Investment Banking

What is the difference between commercial and investment banking?

Commercial bank: accepts deposits from customers (retail depositors, commercial depositors etc. and makes consumer and commercial loans using these deposits. It may also offer anciliary services like credit cards Investment bank: acts as an intermediary between companies and investors. Does not accept deposits, but rather sells investments, advises on M&A, etc. Loans and debt/equity issues…...

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Suppose we issued equity to purchase a machinery, how will it be affecting cash flow statement for the entire year?

Ther will be no direct impact in cash flow statement either in Investing activity or financing activity as there is no cash flow. However the tax sheid on depreciation which is added back to net income and it also impacts the tax paid with affects the balance of CFO. Favorite… To get access, please buy...

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How much dividend should we declare? Is there an alternative?

Dividend should be declared based on future needs of the organisation. If the company has positive NPV projects available do not declare dividend, else do. Alternatives to distribution of dividend: Buy back of shares: This comes out with advantages such as a. When the growth potential is limited they use unused cash to buy back…...

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Difference between broad money and narrow money?

The term “narrow money” typically covers the most liquid forms of money, i.e. currency (banknotes and coins) as well as bank-account balances that can immediately be converted into currency or used for cashless payments (overnight deposits, checking accounts, etc). Broad Money is M3 M0 is the sum of Currency in Circulation, Bankers’ Deposits with RBI,…...

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What SLR, CRR, REPO, Reverse Repo and rates?

CRR is a reserve maintained by banks with the RBI. It is a percentage of the banks’ deposits maintained in cash form. SLR is an obligatory reserve that commercial banks must maintain themselves. It is a percentage of commercial banks’ net demand and time liabilities, maintained as approved securities. These are defined liquid securities. Repurchase…...

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Difference between EBITDA and cash flow from operation?

The main difference between EBITDA and cash flow from operation is working capital changes and taxes. In EBITDA, it is before tax and in cash flow from operations, it is after tax. The second difference is that EBITDA is on an accrual basis and cash flow from operations is on cash basis. Favorite… To get...

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How is a firm valued?

Financial analysts can evaluate a corporation in a variety of ways. The discounted cash flow (DCF) approach and the relative valuation method are the two most popular methods of valuation. In the first approach, we must first determine the free cash flow before determining the present value of a company. In the second approach, we…...

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What is payback period and discounted payback period?

The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.The discounted payback period is a capital budgeting…...

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What is DCF and why do we calculate DCF?

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher…...

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How to evaluate investment in the concept of capital budgeting?

The most common capital investment evaluation tools are the Payback Period (PP), Return on Investment (ROI), Net Present Value (NPR), and Internal Rate of Return (IRR). Each method can provide insight into investment options, but each also has limitations. If net present value is positive, the project should be accepted. If internal rate of return…...

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What is Capital budgeting? Give an example of a capital budgeting decision.

Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected. As part of capital budgeting, a company might assess a prospective project’s…...

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What is securitization?

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming it (or them) into a security. Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate…...

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What is loan syndication?

Loan syndication is the process of involving several different lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that may be too much for a single lender to provide or outside the scope of a lender’s risk exposure levels. Thus,…...

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What is minority interest?

Ind AS 110 defines Non Controlling Interest (earlier called Minority Interest) – NCI is Equity in a subsidiary not attributable, directly or indirectly, to a parent. Minority Interest also referred to as non-controlling interest (NCI), is the share of ownership in a subsidiary’s equity that is not owned or controlled by the parent corporation. Favorite…...

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Explain NPV and IRR and how do you calculate the same?

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. NPV = Cash inflows / (1+r) ^n – Cash outflows Internal rate of return (IRR) is a metric…...

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How will you calculate enterprise value? And how is it different from market capitalisation

Enterprise Value, or EV for short, is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus…...

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What is accretion and dilution?

Accretion is asset growth through addition or expansion. Accretion can occur through a company’s internal development or by way of mergers and acquisitions. Dilution is a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Adding to the number of shares outstanding…...

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What is book value?

The book value of a company is the net difference between that company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated. An asset’s book value is equivalent to its carrying value on the…...

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Tell me some Liquidity and Coverage ratios?

Liquidity – Current ratio; Quick Ratio; Cash Ratios Liquidity Ratios A company with adequate liquidity will have enough cash available to pay its ongoing bills in the short run. Here are some of the most popular liquidity ratios: Current Ratio Current ratio = Current assets / Current liabilities The current ratio measures a company’s ability…...

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Difference between solvency and liquidity?

Solvency is defined as the firm’s potential to carry on business activities in the foreseeable future, to expand and grow. It is the measure of the company’s capability to fulfil its long-term financial obligations when they fall due for payment. A solvent company is one that owns more than it owes; in other words, it…...

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Suppose there are two companies, how to compare them based on profitability?

