Investment Banking Guide: (Breaking into Wallstreet)

My Story- Be sure to hit on 5 key points

1) Beginning: Where you are from
2) Finance Spark: How did you get involved in Finance
3) Growing Interest: Sequence of Internships/ Experiences leading up to this point
4) Why You Are Here: Potentially- Background + IB = Long-Term Success
5) Future: To be an Investor
Originally from Raleigh North Carolina and spent my entire life there up until college. Going
into school was unsure about Computer Science or Business so of all the schools I applied to
Virginia Tech had the best of these programs
When I got to school started out as an engineer but soon found I enjoyed the business classes
(Willy Js Intro to Business) more than CS classes, prompted me to choose finance
After deciding on business interested in investing and started my own fund (TU-Invest) with
several friends originally to make some extra money but with the help of our mentor returned
200% in the first year and I was hooked.
Realizing I was interested in Investing/ Finance decided to join an on campus club. Applied to
both SEED (Student-managed Endowment for Educational Development, equities) and BASIS
(fixed income). I got into both but choose bonds because I already knew about equities and more
prestigious reputation.
After BASIS led to Internship at Genworth Financial in their public fixed income division.
Worked with CMBS trading and Corporate Credit Research. While their my MD and mentor
Joeseph McCusker spoke of his time as an Investment banker and the highly competitive and
intensive atmosphere that was missing at a Buy-side shop. Coupled with the fact I found myself
more interested in deals than credit itself it sparked my interest in IB
This has led me to pursue an IB internship. Background + IB will insure long-term success
I hope one day to run a hedge fund, or MD of an IB industry group
Valuation:
What are the three main valuation methodologies?
The three main valuation methodologies are Precedent Transaction, Comparable Company
Analysis, and DCF (discounted cash flow) Analysis
Of the three valuation methodologies, which ones are likely to result in higher/lower value?
Firstly, the Precedent Transactions methodology is likely to give a higher valuation than the
Comparable company methodology. This is because when companies are purchased, the targets
shareholders are typically paid a price that is higher than the targets current stock price.
Technically speaking, the purchase price includes a control premium. Valuing companies based

on M&A transactions will include this control premium and therefore likely result in a higher
valuation than a public market valuation.
DCF will also likely result in a higher valuation than the Comparable company analysis because
DCF is also a control based methodology and because most projections tend to be generous.
Whether DCF will be higher than precedent transactions is debatable but is fair to say that DCF
valuations tend to be more variable because the DCF is sensitive to multiple assumptions or
inputs
What are some other possible valuation methodologies in addition to the main three?
Other possible valuation methods are: leverage buyout (LBO) analysis, replacement value, and
liquidation value
Common Valuation Metrics
Probably the most common valuation metric used in banking is EV/ EBITDA. Others: EV/
EBIT, Price to Earnings (P/E), and Price to Book Value (P/BV)
Why not EV/ Earnings or Price/ EBITDA as valuation metrics?
EV/ Earnings is an apples to oranges comparison and is considered inconsistent due to the fact
that Earnings is dependent on capital structure and tend to vary. Similarly Price/ EBITDA is
inconsistent because Price is dependent on capital structure while EBITDA is unlevered. Price/
Earnings is fine because both are levered.
What is the formula for Enterprise Value?
EV= Market Value of Equity + Debt + Preferred Stock + Minority Interest Cash
Walk me through a DCF?
In order to do a DCF analysis, first we need to project FCF for a period of time (five years). FCF
= EBIT Taxes + Depreciation & Amortization CAPEX then adjusted for Changes in Working
Capital. This is unlevered FCF b/c it does not include interest and is independent of debt and
capital structure.
Next use either Perpetuity Growth or Terminal Multiple method to predict the value of the
company/assets for years beyond the project period (5years) to get the Terminal Value. Using the
Growth method choose an appropriate growth rate such as expected gdp or inflation. To calculate
the terminal value multiply the last years FCF by 1 + growth rate / by discount rate growth
rate
FCF (1+Growth Rate)/ (Discount Rate- Growth Rate)
Multiple method and more often used take an operating metric for the last project period and
multiply by an appropriate valuation multiple. Most common is EBITDA. Typically select the
appropriate EBITDA multiple by taking what we concluded for our comparable company
analysis on a LTM basis.
Now that have projects of FCF and terminal values, to get to present value discount at the
weighted average cost of capital. Summing up the present value of the projected cahs flows and

the present terminal value gives us the DCF valuation. b/c used unlevered cash flows and WACC
the DCF represents EV.
What is WACC and how is it calculated?
WACC (Weighted Average Cost of Capital) is the discount rate used in a DCF analysis to get the
present value of FCFs and terminal value. Represents cost of each type of capital weighted by
the respective percentage of each type of capital assumed for the companys optimal capital
structure. Specifically the formula for WACC is
WACC= Cost of Equity * % of Equity + Cost of Debt * %of Debt * (1- Tax rate) + Cost of
Preferred Equity * %of Preferred Equity
To estimate the Cost of Equity typically use the CAPM (Capital Asset Pricing Model). To
estimate the cost of debt, we can analyze interest rates/yields of debt issued by similar
companies. Similar to cost of debt, estimating the cost of preferred requires us to analyze the
dividend yields on preferred stock issued by similar companies
Cost of Equity?
CAPM = Risk Free Rate * Beta * Equity Risk Premium.
Risk free rate typically chosen is a 10 or 20yr treasury. Beta should be levered and represents the
riskiness of the companys equity relative to the overall equity markets. The equity risk premium
is the amount that stocks are expected to outperform the risk free rate over the long-term.
What is Beta?