Investment Banking Technical Interview Practice Set

This flashcard set covers essential accounting fundamentals, three-statement financial modeling, valuation techniques (including DCF and multiples), M&A concepts, LBO mechanics, and general investment banking terminology.

Three Financial Statements

The income statement, balance sheet, and cash flow statement.

Income Statement

A statement showing a company's revenues, expenses, and profitability over a period of time.

Balance Sheet

A statement showing a company's assets, liabilities, and shareholders' equity at a specific point in time.

Cash Flow Statement

A statement showing how cash changes during a period through operating, investing, and financing activities.

Basic Accounting Equation

$$Assets = Liabilities + Shareholders' Equity$$

Revenue

Income generated from a company's primary business activities.

EBITDA

Earnings before interest, taxes, depreciation, and amortization.

EBIT

Earnings before interest and taxes; essentially operating income.

Net Income

Profit remaining after all expenses, including interest and taxes.

Depreciation

The allocation of the cost of a tangible asset over its useful life; it is a non-cash expense that reduces taxable income.

Amortization

The allocation of the cost of an intangible asset over its useful life.

Working Capital

$$Current \, assets - current \, liabilities$$

Net Working Capital (Financial Modeling)

Operating current assets minus operating current liabilities, excluding cash and debt.

Accounts Receivable Increase Impact

Cash flow decreases because revenue has been recognized but cash has not yet been collected.

Accounts Payable Increase Impact

Cash flow increases because the company has delayed paying its suppliers.

Inventory Increase Impact

Cash flow decreases because the company has spent cash to acquire inventory.

Deferred Revenue

Cash received before the company has delivered the associated goods or services.

Goodwill

An intangible asset created primarily when a company acquires another company for more than the fair value of its identifiable net assets.

Indirect Method of Cash Flow

A method that starts with net income and adjusts for non-cash items and changes in working capital.

Capex

Capital expenditures; cash spent on long-term assets such as PP&E.

Primary Valuation Methodologies

Comparable companies analysis, precedent transactions analysis, and discounted cash flow (DCF) analysis.

Comparable Companies Analysis

Valuing a company based on how similar publicly traded companies are valued.

Precedent Transactions Analysis

Valuing a company based on multiples paid in comparable historical acquisitions.

DCF (Discounted Cash Flow)

A valuation method that estimates the present value of a company's future cash flows.

Enterprise Value

The value of a company's operations available to all capital providers.

Equity Value

The value attributable to common shareholders.

Enterprise Value Formula

$$Equity \, value + debt + preferred \, stock + minority \, interest - cash \, and \, cash \, equivalents$$

Equity Value Formula

$$Enterprise \, value - debt - preferred \, stock - minority \, interest + cash \, and \, cash \, equivalents$$

Market Capitalization

$$Share \, price \times fully \, diluted \, shares \, outstanding$$

Fully Diluted Shares Outstanding

Basic shares outstanding plus dilutive securities such as options, warrants, and convertible securities.

EV/EBITDA

A common multiple that compares operating value to operating earnings, minimizing differences from capital structure, taxes, and non-cash items.

P/E Ratio

$$Market \, capitalization / net \, income$$

Accretion/Dilution

The effect of a transaction on the acquirer's earnings per share (EPS).

Free Cash Flow

Cash generated by the business available to capital providers after operating expenses, taxes, and required investments.

Unlevered Free Cash Flow (UFCF)

Cash flow available to all capital providers before interest payments.

UFCF Formula

$$EBIT \times (1 - tax \, rate) + D\&A - Capex - change \, in \, net \, working \, capital$$

WACC

Weighted average cost of capital; represents the required return of a company's capital providers weighted by their share of capital structure.

Terminal Value

The estimated value of a company's cash flows beyond the explicit forecast period.

Perpetuity Growth Formula

$$Terminal \, Value = \frac{Final \, Year \, FCF \times (1 + growth \, rate)}{WACC - growth \, rate}$$

Sensitivity Analysis

Testing how valuation changes when key assumptions such as WACC and terminal growth change.

Synergies

Additional value created by combining two companies (e.g., cost savings or additional revenue).

Control Premium

The additional amount paid above the target's unaffected share price to obtain control.

LBO (Leveraged Buyout)

An acquisition of a company using a significant amount of debt to increase potential returns to equity investors.

IRR

Internal rate of return; the annualized rate of return generated by an investment.

MOIC

Multiple of invested capital; total proceeds divided by initial investment.

Debt Sweep

Using excess cash flow to automatically repay outstanding debt.

Sponsor

A private equity firm that invests equity capital in an acquisition.

IPO (Initial Public Offering)

A transaction where a private company sells shares to the public for the first time.