The operating margin ratio uses operating income and revenue to determine the profit a company is getting from its operations. This ratio, along with net profit margin, can give investors a good visibility on the profitability of a company as a whole. The operating margin ratio is calculated by dividing net operating income by total…...

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What are some Profitability and valuation ratios

Profitability Ratio 1. Gross Profit Margin 2. Net profit Margin 3. Return on equity 4. Return on assets 5. Return on capital employed 6. Gross Profit margin 7. Net Profit margin 8. Earnings per share Valuation Ratios 1. P/E ratios 2. Earnings Yield 3. Price / Book value Favorite… To get access, please buy CA...

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What is the difference between commercial and investment banking?

Commercial bank: accepts deposits from customers (retail depositors, commercial depositors etc. and makes consumer and commercial loans using these deposits. It may also offer anciliary services like credit cards Investment bank: acts as an intermediary between companies and investors. Does not accept deposits, but rather sells investments, advises on M&A, etc. Loans and debt/equity issues…...

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What are the key points to be kept in mind while analysing the financial position of company from its financial statements?

Financial analysis, the process of accumulating, envisioning, controlling, deciphering, and anticipating financial data and following the aim to evaluate the financial accomplishment of a particular department inside a company or of a company itself. It helps in making more reliable decision making The financial statements that include the income statement, balance sheet and cash flow…...

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How do you ensure completeness and accuracy of financial statements?

Ensure the accuracy of the data entry process, which involves journal entries of financial transactions and the posting of journal entries to the ledger which can be done by Automated data entry process, cross-checking the first data entries and assimilating a suite of technology-based and manual data entry techniques The next step towards the accuracy…...

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What do you mean by debt extinguishment?

Debt extinguishment occurs when a debt instrument is terminated. This occurs when the borrower repays the lender or bonds are retired by the issuer. Extinguishment may not involve full repayment of a debt; the two parties may agree on a lesser repayment amount if the borrower is unable to make a full repayment of the…...

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What do you understand by debt covenant?

Debt covenants can simply be defined as agreements between the business and the creditors. Under this, the borrowing company is supposed to abide by certain conditions, in order to be entitled to receive the loan. If those conditions are not met, the borrower is considered to be a defaulter. For instance, “the borrower shall not…...

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What is the need for Cash Flow Statements?

So long as you use accrual accounting, cash flow statements are an essential part of financial analysis for three reasons: They show your liquidity. That means you know exactly how much operating cash flow you have in case you need to use it. So you know what you can afford, and what you can’t. They…...

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What are the methods of Cash Flow statement and give at least one example of each activity?

There are two ways to prepare a cash flow statement: the direct method and the indirect method: Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive. Indirect method – The indirect method presents…...

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What is Operating/Financial Leverage?

A. Operating leverage and financial leverage are two types of leverage that refer to how a company uses debt to amplify the returns on its operations or investments. Operating leverage is the extent to which a company’s operations are financed with fixed costs, such as salaries and rent, as opposed to variable costs, such as…...

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All Financial Ratios and profitability ratios.

A. Financial ratios are used to evaluate a company’s financial performance and health by comparing different financial metrics. There are many different financial ratios that can be used, but some of the most common ratios include: Liquidity Ratios: 1. Current Ratio: Current Assets/Current Liabilities 2. Quick Ratio or Acid Test Ratio: (Current Assets – Inventory)/Current…...

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What is negative working capital?

A. Working capital is a measure of a company’s short-term liquidity and is calculated as the difference between a company’s current assets and its current liabilities. Negative working capital occurs when a company’s current liabilities exceed its current assets. This means that a company’s short-term obligations are greater than its short-term resources. When a company…...

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How to calculate free cash flows?

A. Free cash flow (FCF) is a measure of a company’s cash flow that is available for distribution after accounting for capital expenditures. It is the cash that a company generates after accounting for the funds necessary for maintaining and growing its business operations. The formula for calculating free cash flow is: Free Cash Flow…...

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What is Deferred Revenue? What is its importance in Due diligence.

A. Deferred revenue is a liability that represents revenue that a company has received but has not yet earned. It is revenue that a company has received in advance for goods or services that will be provided in the future. There is no accounting for deferred revenue. If the customer has already paid it will…...

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How will you find Enterprise Value?

A. The enterprise value (EV) of a company is a measure of the total value of a company. It is calculated by adding the market capitalization of the company, the outstanding debt, and any preferred stock, and then subtracting any cash and cash equivalents. The formula for calculating enterprise value is: EV = (Market Capitalization)…...

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What do you mean by EBITDA?

A. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s financial performance that excludes certain non-cash expenses, such as interest, taxes, depreciation, and amortization. EBITDA is calculated by taking a company’s net income and adding back interest, taxes, depreciation, and amortization expenses. This results in a measure…...

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What do you understand by QOA (Quality of asset)?

Quality of assets (QOA) refers to the condition, value, and overall performance of a company’s assets. It is a measure of the underlying economic value and performance of a company’s assets, and it is used to assess the quality of a company’s assets and its ability to generate future cash flows. One common formula is…...

