Recruitment Ready
General Finance Interviews
Outline
I.
General Interview Tips
I.
II.
II.
III.
Interview Etiquette
Common Questions
I.
II.
III.
IV.
Behavioural Questions
Employer Questions
Understanding the Job
Basic Technical Questions
I.
II.
III.
V.
VI.
Resources
Most Common Mistakes
Capital Structure
Valuation methodologies
Accounting
Other Questions
Summer 2014 Student Recruiting Experiences
2
General Interview Tips
General Tips
Practice, Practice, Practice!
4
Resources
•
Career services
–
–
Danielle Dagenais (Finance, Investment Banking, Investment Management)
Offers help with
•
•
•
•
•
•
McGill Investment Club workshops
Prep Documents
–
–
–
–
–
•
Resume & Cover Letter
Job Opportunities
Preparation for interviews and mock interviews
Evaluation of internship and job offers
Breaking into Wall Street
Mergers & Inquisitions
Vault guide
Queen’s Commerce Prep Guide
BCom Career Handbook
Myself
Use the resources available to you!
5
Interview Etiquette
How to Make a Good Impression
•
•
•
•
•
•
•
Dress for the job
Be on time! Actually, be 10 min early!
– If there are other candidates,
receptionists, talk to them
Keep your cell phone off at all times
Offer a strong firm handshake and
follow person to room with conviction
Look in the eyes and sit fully erect
Smile and use your hands to emphasize
the points you are making
– Do not fidget, scratch…
Beware of excess familiarity but mirror
your interviewer
7
Must Do’s in an Interview
•
Ask for a business card at the end if not given
•
When asked “do you have any questions”, absolutely ask some!
–
–
–
Prepare 3-4 questions you could ask to any interviewer that are not generic
Don’t ask about the salary
It is ok to ask about the next steps in the process
•
Thank them twice at the end (for the opportunity and for taking their time)
•
Again, send a follow-up/thank you note
•
Make sure you can easily be reached after the interview and be ready for calls at random hours
8
Behavioural Questions
Prepare for Fit Questions
•
•
•
•
•
Your story
Happy and sappy experiences
Structures
Practice – BCom Career Handbook
Practice live
10
10
Walk me through your CV?
•
•
•
•
•
•
Tell me about yourself?
Why should I pick you?
Tell me about your experience?
What should I know about you?
What would make you a good XYZ?
What brings you here?
1.
2.
3.
4.
Be chronological
Show how each experience along the way led you in the direction of finance
State why you’re here interviewing today (important to land the question)
Aim for 2-3 minutes max
11
11
Key Experiences
•
Happy:
–
–
–
–
•
What are your strengths ?
When did you demonstrate leadership?
Tell me about this part of your resume?
How do you handle conflict?
Sappy:
–
–
–
–
What is your greatest weakness? Any other?
Tell me about something you would do differently?
What is your greatest failure?
Tell me about a time you failed to honour a commitment
12
12
Variants
•
Variants of strengths and weaknesses question:
-
What kind of feedback did you receive in your internship last summer?
If your friends could describe you in 3 words, which ones would they choose?
If I talk to somebody who doesn’t like you, what would they say about you?
Why would we NOT hire you today?
•
In 3 sentences why would we hire you?
-
1st sentence: School
2nd sentence: Previous relevant experience
3rd sentence: Something that makes you unique
13
Most Fit Questions
14
14
Personal Questions
•
Where do you see yourself in 5 years?
-
OK to say that you are not sure and that it is not prudent to make predictions now, especially given the
fact that you have never tried the job
However, make sure to say that given what you know now, this is what you think you are best fitted for
and where you can contribute the most as an individual
-
•
What do you do for fun?
-
Bankers will spend 80-100 hours/week with you in the office. They want to know if they can spend some
time with you talking about other things than finance
In this case, the worst possible answer would be “I love reading the WSJ and researching stocks”
Don’t necessarily have to be very original, but show that there is more to you than good grades and a
passion for finance
-
15
Personal Questions
•
Why do you want to work in Toronto?
