Finance and Investment Banking Lecture Notes

Comprehensive vocabulary flashcards covering investment banking, private equity, financial modeling, accounting ratios, valuation techniques, and corporate finance principles based on the lecture notes.

Investment Banking

A sector of finance that provides two primary services: Advisory (M+A) and Financing (Underwriting).

Financing

The process of raising money by selling stocks or bonds on behalf of a company, most famously through an IPO.

IPO (Initial Public Offering)

The first time a company gets to sell its shares in the public markets, such as the NYSE.

Advisory

The process of advising companies on buy-side or sell-side transactions, managing M+A, and helping companies with negotiations and finding a good price for a deal.

Asset Management

A division of investment banking that manages clients' money seeking returns while mitigating risk.

Bulge Bracket

Big household names in investment banking, such as JP Morgan and Goldman Sachs, with thousands of employees and global offices.

Boutique

Smaller investment banks that specialize in a specific area like advisory or a particular industry like tech (e.g., Evercore, Lazard).

ECM

Equity Capital Market, dealing with shares and stocks.

DCM

Debt Capital Market, dealing with loans and bonds.

Private Equity

The practice of selling pieces of a company to private investors who buy the company, make it better, and eventually sell it for a profit.

LBO (Leveraged Buyout)

When an investor or private equity firm buys a company using money pulled from other investors.

Growth Equity

Firms that invest in established, fast-growing businesses that need capital to expand operations or enter new markets, typically taking a minority stake with little to no debt.

Venture Capital (VC)

A type of financing where firms pour money into small, unproven startups in hopes they turn into billion-dollar companies; characterized by high risk and high rewards.

Distressed Investing

Firms buying struggling or bankrupt companies at a discount to try and turn them around for profit by fixing operations.

IRR (Internal Rate of Return)

The rate of return at which a project breaks even, where $NPV = 0$. It focuses on the pace or speed of returns.

MOIC (Multiple on Invested Capital)

A metric that shows the total money multiple, focusing on the size or magnitude of the return (e.g., investing $1\,million$ and getting $2\,million$ results in an $MOIC = 2x$).

Financial Modeling

A process used to help a company see the likely financial results of a decision through planning, forecasting, and decision support.

ROI (Return on Investment) Formula

$$\frac{\text{revenues from investment}}{\text{cost of project}}$$

Payback Period Formula

$\frac{12}{ROI}$ or $\frac{\text{cost of investment}}{\text{average annual cash flow}}$

Net Present Value (NPV)

The output of a discounted cash flow model that determines intrinsic value; where $NPV = 0$, the PV of cash generated equals the PV of investments.

Customer Lifetime Value (CLV)

$$\text{average purchase value} \times \text{purchase frequency} \times \text{customer lifespan}$$

Balance Sheet

A financial statement that gives a snapshot of a business's assets, liabilities, and equity at a single point in time, following the equation $A = L + E$.

Income Statement

A financial statement that summarizes a business's revenues and expenses over a period of time.

Cash Flow Statement

A financial statement showing cash inflows and outflows over a period of time, categorized into operating, investing, and financing activities.

Accrual Method

The accounting method where revenue is recognized as it is earned and expenses are recorded as they are incurred, regardless of when cash moves.

CAGR (Compound Annual Growth Rate)

A metric that measures the growth rate of an investment over a specified period assuming compounding.

Gross Profit Margin (GPM)

$$\frac{\text{Gross Profit}}{\text{Revenue}}$$

ROA (Return on Assets)

$$\frac{\text{Net Profit}}{\text{Total Assets}}$$

ROE (Return on Equity)

$$\frac{\text{Net Profit}}{\text{Total Equity}}$$

Capital Employed

$$\text{total assets} - \text{current liabilities}$$

Cash Ratio

$$\frac{\text{Cash}}{\text{Current Liabilities}}$$

Inventory Turnover Ratio

$$\frac{\text{Cost of Goods Sold}}{\text{Inventory}}$$

Cash Conversion Cycle (CCC)

$$DSI + DSO - DPO$$

Debt to Equity Ratio

$$\frac{\text{Total Liabilities}}{\text{Total Equity}}$$

Price-to-Earnings Ratio (P/E)

$$\frac{\text{Share Price}}{\text{Earnings per share}}$$

Dividend Yield Ratio

$$\frac{\text{Dividends per share}}{\text{share price}}$$

EBIT (Earnings Before Interest and Taxes)

$\text{Net Profit} + \text{Interest Expense} + \text{Tax Expense}$; often referred to as operating profit.

EBITDA

$$\text{Earnings Before Interest, Taxes, Depreciation, and Amortization}$$

Working Capital

The difference between current assets and current liabilities.

Enterprise Value (EV)

$\text{Equity Value} - \text{Cash} + \text{Debt}$; it represents the purchase price of the entire company independent of its funding structure.

Market Capitalization

$$\text{Company's Outstanding Shares} \times \text{Current Market Price}$$

Discount Rate

The percentage return an investor wants in order to make waiting for future money or taking a risk worth it.

WACC (Weighted Average Cost of Capital)

The average discount rate used for a company, calculated by blending the costs of debt, preferred shares, and equity.

CAPM (Capital Asset Pricing Model)

$E(R_i) = R_f + \beta_i \times (R_m - R_f)$; a model that explains the relationship between expected return and market risk.

Beta (\beta)

A measure of an asset's systematic risk relative to the market; where $\beta = 1$ moves with the market, $\beta > 1$ is more volatile, and $\beta < 1$ is less volatile.

Time Value of Money (TVM)

The principle that a dollar today is worth more than a dollar in the future because it can be invested to earn interest.

Secured Bond

A bond backed by an asset of value that the issuer uses as collateral, providing a higher level of claim for bondholders.

Cap Rate (Capitalization Rate)

$\frac{\text{Annual NOI}}{\text{Price of Property}}$; used in real estate to show the relationship between income and property price.

Hedge Fund

A fund that pools money from wealthy clients and institutions to invest in financial markets, often using high leverage and taking significant risk for big returns.

Economic Moat

A company's competitive advantage or barrier to entry that protects its long-term profitability and market position, such as cost advantage or network effects.