?

Higher discount rates → Lower present value of future cash flows → DCF valuations decrease.

What happens to tech company valuations if treasury yields rise?

Future cash flows discounted more heavily → Tech valuations fall → Investors rotate into value sectors.

If oil prices spike, how does that impact consumer sector valuations?

Higher input costs → Reduced consumer spending power → Lower margins → Consumer valuations fall.

What is the impact of a strong USD on emerging market M&A activity?

Strong USD makes EM assets cheaper → Cross-border M&A increases → Local EM companies face refinancing pressure.

If VIX rises dramatically, how would hedge funds react?

Higher volatility → More trading opportunities → HFs deploy volatility strategies → Higher trading volumes.

How does an inverted yield curve impact IPO markets?

Recession signal → Risk appetite drops → IPOs postponed → Valuations pressured lower.

What happens to high-yield bonds during financial stress?

Credit spreads widen → HY bond prices fall → PE financing via debt becomes more expensive.

If copper prices fall consistently, what macro signal does it send?

Global industrial activity is slowing → Recession risk rising → Defensive sector rotations expected.

If WTI oil stays above $100/barrel for 6+ months, what sectors benefit most?

Energy sector profits surge → Energy stock valuations rise → Renewables gain strategic momentum too.

If the 10-Year US Treasury yield spikes by 100bps, which sectors would you expect to suffer most, and why?

• Tech and high-growth sectors suffer first (valuation models highly sensitive to discount rates).

• Utilities and real estate also pressured (interest-rate sensitive, financing dependent).

• Financials (banks) may benefit initially due to wider net interest margins.

A strategic acquirer offers 100% stock for a target in a rising market. Why might the target prefer cash instead?

• Cash is guaranteed value today; stock value may fluctuate post-deal.

• Rising markets could be volatile; target risks "buyer's stock crashing" post-announcement.

• Cash helps target shareholders de-risk and monetize instantly.

If the VIX shoots from 15 to 35 in 48 hours, what should you advise an M&A client contemplating an IPO or acquisition?

• Delay IPO or deal launch: heightened volatility crushes valuation certainty.

• Potentially renegotiate terms or financing arrangements.

• Focus on risk management: hedging FX, interest rate exposures if cross-border.

If EBITDA margin assumptions in a DCF drop by 2%, how would valuation react and what drives the degree of change?

• Lower EBITDA margins reduce FCF forecasts → lower valuation.

• Impact size depends on margin sensitivity: capital intensity, operating leverage, growth assumptions.

• If margins drop in perpetuity, Terminal Value also collapses heavily.

If crude oil prices remain above $100/barrel for the next 12 months, which two sectors (non-energy) would you short, and why?

• Airlines: fuel cost = 20–30% of operating costs, margin squeeze inevitable.

• Consumer discretionary: higher energy prices reduce disposable income → lower spending on non-essentials (retail, luxury).