-
Again, given that finance has high employee turnover rates, it is important for banks to now that you are
committed to stay with the office
This is especially true for regional offices like Montreal and Calgary from where a lot of people want to
transfer to Toronto or New York
-
•
Tell me something interesting about you that’s not listed on your resume
-
It’s a difficult question that can be surprising given that we usually put most of what is interesting about us
on our resumes
Here, it is important to be somewhat original and show that there is something unique about you
It doesn’t have to be an interest, it can be a special story or event
Nothing illegal! Nothing related to sex, religion or politics.
-
16
With Practice
17
17
Employer Questions
Employer Questions
•
Why do you want to work for XXX?
-
-
Extremely important to be able to back up arguments! Everybody will say “You have an amazing culture”,
but how do you show that this is true?
Typically, you need to talk to professionals or fellow students who have worked there to get a sense of
what it’s like
Be able to talk about the bank’s strengths and recent important deals
•
Where else are you interviewing?
-
If you’re interviewing for an IB position, say that you are interviewing only for IB at other banks too (shows
that you are convinced this career is right for you)
Often times, banks will feel more rushed to give you an offer if they know you have attracted attention
from competitors, but don’t be too cocky about it!
Don’t lie about it, they can check very easily
-
-
19
Employer Questions
•
Why do you want to work in Montreal? It’s a regional office with a very small team
-
Working in a small office has a lot of advantages!
-
If you are good, people will give you more work and trust you with more challenging tasks earlier on
Senior people are much more approachable
You can work on a lot of different kinds of projects
More opportunities to attend client meetings and have direct exposure to the job
•
Why do you want to work in metals and mining? There is hardly any activity these days
-
Highlight your long-term view and cyclical nature of this industry and capital markets
Once activity picks up, there will be a vacuum for human capital and more opportunities
20
Employer Questions
•
What do you think is our biggest weakness / which of our competitors do you admire most?
-
-
Important to do your research beforehand!
Saying something like being “weaker in some geographic region” or “lacking experience in a given
industry” is acceptable to say, but indicate how it doesn’t really matter because they are really strong in
something else
Always talk with respect about competitors!
•
Who is our CEO?
-
Absolutely crucial to know and makes you look very bad if you can’t answer
21
Understanding the Job
Understanding the Job
•
Why do you want to do Investment Banking?
-
Everyone should have a personalized answer and his own reasons why they want to do it. You want to
sound credible and passionate about this job
Worst possible answer here is to say “I’m not sure” or “for the money”
Common answers include: “I want to be pushed to my limits”, “I want to work with the smartest people”
and “Investment Banking will teach me a lot”
-
23
Understanding the Job
•
What will you actually be doing as an intern?
-
As an investment banker summer analyst, you cannot expect to be making models and other fancy stuff
It is important to recognize that you will spend most of your time working on pitch books and researching
companies/industries
However, even if the tasks appear simple, you should also recognize that you will actually be exposed to a
ton of very smart people and that you will learn a great amount about the industry
-
•
What is a pitch book?
-
Sales tool of the investment bank. There are three main types:
-
Market Overview / Bank Introduction
Deal Pitches (M&A, IPO, debt issuance, etc.)
Management Presentations
24
Understanding the Job
•
How much do you expect to work in a typical work week?
-
As an investment banking summer analyst, you will probably spend anywhere between 80 and
100 hours per week in the office
This is true for the analyst level, but the hours do get better as you progress towards associate
and VP
-
•
How do companies select the bankers they want to work with?
-
Everything in finance has to do with relationships, and this is especially true in investment banking
Typically, all the banks will pitch to the company in what is called a “beauty pageant contest”
•
You are asked to summarize a company on one slide with four quadrants
-
This question tests your ability to summarize the most important facts about a company in a restricted
space. Typically, you would probably include some valuation metrics, a company description, share
performance chart and summary of management
25
Recruitment Ready
Technicals - Basics
Outline
I.
II.
Corporate Structure
Valuation
a)
b)
c)
III.
