Aswath Damodaran - Valuation
Investment bankers help private and government clients raise money - by issuing debt, and selling equity to qualified investors. Investment bankers also help clients go through the IPO process; help clients with mergers and acquisitions; and advice clients on unique investment opportunities.
Let's take a brief look at the key job duties, success traits, and job skills of Investment Bankers - which will help you to prepare for and answer your investment banker interview questions in a more impactful way.
Investment Banker Job Duties - Investment Bankers create financial models to value equity and debt. They structure deals, prepare presentations highlighting client portfolios, network with potential investors, and pitches client deals to these potential investors. Investment Bankers establishes fair value for the companies involved in merger and acquisition transactions by performing various valuation methods.
Investment Banker Success Traits - Investment Bankers require good leadership skills, interpersonal and communication skills, persuasion skills, negotiation skills, presentation skills, team skills, and the ability to work for long hours.
Investment Banker Job skills - Investment Bankers require excellent math, quantitative, and analytical skills; accounting knowledge, and financial knowledge. Investment bankers must have experience in creating financial models to value debt and equities; and experience with various valuation methods.
By asking this question, the interviewer wants to see if you have the passion, skill set and experience required to be a successful Investment Banker.
Best way to answer this question is to briefly talk about yourself and highlight the following four points in sequence.
1. Your education.
2. Your previous experience - Highlight the job duties from your previous jobs that match the requirements for this job.
3. Your strengths and passions - Highlight the success traits required for an investment banker - leadership skills, communication skills, persuasion skills, presentation skills, and quantitative skills etc.
4. Your job specific skills - Highlight your experience as an investment banker - with creating financial models, performing company valuations, soliciting potential investors, pitching client investments, experience with IPO process, and mergers and acquisitions etc.
Important - Do not specify your hobbies, personal details, or family details unless specifically asked for.
This situational question, or a variation of it, is frequently asked in investment banker interviews, because this is a real situation in the life of an investment banker.
Investment bankers are expected to work 80-100 hours per week, with the work day starting at 10:00 am and usually ending after midnight, with dinner in the office.
Investment bankers must have this mindset to sacrifice some family events if needed, and the stamina to work those long hours.
You should answer this question by saying that you would stay back to finish the work, and that is expected from an investment banker.
There are four basic financial statements that provide you the information needed to evaluate a company.
1. Balance sheet
2. Income statement
3. Statement of cash flow
4. Statement of retained earnings
You have to know the purpose of each of these financial statements, what the the key line items in each document are, and how the documents are related to each other.
This is another frequently question in an investment banker interview that tests your knowledge of the financial statements. The question can be asked in different ways, like 'What is the purpose of an income statement? What is the purpose of cash flow statement?, etc.
An income statement contains the financial results of a business over a period of time - yearly, quarterly, or monthly. It consists of revenue, expenses, and net income.
A statement of cash flow contains details of the cash inflows and outflows of a business over a period of time - yearly, quarterly, or monthly. It consists of - cash flow from operations, cash flow from investments, and cash flow from financial activities.
This is another frequently asked interview question for an investment banker - testing your knowledge of the line details contained in the financial documents.
The major line items in a cash flow document are
1. cash flow from operational activities
2. Cash flow from investing activities
3. Cash flow from investing activities
4. cash at beginning of the year
5. Cash at end of the year
6. Net increase or decrease in cash.
The statement of cash flow gets its information from all the other three financial documents.
This is another frequently asked interview question for an investment banker - testing your knowledge of how the four financial statements are related to each other, and how changing a line item in one document impacts the other documents.
Following is the impact to the financial documents when there is a decrease in gross margins.
Income statement - Net income is lower.
Cash flow statement - Cash flow from operational activities is lower. Net cash flow is lower.
Balance sheet - New cash is lower, Shareholder's equity is lower.
There are four commonly used valuation techniques to value a company.
1. Discounted Cash Flow (DCF)
2. Multiples method
3. Market valuation
4. Comparable transactions method
There are two ways to value a company using the Discounted Cash Flow (DCF) method.
1. Adjusted Present Value (APV) method
2. Weighted Average Cost of Capital (WACC)
Adjusted Present Value (APV) and Weighted Average Cost of Capital (WACC) are the two methods to value a company using the Discounted cash Flow (DCF) analysis.
Both these method require calculation of Free Cash Flow (FCF) and Net Present Value (NPV) of the FCF, which requires calculation of the discount rate.
The way the discount rate is calculated for APV method, is different from the way the discount rate is calculated for the WAAC method.
For the APV method, the discount rate is calculated on un-leveraged equity.
For the WACC method the discount rate is calculated on leveraged equity using Capital Asset Pricing Model (CAPM).
Multiples such Sales, P/E (Price-to-Earnings) Ratios, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are used to value a company using the Multiples method.-->