To Know Flashcards
Key strengths
Proven strong numerical and analytical skills, teamwork and leadership skills, project and time management skills, relationship building skills (IB is a relationship industry so this is important), dedication, drive and ambition, self confidence and ability to make tough decisions under pressure.
weaknesses
“I’m a perfectionist and like to be in control of my own work which can lead to taking on too many tasks but I’m working on my ability to delegate and my ability to balance speed and accuracy of work” - basically delegating isn’t really relevant to entry level work so you aren’t throwing any red flags here.
why Cantor Fitzgerald
Cantor’s PEI team are extremely strong in the mid-market M&A space and within the sector - which is a significant attraction given energy/infra background (expand on your interest/experience here),
high deal flow = live deal exposure, I believe learning by doing is the best way to learn etc.,
similarly lean deal teams gives me more exposure to live work, clients and experienced senior bankers which also contribute to a steep learning curve
what do you think are the key characteristics for the job
Positive attitude, drive and determination, willingness to learn, capacity for work, efficient time management, communication ability, teamwork skills, detail oriented. Consider why each of these is the case and how you can demonstrate why you have them.
walk me through the three financial statements
Income statement
Revenue
COGS
Gross profit
SG&A
EBITDA
D&A
EBIT
Interest
Total taxes
Net income (flows into first line of CF statement)
Cashflow statement
Net income
- cash from operating (cash tax, interest paid, cash from working capital items)
- cash from investing (capex)
- cash from financing (all cash associated with debt)
= cash balance bottom line (flows into the BS)
Balance sheet
Cash
Inventory
PPE
Accounts receivable
= Total assets
Accounts payable
Debt
Shareholders equity
= Total liabilities & Equity
what are the three methods of valuation a
1) Discounted Cashflow Analysis (unlevered cashflow analysis)
A DCF is a valuation method that estimates the value of a company/investment using its expected future cashflows.
From the income statement: Revenue - COGS = Gross profit - SG&A = EBITDA
From the cashflow statement: EBITDA - operating cashflow items - investing cashflow items
Apply WACC discount rate across the number of years we are forecasting for -> Net Present Value (today’s value of the expected cash flows - today’s value of invested cash)
To get to Enterprise value we need to account for the years after the forecasted cashflow period, known as the terminal value. For this we use an exit multiple (EV/EBITDA), or a perpetual growth method (Gordon Growth method) but in reality that’s more one for the LSE professors than people who actually work in the industry. ]
For our team it’s worth knowing what a Dividend Discount Model (DDM) is as well (levered cashflow analysis)
Basically the exact same down to the CF line where we also account for financing cash:
From the cashflow statement: EBITDA - operating cashflow items - investing cashflow items - financing cashflow items
Apply cost of equity discount rate -> gives you an NPV that when combined with the terminal value gives you Equity value
2) Comparable company valuation
Find comparable public companies: similar by industry classification, geography, size, growth rate, margins & profitability etc
Gather relevant information between companies from financial statements
Calculate comparable ratios, typically:
- EV/EBITDA
- P/E (Price/Earnings ratio) = share price/(earnings/share) = market cap/net income
- for renewables projects EV/MW is a good one to mention here
3) Precedent transaction analysis
Follows the exact same concept except for known past M&A transactions. Key thing to be aware of here is the concept of “control premiums”. i.e. you pay more to take control of the company therefore the multiples will be higher
- Enterprise value vs Equity value
Enterprise value - total value of the assets of the business excluding cash
EV = market cap + total debt - cash
Unlevered cashflow analysis in a DCF gives EV
More commonly used in valuation techniques because it makes companies more comparable by removing their capital structure from the equation
Equity value - the value that remains for shareholders once all debt has been paid off
EqV = market cap = number of shares x share price
levered cashflow in a DDM gives equity value
what is the cost of equity
Cost of equity is an implied cost or an opportunity cost of capital. It is the rate of return shareholders require, in theory, to compensate them for the risk of investing in stock.