DCF
Comparable Company Analysis
Precedent Transactions
Accounting
27
Capital Structure
Corporate Structure
•
Secured Debt
•
Underfunded Pension
•
Operating Leases
•
Unsecured Debt
•
Convertible Debt
•
Preferred Shares
•
Equity
Seniority
29
Optimal Capital Structure
•
•
The advantage of debt is that it gives tax shields to the company through the interest paid
It would NOT be optimal for the firm to add on 100% debt as bankruptcy costs eventually become
more important than the benefits derived from tax shields
30
Enterprise Value
Enterprise Value =
+
+
+
+
+
+
+
+
-
Market Capitalization
Debt
Minority Interest
Preferred Equity
Cash
Underfunded Pension
Capital and Operating Leases
Contingent Liabilities
Long-term Provisions
Tax Liabilities
Short-term Investments
31
Capital Structure Questions
•
Why do you subtract cash from EV? Is it always accurate?
•
Should you use the book value or market value of each item when calculating EV?
•
Why do we look at both Enterprise Value and Equity Value?
•
What’s the difference between Equity Value and Shareholder’s Equity?
•
Should cost of equity be higher for a $1B or $100B company?
•
Same question for WACC?
32
Valuation
Traditional Valuation Methodologies
Discounted Cash Flow
Precedent Transaction Analysis
Comparable Trading Analysis
34
• Value based on net present value of future cash flows (enterprise
or equity cash flows)
• Value based upon applying observed financial metrics from
comparable past transactions
• Value based upon applying observed current trading metrics of
comparable, public companies
34
Discounted Cash Flow
Discounted Cash Flow - Principles
“Value determined by calculating the present value of a stream of projected cash flows over a certain
period and a terminal value”
 Projected after-tax unlevered free cash flows
 Forecast period should be long enough so that business reaches a steady state by the end of period and incorporates a cycle (if a
cyclical industry)
 Typically 5 to 10 years
 Terminal value
 Value of perpetual cash flows following end of forecast
 Terminal year should best mirror company's normalized future steady state
 Discount rate
 Weighted average cost of capital (“WACC”)
 Depends on capital structure (typically weighted average cost of equity and debt)
 WACC should reflect optimal and sustainable capital structure and underlying estimate of business risk
Enterprise Value
• PV of cumulative
cash flows to all
claim holders
36
Unlevered Free
Cash Flow “UFCF”
• + EBIT*(1-tax)
• + Depreciation & Amortization
• - Capital Expenditure
• - ∆ in Working Capital
Discounted Rate
• Weighted
Average Cost of
Capital “WACC”
36
Discounted Cash Flow – Terminal Value
“Determining the terminal value involves the application of one of the following going concern
approaches”
Practice
•
Comparable Trading /
Transaction Multiple
•
•
Perpetual Growth
•
•
Considerations
Based upon current trading
multiples ~ multiples of EBITDA
Based upon multiples paid in
comparable company
transactions
•
Single stage – constant growth
perpetuity
Unlevered Free Cash Flow * (1+
Perpetual Growth Rate) / (WACC
– Perpetual Growth Rate)
2 stage – growth rate 1 for n
years followed by growth rate 2
•
•
•
•
Industry or company
considerations may make the
current environment not
comparable to the terminal year
Implies a perpetual growth rate
from the terminal point onward
Ideal when company is in steady
state
Very sensitive to changes in
inputs, especially perpetual
growth rate assumptions
Implies multiples as if the
business was transacted in the
terminal year
37
37
Discount Cash Flow
Strengths
Limitations
 Based on well accepted corporate finance theory
 False perception attributed to sophisticated technique
due to inherent subjectivity in forecast, terminal value
and WACC
 Flexibility to handle different patterns of cash inflows and
outflows
 Recognizes time value of money
 Demands extensive set of forecast data and related
due diligence
 Allows explicit consideration of project risks
 Sensitive to long term growth assumptions
 Focuses on future operations
38
 Lacks external reference to reconcile valuation
differences
38
Comparable Company Analysis
Comparable Company Analysis (‘’Comps’’)
 What is comparable company analysis?
