Technical Knowledge Investment Banking

1. What are the three main accounting statements and how are they connected?
The three main accounting statements are:
(1) The Income Statement, which shows the manufacturing and selling actions of the enterprise that
results in profit or loss. Net income, the bottom line, flows from the Income Statement to Retained
Earnings on the Balance Sheet. It also becomes the first line of Cash from Operations on the Cash
Flow Statement. Income Statement is like a cumulative record over a period of time.
(2) The Balance Sheet records what the company owns and what it owes, including the owners stake.
Each statement views the enterprises financial health from a different and necessary perspective. Like
its name suggests, the Balance Sheet always balances. This financial statement acts as a record for a
firm's assets and all the claims against those assets. The remaining value is called Stockholder's
Equity. The Cash Balance, which is the first line item under Current Assets at the top of the Balance
Sheet, is taken from the Ending Cash on the Cash Flow Statement. The Balance Sheet, unlike the
Income Statement, is not a cumulative record over time; it is a snapshot of one moment in time.
(3) The Cash Flow Statement, which details the movements of cash into and out of the coffers of the
enterprise. The Cash Flow Statement connects the three financial statements together. The statement
begins with Net Income from the Income Statement and the Ending Cash balance at the bottom Cash
Flow Statement flows to Cash and Cash Equivalents at the top of the Balance Sheet.
2. What are the three ways to value a company (and explain when to use them)?
There are three basic techniques to value a company, which include: discounted cash flow (DCF),
relative valuation (multiples approach) and comparable transactions.
Intrinsic value (DCF) is considered the more academically respected approach. The DCF says that the
value of a productive asset equals the present value of its cash flows. The answer should run along
the line of project free cash flows for 5-20 years, depending on the availability and reliability of
information, and then calculate a terminal value. Discount both the free cash flow projections and
terminal value by an appropriate cost of capital (weighted average cost of capital (WACC) for
unlevered DCF and cost of equity for levered DCF). In an unlevered DCF (the more common
approach) this will yield the companys enterprise value (firm and transaction value), from which we
need to subtract net debt to arrive at equity value. Divide equity value by diluted shares outstanding to
arrive at equity value per share.
Relative valuation (Multiples): The second approach involves determining a comparable peer group
companies that are in the same industry with similar operational, growth, risk, and return on capital
characteristics. Truly identical companies of course do not exist, but you should attempt to find as
close to comparable companies as possible. Calculate appropriate industry multiples. Apply the
median of these multiples on the relevant operating metric of the target company to arrive at a
valuation. Common multiples are EV/Rev, EV/EBITDA, and P/E.
Lastly, the last valuation method is the comparable transactions, which is the main approach of the
method and is used to look at similar transactions where the acquisition target has a similar business
model and similar client base to the company being evaluated. This approach is fundamentally
different from that of DCF valuation method, which calculates intrinsic value.
3. Walk me through a discounted cash flow (DCF).
A DCF involves first forecasting the free cash flows of the business for a certain period of time, for
example five years. After this period of time, we must calculate a terminal value. This represents our
estimate of the value at year five of all future cash flows of the business. Finally, we need to turn all
these future cash flows into a present value. To do this we discount all cash flows at the weighted
average cost of capital.

There are 3 essential parts to a DCF:

(1) Companys Free Cash Flow (FCF)
(2) Terminal Value of a Company
(3) The Weighted Average Cost of Capital (WACC)
Free Cash Flow = Operating Cash Flow Capital Expenditures Change in Net Working Capital
Terminal Value of the Company two methods: EBITDA Multiple or Perpetuity Growth
WACC two components: Cost of Equity (CAPM) and the after tax cost of debt
4. Why would a company issue stock vs. debt?
A company issues stock because companies need to raise money. To do this, companies can either
borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A
company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the
process of debt financing.
On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the
company because it does not require the company to pay back the money or make interest payments
along the way. All that the shareholders get in return for their money is the hope that the shares will
someday be worth more than what they paid for them. The first sale of a stock, which is issued by the
private company itself, is called the initial public offering (IPO).
5. Tell me about a merger or acquisition that has recently occurred. What are some possible
synergies between the two companies?
Recently, it was announced that Heinz Inc. and Kraft Foods Group would merge. The merger will
create the 3rd largest food and beverage company in North America and the 5th largest food and
beverage company in the world.
The significant synergy potential in this particular merger includes an estimated $1.5 billion in annual
cost savings implemented by the end of 2017. With stock and cash transaction, Kraft shareholders will
receive a special cash dividend of $16.50 per share upon closing and stock in the combined company
representing a 49% stake in the new company. Berkshire Hathaway and 3G Capital will invest an
additional $10 billion in The Kraft Heinz Company; existing Heinz shareholders will collectively own
51% of the new company. Significant synergy opportunities with strong platform for organic growth in
North America, as well as global expansion, by combining Krafts brands with Heinzs international
platform.
Synergies will come from the increased scale of the new organization, the sharing of best practices
and cost reductions. The combination of these iconic food companies joins together two portfolios of
beloved brands, including Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia. Together the new
company will have eight $1+ billion brands and five brands between $500 million and $1 billion. The
complementary nature of the two brand portfolios presents substantial opportunity for synergies, which
will result in increased investments in marketing and innovation.
Technical Knowledge Sales & Trading
6. What information is important when reading stock price quotes on Google Finance or Yahoo
Finance? What are some of the metrics you want to pay attention to? Describe what they mean
in relations to the companys stock.
Information that is crucial when looking and reading into a stock price quotes on Google Finance or
Yahoo Finance are:
P/E Ratio The price to earnings ratio reflects the relationship between the price per share and the
income earned per share by the company in which the shares are held. A higher P/E points to a more
expensive stock, relatively speaking, because an investor pays more per unit of income.