Cost of equity if typically estimated using the capital asset pricing model (CAPM) you do not need to understand this just have the equation memorised
Cost of equity = risk free rate (rate of return in a government bond) + equity beta * equity risk premium
what is the cost of debt
Cost of debt is readily observable in the market as yield on debt with equivalent risk
what is the Wacc
This is the blended cost of capital across all sources including common shares, preferred shares & debt.
The cost of each type of capital is weighted by its percentage of total capital and they are added together.
The purpose of WACC is to determine the cost of each part of the company’s capital structure based on the proportion of equity, debt and preferred stock it has.
Used as DR in an unlevered cashflow analysis
WACC = cost of equity * (% equity) + cost of debt * (% debt) * (1 - tax rate) + cost of preferred shares * (% of PS)
walk me through a LBO model
In an LBO, a PE firm acquires a company using a combination of debt and equity, operates it for several years, then sells it. The maths works because leverage amplifies returns. The PE firm earns a higher return if the deal goes well because it uses less of it own money upfront.
1) Build a financial forecast for the target company
2) Calculate the free cash flow of the company
3) Create interest and debt schedules
4) Model the credit metrics to see how much leverage the transaction can handle
5) Calculate the free cash flow to the sponsor
6) Determine the IRR for the sponsor
7) Perform sensitivity analysis
what characterises the ideal lbo candidate
Generally mature, stable, non-cyclical, predictable companies. Given the amount of debt that will be strapped to the company, it is important that cash flows are predictable, with high margins and relatively low capex. There should be a realistic path to exit, with returns driven by EBITDA growth and debt paydown.
walk me through a typical M&A process
Preparation Phase
Client signs an engagement letter with the financial advisor. During the pre-launch phase, senior bankers identify potential buyers, create a marketing strategy and lay out a deal timeline. Junior bankers create marketing materials: A short pre-NDA teaser document (5-10 pages), a Confidential Information Memorandum (CIM, 30-100+ pages), Excel financial model and a management presentation deck. During the pre-launch phase, external advisors will prepare any third party VDD reports necessary (financial/tax report, legal report, technical report, commercial report, etc.)
Phase 1
Deal launch begins with senior bankers reaching out to potential buyers with the teaser. Each interested buyer signs an NDA. The CIM, model and process letter is then sent to potential buyers. Each buyer that is still interested will send a preliminary non-binding offer with purchase price, proposed funding, sector expertise summary, etc. These offers are proposed to the client and if there are several, generally a smaller number of selected buyers will be taken forward to phase 2.
Phase 2
Buyers are admitted to a Virtual Data Room (VDR) with a comprehensive file system of the seller’s company documents allowing bidders to complete more detailed due diligence. Buyers can submit Q&A and request specific additional documents. Buyers will attend management presentations and site visits if relevant. There is then a second bid date when buyers submit binding offers. The seller may negotiate offers before selecting a buyer to sell to. Transaction documentation is finalised and the deal is signed and closed. The financial advisor is paid a fee which is typically a percentage of the sale price. Typical 2 phase processes take 4-8 months.
what is a CFADS
Cash Flow Available for Debt Service. This is the amount of cash available to all debt and equity investors.
CFADS = EBITDA - Capex - cash tax +/- change in working capital
what is DSCR
Debt Service Coverage Ratio. Ensures the borrower has a certain amount of headroom on CFADS above debt service to account for volatility of cashflows.
DSCR = CFADS / Debt Service
The more uncertain/volatile the CFADS, the higher the DSCR will be.
Low DSCR example - Toll road - very predictable, steady cashflows (1.20 - 1.30x)
High DSCR example - Power plant - fluctuations in energy prices, no contracted offtake (2.00 - 2.50x)
explain leverage ratios / gearing
Leverage ratios place a ceiling on the amount of debt one can use to fund a project. These ratios ensure the borrower has some skin in the game in the form of equity.
e.g. 85% leverage ratio (maximum gearing): $1bn project -> max debt: $850m + $150m equity