 Provides a market-based valuation perspective on comparable publicly traded companies
 It is based on publicly available information; reflects what the many independent investors that comprise the market think

Implied valuation does not reflect premium for control or any synergy potential
 Effectiveness of this valuation method depends on the comparability of the companies selected and metrics used to compare the companies
•
Comparable trading analysis: Key Valuation Metrics / Multiples
Enterprise Value
Equity Value
• Revenues
• Earnings
• EBITDA
• Levered Cash Flow
• Unlevered Cash Flow
• Book Value
Multiples based on economics that all stakeholders are
entitled to (debtholders and shareholders)
40
Multiples based on economics that only
shareholders are entitled to
40
Comparable Trading Analysis
Less affected and easier to interpret when there are capital
structure differences
General Preference for
Enterprise Value / EBITDA
Multiples…
Permits the use of statistics less affected by accounting
policy variations
More comprehensive – focuses on the business and not just
the equity investor’s stake
More flexible – can be modified to exclude non-core assets
41
41
Making a comps table
•
•
•
Select the right peer group
Focus on the appropriate financial metric and ratios: each sector utilizes a standard set of ratios/metrics
Make the necessary adjustments to ensure comparability (non-recurring items, accounting policies, M&A activity)
Value Drivers
Relative
Risk
Profile
Relative
Growth
42
Illustrative Considerations
Strategic Positioning
•
•
•
Market / Product leadership
Client-base & supply chain
Technology & patent
Size
•
•
Market presence, operating “leverage”
Good proxy for risk
Profitability
•
•
•
Cost structure
Margin analysis
Consistency
Capital Structure
•
Financial leverage
Others
•
•
•
Quality of management
Non-recurring items
Different accounting practices
Growth Profile
•
•
•
Sales, EBITDA, earnings
Consistency of growth / volatility
Growth potential
42
Comparable Trading Analysis
Strengths
Limitations
 Objective comparison reflecting all publicly available
information on the overall sector and the individual
companies
 Challenge of finding true “comparability” within peer
groups
•
Growth / profitability expectations
•
Sector trends
•
Risk factors
 Often provides a reliable, useful first order approximation of
value
 May be forward looking, and can also be backward looking
 Ease of understanding and application
 Requires fewer assumptions (e.g. Discount rates)
 Standard practice when valuing emerging companies, as
forecasting cash flows is difficult
43
•
Very difficult to adjust for differences in
underlying business of comps
 Company specific issues may limit analysis and
effectiveness (e.g. limited liquidity)
 Other external factors may impact share price performance
•
Market sentiment, M&A activity in the sector and
regulatory issues
 Analysis is focused on trailing date and on next 1-2 years,
thus ignoring future performance and long-term issues
 Assumes market prices of comparable companies correctly
reflect all available information
43
Precedent Transaction Analysis
Precedent Transactions Analysis
• Valuation based upon applying observed financial and operating metrics from comparable transactions
• Provides useful information on valuation multiples that acq
• Provides indication of private market value
• Value of consideration that willing buyers and sellers are prepared to exchange in current economic
environment
• Many considerations discussed in Comparable Trading Analysis section apply, however three specific nuances
to this methodology must be addressed
Considerations
Relevance
•
•
•
Comparability of precedent deals and the acquired companies
Was the deal completed under comparable economic conditions
Is the other consideration comparable (cash vs. stock)?
Size
•
•
Eliminate all deals that are too small or too large compared to the potential transaction
Look at relative size of acquirer versus target
Information
•
Only include deals where sufficient / reliable information is available
Type of Deal
•
•
•
Private deals: if no public data is available, do not use in deal comparison
Timing: the more recent the data, the more relevant the benchmark
Auction / Interlopers: competition for the assets drives valuation up
45
45
Precedent Transactions Analysis
Strengths
Limitations
 Based on public information
 Relevance deteriorates over time
 Reflects different premium at which transactions have been
completed in the past (important to isolate impact of
economic cycles)
 Important not to miss context for the premium paid in
different transactions to avoid drawing misleading
conclusions.