Market Capitalization Market capitalization estimates the total dollar value of the company whos
stock is being traded. Its determined by multiplying the total number of shares by the last trade.
52-week range The 52-week range is practically the same as the days range: its just the range of
prices a stock has sold for over the course of the last year. In a volatile market like were in now, the
days range can actually offer better information than the 52 week range because drops and rallies can
make it harder to tell what a realistic range for a given stock looks like.
Volume - A stocks volume reflects the total number of shares of that stock that have been traded
throughout a single day. If a stock is particularly active, its worth checking into why: bad news could
have lead investors to unload a particular stock, while good news could send every investor looking for
a few shares.
Average volume The average volume over the past three months of a stock is often fairly similar to
the stocks volume over the past day. Knowing the average volume can help you decide when the daily
volume is active enough to warrant notice.
Earnings per share (EPS) - Earnings per share is the amount of money that you would have earned if
you purchased a share of this stock last quarter and sold it today. Right now, many stocks EPS are
looking grim: its a useful indicator of how a stock will do if you plan to sell it in the short term, but if
youre planning to hold it long-term, the EPS is less of a concern.
Dividend & Yield - If youre looking to turn a profit on stocks, the dividend and yield are probably the
first places you look. The dividend is the payment the company pays to shareholders based on its
profits. The yield is the dividend expressed as a percentage of the price per share. And while a high
dividend is good, an extremely high yield definitely isnt: extremely high yields can point to a company
in some financial trouble.
7. Pitch me a stock
I recommend Microsoft (MSFT) as the company announced that it was realigning its divisions to focus
on services and devices. Microsoft has been shifting its business away from only personal computers
to creating a Microsoft eco-system, a computing platform where various devices will access data
through the Internet. Microsoft is focused on creating a seamless experience across all end user
devices.
Currently Microsoft is trading at $40.29 and is a very solid value stock with a fortress balance sheet
and priced accordingly. The stock is on the cusp of a major paradigm shift toward growth. All bets are
off in regards to what happens next for the company. I believe Microsoft has substantial upside from
here.
Microsoft is outperforming the industry and its peers with regard to profitability. With gross margins
slightly better than its peers and on par with the industry average Microsoft is performing well.
Moreover, when it comes to net profit margins Microsoft is doing considerably better than its peers and
the industry average. This tells me Microsoft is doing a good job of managing overhead and fixed cost.
Microsoft has an enormous amount of firepower. It can move into a new industry and start making
profits in short order by acquisition and expansion. Microsoft's strong financial position allows the
company to make moves which lead to opportunity for greater profits.
The fact that Microsoft is so formidable regarding to size and strength is both good and bad. With a
company of this size, the constant redeployment of personnel and assets can become a money drain if
not managed closely. Microsoft will need to stay on track regarding the realignment of operations to be
successful.
8. What is high-frequency trading?