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What do you understand by QOE (Quality of earnings)?

Quality of Earnings (QOE) refers to the sustainability, predictability, and stability of a company’s earnings. It is a measure of the underlying economic performance of a company, and it is used to assess the quality of a company’s earnings and its ability to generate future cash flows. The formula is Net Cash from Operating Activities/Net…...

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How does the treatment of financing fees differ from transaction fees in an LBO model?

Financial Fees → Financing fees are related to raising debt or the issuance of equity and can be capitalized and amortized over the tenor of the debt (~5-7 years). Transaction Fees → On the other hand, transaction fees refer to the M&A advisory fees paid to investment banks or business brokers, as well as the…...

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What is PIK interest?

PIK interest (“paid-in-kind”) is a form of non-cash interest, meaning the borrower compensates the lender in the form of additional debt as opposed to cash interest. PIK interest typically carries a higher interest rate because it has a higher risk to the investor (i.e.,delayed payments result in less certainty of being paid). From the perspective…...

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Name a few warning signs you would watch out for while evaluating a potential investment opportunity in LBO

Industry Cyclicality: A potential LBO contender should produce steady cash flow. Therefore,from a risk perspective, an investment is less appealing when revenue and demand changes arevery cyclical and reliant on the current economic conditions (or other external variables). Customer Concentration: As a general rule, no one customer should represent more than 5–10% of total revenue…...

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What qualities make a company the perfect candidate for an LBO?

A candidate for an LBO should possess the majority (or all) of the following qualities: A mature industry with a defendable market position, a business model with recurring revenue, a strong, committed management team, and a variety of revenue streams with little cyclicality; and steady, predictable cash flow generation Low Capex Needs & Working Capital…...

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What are the main LBO return-generating levers?

1) Deleveraging – As more loan principal is paid down with the help of the cash flows produced by the acquired company, the value of the equity held by the private equity firm increases over time. 2) EBITDA Growth Increasing EBITDA can be done through introducing new growth strategies to boost revenue, cost-cutting initiatives to…...

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What are the private equity firms’ investment exit strategies?

A PE firm will typically monetize their investment in one of the following ways: Sale to a Strategic Buyer: Sales to strategic buyers typically have higher valuations and are more convenient since they are willing to pay more for the likelihood of synergies. Another alternative is to sell to another financial buyer (often known as…...

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What is the basic intuition underlying the usage of debt in an LBO?

Ans. A high percentage of borrowed money is typically used to finance an LBO, and the private equity sponsor contributes just a modest amount of equity to the deal. The sponsor will be able to earn more money when selling the investment because the debt’s principal will be reduced throughout the course of the holding…...

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Walk me through the mechanics of building an LBO model for a financial buying.

Step 1 – Entry Valuation – Calculating the implied entry valuation based on the entry multiple and LTM EBITDA of the target firm is the first step in creating an LBO model. Step 2 – Sources and Uses, the proposed transaction structure will then be shown in the “Sources and Uses” section. The “Sources” side…...

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What is a leveraged buyout (LBO) for a PE firm?

An LBO is the purchase of a business, whether it is privately held or publicly listed, in which a sizeable portion of the purchase price is financed by debt. The remaining sum is covered by equity contributions from the financial sponsor, and, in some situations, stock transfers made by the current management team of the…...

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What is Pre-money / post- money valuation?

Pre- Money Valuation – Pre-money valuation is the value of a firm before any outside capital in most recent/proposed round of funding has been added. Pre-money is best defined as the potential value of a start-up before it starts to receive outside funding. This valuation not only provides investors with a sense of the current…...

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What is the difference between Private Equity and Venture Capital?

Capital invested in a business or other entity that is not publicly listed or traded is known as private equity.Private Equity investors prefer to invest in stable companies, whereas Venture Capital (VC) investors usually come in during the start-up phase. Favorite… To get access, please buy CA Interview Question Bank...

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Difference between strategic buyers and financial buyers?

Strategic buyers must carefully analyse purchases based on how the targets will “tie in” with their existing company and business units since they frequently incorporate the acquired business into a larger corporation. Moreover, strategic buyers are primarily interested in acquiring the company to achieve synergies in long run. Financial buyers, on the other hand, typically…...

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Suppose you see goodwill in the balance sheet. What does it mean?

Goodwill arises when a company acquires another entire business. The amount of goodwill is the purchase consideration of the business minus the fair market value of the net assets that can be identified, and the liabilities obtained in the purchase. Goodwill does not mean any of the following – company’s brand name, solid customer base,…...

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Is too much goodwill a bad thing?

It means that the company has acquired other entities for a consideration higher than Fair Market Value of Net Assets. Goodwill does not measure synergy, it measures how much I overpaid. So I will have to go into the specifics to know whether my Goodwill is justified. Goodwill ends up being impaired very frequently so…...

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