 Overview of potential interlopers based on historical
behaviour and their strategic approach to M&A
•
Financial versus strategic investor;
•
Governance issues, commercial agreements, etc.;
 Ease of understanding and calculation
•
Asset competition driving up prices; and
 Commonly used yardstick / rule of thumb
•
Distressed sales.
 Important to distinguish what kind of assets were traded in
order to achieve like-for-like comparisons.
 Market conditions at the time of a transaction can have
substantial influence on valuation (ie. Sector consolidation)
 Challenge of true “comparability”
46
46
Outputs
DCF
•
What is the purpose of a Discounted Cash Flow analysis?
–
Obtain intrinsic value of company by forecasting free cash flows 5 to 10 years into the future, discounting
them and the terminal value to today
2013A
(USD in million, except share price)
Revenue
Intermodal
% growth
Coal
% growth
Industrial Products
% growth
Agricultural
% growth
Chemicals
% growth
Automotive
% growth
Other Revenue
% growth
Total Revenue
% growth
Operating Expenses
Salaries and Expenses
% of revenue
Equipment and Rent
% of revenue
Fuel and Utilities
% of revenue
Materials and Supplies
% of revenue
Other Expenses
% of revenue
Total Operating Expenses
% of revenue
Gross Profit
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2014E
4,029.00
3.5%
3,983.00
-0.2%
3,703.00
6.7%
3,124.00
-6.7%
3,480.00
11.1%
1,999.00
14.3%
1,265.00
5.4%
21,583.00
3.8%
$
4,732.00
21.9%
1,226.00
5.7%
3,549.00
16.4%
0.0%
3,106.00
14.4%
12,613.00
58.4%
$
$
$
$
$
$
$
$
$
$
$
$
$
8,970.00 $
2015E
4,290.89
6.5%
4,158.33
4.4%
3,925.18
6.0%
3,402.35
8.9%
3,688.80
6.0%
2,119.94
6.1%
1,328.25
5.0%
22,913.73
6.2%
$
5,018.11
21.9%
1,260.26
5.5%
3,757.85
16.4%
0.0%
3,207.92
14.0%
13,244.14
57.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
9,669.59 $
2016E
4,580.52
6.8%
4,255.24
2.3%
4,170.50
6.3%
3,671.47
7.9%
3,919.35
6.3%
2,239.72
5.7%
1,397.98
5.3%
24,234.79
5.8%
$
5,307.42
21.9%
1,332.91
5.5%
3,974.51
16.4%
0.0%
3,392.87
14.0%
14,007.71
57.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
10,227.08 $
2017E
4,827.87
5.4%
4,311.86
1.3%
4,374.86
4.9%
3,888.46
5.9%
4,111.40
4.9%
2,339.16
4.4%
1,452.50
3.9%
25,306.11
4.4%
$
5,542.04
21.9%
1,391.84
5.5%
4,150.20
16.4%
0.0%
3,542.86
14.0%
14,626.93
57.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
10,679.18 $
2018E
5,083.74
5.3%
4,369.23
1.3%
4,584.85
4.8%
4,072.77
4.7%
4,308.75
4.8%
2,422.90
3.6%
1,507.70
3.8%
26,349.95
4.1%
$
5,770.64
21.9%
1,449.25
5.5%
4,321.39
16.4%
0.0%
3,688.99
14.0%
15,230.27
57.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
11,119.68 $
2019E
5,348.10
5.2%
4,427.37
1.3%
4,800.34
4.7%
4,212.47
3.4%
4,511.26
4.7%
2,490.02
2.8%
1,563.48
3.7%
27,353.03
3.8%
$
5,990.31
21.9%
1,504.42
5.5%
4,485.90
16.4%
0.0%
3,829.42
14.0%
15,810.05
57.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
11,542.98 $
2020E
5,620.85
5.1%
4,486.28
1.3%
5,021.16
4.6%
4,354.43
3.4%
4,718.77
4.6%
2,426.52
-2.6%
1,619.77
3.6%
28,247.78
3.3%
$
6,186.26
