Investment Banking Representative Qualification Exam

A Discounted Cash Flow (DCF) analysis values a company based on the present value of its expected future free cash flows. The process involves projecting unlevered free cash flows (typically 5-10 years), calculating a terminal value to capture value beyond the projection period, and discounting everything back to present value using the Weighted Average Cost of Capital (WACC).

Terminal value can be calculated using either the perpetuity growth method (applying a long-term growth rate to the final year's cash flow) or the exit multiple method (applying a trading multiple to the final year's EBITDA). Terminal value often represents 60-80% of the total enterprise value in a DCF, making the choice of terminal assumptions critical.

Comparable company analysis (trading comps) values a company by applying multiples from publicly traded peers. Common multiples include EV/EBITDA, EV/Revenue, and P/E. This approach reflects current market sentiment but does not include a control premium.

Precedent transaction analysis values a company by examining multiples paid in prior acquisitions of similar companies. Because acquirers typically pay a premium for control, precedent transaction multiples are generally higher than trading multiples. The difference -- usually 20-40% -- is known as the control premium. Precedent transactions may be less reflective of current conditions if the comparable deals are dated.

An Initial Public Offering (IPO) is the process by which a private company offers shares to the public for the first time. The investment bank acts as the underwriter, guiding the company through SEC registration, due diligence, roadshow marketing, and pricing. During the book-building process, the underwriter gauges investor demand to set a price range and ultimately the final offering price.

Key regulatory periods include the quiet period, during which the issuer and underwriters are restricted in what they can communicate publicly, and the lock-up period (typically 90-180 days post-IPO), during which insiders are prohibited from selling their shares. The underwriter may also engage in stabilization activities -- buying shares in the open market to support the stock price immediately after the IPO.

In a firm commitment underwriting, the investment bank purchases the entire offering from the issuer and resells it to investors. The underwriter assumes the risk of unsold shares and guarantees the issuer a specific amount of capital. This is the most common type for large IPOs and is preferred by issuers because it provides certainty of proceeds.

In a best efforts underwriting, the investment bank acts as an agent, agreeing to use its best efforts to sell the securities but making no guarantee. Any unsold shares remain with the issuer. An all-or-none arrangement is a variation where the offering is cancelled entirely if the full amount cannot be sold.

A tender offer is a public bid to purchase shares directly from shareholders, typically at a premium to the current market price. The Williams Act (1968 amendments to the Securities Exchange Act of 1934) regulates tender offers to protect shareholders by requiring disclosure and fair treatment.

Key provisions include: the offeror must file Schedule TO with the SEC, the offer must remain open for at least 20 business days, shareholders have withdrawal rights during the offer period, and if the offer is oversubscribed, shares must be purchased on a pro rata basis. Any person acquiring more than 5% of a company's shares must file Schedule 13D within 10 days of crossing that threshold.

Accretion/dilution analysis determines whether a proposed acquisition will increase (accrete) or decrease (dilute) the acquirer's earnings per share (EPS). If the combined pro forma EPS is higher than the acquirer's standalone EPS, the deal is said to be accretive; if lower, it is dilutive.

The analysis depends on several factors: the target's earnings contribution, the form of consideration (cash vs stock), the cost of financing (interest expense on debt or new share issuance), and any expected synergies. A deal may be initially dilutive but become accretive over time as synergies are realized. Boards and shareholders closely scrutinize this analysis when evaluating proposed transactions.