High-frequency trading (HFT) is a primary form of algorithmic trading in finance that uses powerful
computers to transact a large number of orders at very fast speeds. High-frequency trading uses
complex algorithms to analyze multiple markets and execute orders based on market conditions.
Specifically, it is the use of sophisticated technological tools and computer algorithms to rapidly trade
securities. As of 2009, HFT accounted for 60-73% of all US equity trading volume, with that number
falling to approximately 50% in 2012. High-frequency traders move in and out of short-term positions at
high volumes aiming to capture sometimes a fraction of a cent in profit on every trade. High-frequency
traders typically compete against other HFTs, rather than long-term investors. HFT firms make up the
low margins with incredibly high volumes of trades, frequently numbering in the millions.
9. What is your opinion on Europes economy? Do you think there are any solutions to their
economic problems?
The European Central Bank's (ECB) quantitative easing (QE) program have created a state of
euphoria among global investors, but it will do very little to fix Europe's economic problems. QE is not
the way out for Europe's economic woes. The ECB's plan to purchase public-sector bonds in an
attempt to bring inflation up to a target and boost Europe's economy is completely misguided. All that it
may accomplish is create asset bubbles and new distortions in the real economy.
The euro crisis has had a devastating impact especially on the Eurozone countries which include
Greece, Portugal, Ireland, Spain, Italy and Cyprus, producing massive unemployment and increasing
substantially the debt-to-GDP ratio, mainly due to the policies that were implemented in the midst of an
economic recession as part of the bailout plans.
GDP in Spain, Portugal, Ireland, and Italy is on the average 7 percent below the pre-crisis levels;
Greece's GDP is nearly 25 percent below its pre-crisis peak. The official unemployment rates in the
peripheral countries are extremely high, indicating that there is no recovery. In Greece, the official
unemployment rate is 26 percent while in Spain it is close to 24 percent. In Portugal it is 13.3 percent,
in Italy 12.6 percent, and in Ireland (the country with the highest net migration level in Europe) at over
10 percent.
The public debt ratio has also exploded for all of these countries, leaving them in a state of debt
bondage and permanent austerity from which they are unlikely to escape any time in the foreseeable
future. What Europe's economies need are fiscal policies that can stimulate real growth and generate
jobs. Large-scale direct stimulus spending by governments will boost the real economy by increasing
aggregate demand and will help to cause wages to rise.
10. What is your opinion on Chinas slowing economy? How do you think this would affect
China and the United States? Do you think China should take any actions to boost economic
activity?
The slowdown of Chinas economy is far from over. In the next two to three years, Chinas growth
performance is almost certain to deteriorate because of the overhang of its real estate bubble and the
massive manufacturing overcapacity. The challenge for Beijing is that these problems are all
connected with each other and piecemeal solutions no longer work.
Chinas real estate bubble is one primary reason. Even with last years 4.5% drop in housing prices,
the first in two decades, the unraveling of the overbuilt real estate sector has hardly begun. More than
60 million empty apartments await buyers, and the residential housing market is essentially comatose.
Meanwhile, the real estate sector accounts for between 25% and 30% of Chinas GDP (if upstream
and downstream industries such as steel, cement, glass, furniture, and appliances are included), so it
is impossible for the Chinese economy to regain momentum without reviving this vital industry.
The only way to breathe life into the real estate sector is to liquidate excess inventory. Housing prices
need to fall further to entice buyers. Unfortunately, plunging housing prices will not only hurt affluent
Chinese who have poured their fortunes into investment properties, but it will also trigger defaults by
overleveraged real estate developers who can no longer service or repay their bank loans. Although a

financial sector meltdown is unlikely because the Chinese state will support the banking system,
restructuring of the real estate sector will unavoidably depress short-term growth.
I personally believe that the Chinese economy will not be able to return to a sustainable growth path
unless the government aggressively tackles the interconnected mess of a real estate bubble, excess
industrial capacity, and financial deleveraging (debt-to-GDP now stands around 250%, the highest rate
of any emerging market economy).
Unfortunately, this is not going to happen. These measures, however crucial to long-term growth, will
likely cause an outright recession. For a leadership team that is up for reappointment in 2017, Chinas
government will do just about anything to avoid this.
Extra Technical Questions
11. Talk to me about the U.S. dollar and its recent position in the economy. How does it affect
you as a student in New York City throughout everyday life?
The dollar's rise is a direct result of America's strong economy while other parts of the world struggle.
The surging value of the U.S. dollar promises new bargains for American consumers and travelers but
also presents big threats to the U.S. economy in a trend that is shaping up to be one of the most
unexpected and significant factors driving the global economy this year. Europe is enacting a new
stimulus program to revive its economy, and Japan is also in stimulus mode.
Personally, for someone who loves to travel all over the world, the strong surge of the U.S. dollar
would greatly benefit me because I can buy more goods internationally because the U.S. dollar is
much stronger right now compared to other international currencies. Travelers are familiar with
exchange rates and how they can impact the cost of goods. But the strong dollar's impact goes well
beyond travel. It affects everything from gas prices at the pump to the profits of America's big
businesses that sell things overseas.
12. Give me your outlook on oil.
I predict that the benchmark price for crude oil, which fell from $98 per barrel in December 2013 to $59
in December 2014, will average $61 per barrel at the end of the year and $69 per barrel in December
2016. Just three months ago, the group forecast that oil would spike to $85 per barrel by December
2015.
Traders, investors and companies that consume a lot of energy think airlines, shipping companies
and manufacturers have to make some assumption about future prices, as do consumers planning
to purchase a car that might average 20 miles per gallon, or 30. The safest assumption, however, may
be that nobody really knows where oil prices are headed. We may not know what oil will cost in a year,
but we dont have to be surprised by big moves in either direction.