21.9%
1,553.63
5.5%
4,632.64
16.4%
0.0%
3,954.69
14.0%
16,327.22
57.8%
$
$
$
$
$
$
$
$
$
$
$
$
$
11,920.56 $
5,901.90
5.0%
4,545.98
1.3%
5,247.11
4.5%
4,472.87
2.7%
4,931.12
4.5%
2,414.39
-0.5%
1,676.46
3.5%
29,189.81
3.3%
6,392.57
21.9%
1,605.44
5.5%
4,787.13
16.4%
0.0%
4,086.57
14.0%
16,871.71
57.8%
12,318.10
48
Free Cash Flow
(USD in million, except share price)
After-Tax EBIT
$
+ D&A
% of revenue
- Capital Expenditures
% of revenue
Capex/D&A
- Changes in NWC
% of revenue
$
Free Cash Flow
$
$
$
2013A
4,462.76 $
2014E
4,830.21 $
2015E
5,093.67 $
2016E
5,303.15 $
2017E
5,489.22 $
2018E
5,664.27 $
2019E
5,832.04 $
2020E
6,008.43
1,772.00 $
8.2%
3,497.00 $
16.2%
197%
(7.00) $
0.0%
1,878.93 $
8.2%
3,780.77 $
16.5%
201%
$
0.0%
2,011.49 $
8.3%
3,877.57 $
16.0%
193%
$
0.0%
2,125.71 $
8.4%
4,048.98 $
16.0%
190%
$
0.0%
2,266.10 $
8.6%
4,215.99 $
16.0%
186%
$
0.0%
2,407.07 $
8.8%
4,376.49 $
16.0%
182%
$
0.0%
2,514.05 $
8.9%
4,519.65 $
16.0%
180%
$
0.0%
2,627.08
9.0%
4,670.37
16.0%
178%
0.0%
2,744.76 $
2,928.37 $
3,227.59 $
3,379.88 $
3,539.33 $
3,694.85 $
3,826.44 $
3,965.14 $ 162,897.07
0.5
0.98x
1.5
0.93x
2.5
0.89x
3.5
0.85x
4.5
0.81x
5.5
0.77x
2,859.45 $
3,005.01 $
3,000.41 $
2,995.79 $
2,981.94 $
2,944.49 $
Discount Year
Discount Factor
PV(Free Cash Flow)
Enterprise Value
- Debt
+ Cash
Implied Equity Value
Diluted Shares Outsanding
Implied Price per Share
Implied EV/2014 EBIT
Current Price
Implied Upside
$
$
$
$
$
$
$
140,216.14
56,310.66
1,366.00
85,271.48
463.1
184.14
18.00x
152.31
20.9%
WACC Calculation
Tax Rate
Cost of Debt
Market Beta
Market Risk Premium
Risk Free Rate
Cost of Equity
Debt
Market Cap
Debt to Value
Equity to Value
WACC
$
$
6.5
0.73x
TV
6.5
0.73x
2,909.28 $ 119,519.76
38.0%
2.6%
1.11
5.5%
1.4%
7.5%
56,310.66
70,052.50
44.6%
55.4%
4.9%
49
Sensitivity Analyses
WACC / Capital Expenditures
WACC / Operating Margins
15.00%
15.50%
16.00%
16.50%
17.00%
56.80%
57.30%
57.80%
58.30%
58.80%
4.5%
$265.76
$253.91
$242.07
$230.22
$218.37
4.5%
$256.76
$249.41
$242.07
$234.72
$227.37
4.7%
$230.28
$219.64
$209.00
$198.36
$187.72
4.7%
$222.19
$215.60
$209.00
$202.41
$195.81
4.9%
$200.73
$191.10
$181.46
$171.83
$162.19
4.9%
$193.41
$187.43
$181.46
$175.49
$169.52
5.1%
$175.74
$166.95
$158.17
$149.39
$140.60
5.1%
$169.06
$163.62
$158.17
$152.72
$147.28
5.3%
$154.33
$146.28
$138.22
$130.16
$122.10
5.3%
$148.21
$143.21
$138.22
$133.22
$128.23
WACC / Intermodal Growth
WACC / Long-Term Growth
-2.00%
-1.00%
0.00%
1.00%
2.00%
2.00%
2.25%
2.50%
2.75%
3.00%
4.5%
$233.43
$237.63
$242.07
$246.76
$251.72
4.5%
$177.74
$206.33
$242.07
$288.01
$349.27
4.7%
$201.20
$204.99
$209.00
$213.24
$217.72
4.7%
$155.53
$179.54
$209.00
$246.02
$293.93
4.9%
$174.35
$177.81
$181.46
$185.32
$189.40
4.9%
$136.39
$156.80
$181.46
$211.86
$250.26
5.1%
$151.65
$154.82
$158.17
$161.71
$165.45
5.1%
$119.73
$137.26
$158.17
$183.53
$214.92
5.3%
$132.20
$135.13
$138.22
$141.48
$144.93
5.3%
$105.09
$120.30
$138.22
$159.65
$185.74
50
DCF Questions
•
Why do we use 5 to 10 years for DCF projections?
