Houlihan Lokey Interview Flashcards
(22 cards)
What are the two main methods of valuation?
DCF (Intrinsic) and relative
What is a DCF valuation?
Discounted Cash Flow - a method to estimate the value of an investment based on its expected future cash flows
Basically the value of an investment today based on projections of how much it will generate in the future
Walk me through a DCF valuation
Step 1) Look at historical free cash flow over a period of years
Step 2) Find a YoY free cash flow growth rate, then use this to find an average growth rate -> use this to project a future growth rate (include other variables such as industry expectations) -> use this to project future free cash flows
Step 3) Find the terminal value (2 main methods) = Sum of all future free cash flows over the lifespan of a business + perpetual growth rate + discount rate (WACC)
Step 4) Apply discount rate to of projected future free cash flows to get present value
Step 5) Sum all present values of FFCF and terminal value to get the ‘total enterprise value’
Step 6) Adjust for (subtract) debt and equity to determain ‘intrinsic value of company’
What is free cash flow?
The amount of cash a company generates after covering its operating expenses and capital expenditures ; so cash available to investors, creditors or reinvestment
What is the perpetual growth rate?
Rate at which the economy grows
What is the discount rate?
Depends, appropriate to reflect risk and time value of money, for public companies we tend to use WACC
What is the time value of money?
‘A dollar today is worth more than a dollar in the future’ because of:
-Inflation reduces purchasing power
-Opportunity cost as can be invested now
Explain the WACC discount rate
Weighted average cost of capital
This reflects the cost of financing a companies operations through debt and equity ; it reflects the average rate of return required by investors (creditors and shareholders)
What is terminal value and what are the 2 main methods of calculating it?
TV = The present value of all future cash flows beyond the forecast period
Gordon growth -> TV = (FCFn x (1+g)) / r - g
FCFn = free cash flow in last projected year
g = perpetual growth rate
r = discount rate
Exit multiple method ->
TV = EBITDAn x Exit Multiple
EBITDA = Earning b4 interest, tax, depreciation, and amortization (earnings from operations b4 operating costs and non-cash expenses)
Exit multiple = Industry standard
What is relative valuation?
A method of determining the value of a company by comparing it to similar companies in the market based on key multiples
Idea = Similar companies should trade at similar multiples, if lower than peers than it may be undervalued, the reverse is true if higher
What are some key valuation multiples?
Enterprise value multiples:
-Used when valuing the whole business (debt + equity holders)
EV / EBITDA
EV / Revenue (used for companies with negative revenue)
Equity value multiples:
-Used when valuing only shareholders equity
P/E ratio
P/B ratio (market cap / book value of equity)
P/S - price to sales ratio (market cap/revenue)
What are the steps in relative valuation?
1) Collect comparable companies
2) Collect market data -> calculate multiples
3) Find the median/mean multiple
4) Apply to target company
5) Adjust for differences: higher growth? higher risk? etc.etc
What are the different products offered by investment banks?
Mergers and Acquisitions
Restructuring
Capital markets
- Helping corporations and governments raise funds by issuing securities
Leveraged finance
- High-risk, high reward finance often used in LBOs
(SnT) Market Making
-Providing liquidity in financial markets
(SnT) FICC
-Fixed income = trading bonds
-Currencies / commodities
Asset and Wealth management
What are the two types of restructuring?
Debtor side and creditor side advisory
Debtor side - Company facing financial distress
Creditor side - Advising creditors on how to negotiate with distressed company to maximise their recovery
What are some signs of a distressed company?
-Limited / diminishing liquidity
-Maturity walls approaching
-Debt trading level declines
What do we look at as liquidity in restructuring>?
Cash + revolver capacity - letter of credit outstanding - restricted cash
What is the process of restructuring?
1) Senior bankers have a list of companies they are watching, try to present a pitch deck before bankrupcy
2) If company decides to pursue restructing, it will hear pitches from 3-5 different IBs
3) If bank doesnt win mandate, it can use same pitch deck for creditors
What is the role of analyst in a place like HL?
-Setting up phone calls with creditors to discuss proposals
-Creating models
-Creating pitch decks
Why do you want to get into restructuring?
Problem solving -> unlike other branches of IB there is no known right answer -> every deal is unique and everchanging through negotiations -> draws on psychology, finance and law
What is a big difference between restructuring and MnA?
MnA = Finding target company, figuring out right valuation and payment mix
Restructuring = Every pitch contains multiple possibilities that are widely different
What are the different types of debt?
Debt is categorized based on seniority and security
Senior Secured Debt
Senior Unsecured Debt
Subordinated Debt (Junior debt)
Convertible Debt
Junk Debt (High-Yield)