•
What are the two ways to calculate Terminal Value?
–
–
Terminal EV / EBITDA multiple (try to think where the company will be in 5-10 years)
Long-term growth (be careful with aggressive figures)
•
How do you know if your DCF is too dependent on future assumptions?
•
What are some other weaknesses of doing DCF’s?
•
Does it make sense to value an oil and gas or mining company with a DCF?
Best way to understand the mechanics of a DCF is to do one yourself!
51
Comparables Questions
EV / EBITDAR
Company
Canadian National
(1)
P/E
(2)
Margins
Ticker
LTM
NTM
LTM
NTM
ROIC
(4)
Growth
EBITDA
NI
EBITDA
(3)
NI
FCF Yield (5)
Div. Yield
Beta (6)
CNR
10.7 x
9.3 x
17.1 x
15.3 x
19.8%
48.2%
25.8%
5.8%
8.6%
1.5%
1.7%
0.72
Canadian Pacific
CP
9.6 x
8.0 x
30.6 x
17.2 x
20.9%
51.4%
13.2%
29.6%
42.6%
0.9%
1.1%
0.82
CSX Corporation
CSX
7.8 x
7.6 x
14.2 x
14.3 x
16.1%
38.8%
16.0%
1.2%
0.1%
1.7%
2.3%
1.22
Genesee & Wyoming
GWR
13.7 x
10.1 x
35.5 x
19.3 x
10.4%
40.6%
11.5%
108.3%
77.6%
-0.2%
0.0%
1.44
Kansas Southern
KSU
15.5 x
13.2 x
40.8 x
23.8 x
14.3%
39.8%
13.2%
12.5%
23.0%
-1.2%
0.8%
1.47
Norfolk Southern
NSC
7.8 x
7.2 x
14.0 x
13.3 x
14.5%
38.1%
15.8%
0.1%
2.6%
0.5%
2.7%
0.49
Union Pacific
UNP
8.6 x
7.8 x
12.8 x
11.6 x
22.1%
49.8%
28.9%
9.8%
15.1%
2.3%
2.0%
1.11
Mean
10.5 x
9.1 x
23.6 x
16.4 x
16.9%
43.8%
17.8%
23.9%
24.2%
0.8%
1.5%
1.04
Median
9.6 x
8.0 x
17.1 x
15.3 x
16.1%
40.6%
15.8%
9.8%
15.1%
0.9%
1.7%
1.11
Low
7.8 x
7.2 x
12.8 x
11.6 x
10.4%
38.1%
11.5%
0.1%
0.1%
-1.2%
0.0%
0.49
High
15.5 x
13.2 x
40.8 x
23.8 x
22.1%
51.4%
28.9%
108.3%
77.6%
2.3%
2.7%
1.47
•
How to select comparables?
•
Which multiples to use? LTM vs. NTM? What if a company has negative EBITDA?
•
Why do we sometimes use the median as opposed to the mean?
•
What are the cons of this valuation method?
52
Precedent Transactions Questions
•
•
•
•
Precedent transactions can only be useful if the firm is considering being bought out
Useful when firm is considering to sell a division
Also relevant for undervalued firms
Incorporates acquisition premium (usually 20-30%)
53
Valuation Questions
•
Which of the three methods yield the highest/lowest valuations?
•
How do you present valuation methodologies to a company?
•
Why can’t you use an Equity Value / EBITDA multiple?
•
Why do you actually use valuations?
•
Why would someone want to use EV / EBIT multiples instead of EV / EBITDA?
54
Accounting
Classic Machine Question
•
On January 1st, company A buys a new machine for $100, financed with $50 in cash and $50 in
debt. It will be depreciated on a straight line basis for 10 years. It will also contribute to revenue in
the coming fiscal year by an additional $10 and COGS of $5. How will this affect all three financial
statements at year end on December 31st? Assume a tax rate of 40% and interest rate of 10%.
I/S
Revenue
COGS
Depreciation
EBIT
Interest
EBT
Tax
Net Income
$ 10.00
$ (5.00)
$ (10.00)
$ (5.00)
$ (5.00)
$ (10.00)
$ 5.00
$ (5.00)
C/S
Net Income $ (5.00)
Depreciation $ 10.00
CFO
$
5.00
Debt
CFF
$ 50.00
$ 50.00
Machine
CFI
$ (100.00)
$ (100.00)
B/S
Cash
PPE
Depreciation
Assets
$ (45.00)
$ 100.00
$ (10.00)
$ 45.00
Debt
R.E.
L + S.E.
$ 50.00
$ (5.00)
$ 45.00
56
Other Accounting Questions
•
If depreciation is a non-cash expense, how does it affect the cash balance?
•
What happens to the financial statements if inventory goes up by $10 and it is financed with cash?
Why is the income statement not affected by changes in inventory?
•
When would a company collect cash from a customer and not record it as revenue?
•
What is the difference between accounts receivable and deferred revenue?
57
Other Questions?
Other Questions
•
•
•
•
•
•
Are you more of a leader or a follower?
What was the most difficult situation you faced as a leader?
Can you talk about a team project that went badly?
What is your career goal?
If I was to give you an offer right now, would you take it?
Recently, some analysts left early. Would you do the same if some opportunity came up?
•
•
•
•
What is your favourite (finance) book?
What was your favourite class?
What is your personal beta?
Tell me a joke
59
General Lessons
Most Common Mistakes
1.
Fail to structure answers properly
2.
Fail to use specific anecdotes to support arguments
3.
Answers too generic  every question is opportunity to differentiate yourself
4.
Lack of preparation
5.
Memorizing answers by heart
61
General Lessons Learned
•
Be genuine
•
Be relaxed
•
Be smart about what you ask for
•
–
Montreal vs. Toronto vs. New York
–
Navigating full time offers
Be patient
–
•
•
•
•
Don’t be afraid to leverage your first offer to get the one you really want
Plan your networking
–
Don’t network too early
–
Make sure you have questions prepared
Be honest about your preferences
Make a checklist before each interview: CEO Name, strength, stock price, etc.
Prepare 3 – 5 key experiences you can draw on to answer almost any behavioural question
62
Summer 2014 Student Experiences
•
Jeremy Kertzer – RBC Capital Markets (Investment Banking)
–
•
Belal Yassine – RBC Capital Markets (Investment Banking)
–
•
belal.yassine@mail.mcgill.ca
Alyssa Obert – J.P. Morgan Chase (Investment Banking)
–
•
jeremy.kertzer@mail.mcgill.ca
Alyssa.obert@mail.mcgill.ca
Colton Dick – CPP Investment Board (Private Equity)
–
colton.dick@mail.mcgill.ca
63
Q&A
Contact
•
Xavier Le Sieur – Bank of America, Merrill Lynch (Investment Banking)
–
xavier.lesieur@mail.mcgill.ca
65