Wall Street Prep Redbook BIWS 400
All Technicals Exam Questions and
Answers247
If we had not deducted interest and the mandatory debt amortization in calculating the free
cash flow above, what metric would we be measuring? - ANSWERS-If that were the case, we
would have calculated the unlevered free cash flow. To get to the unlevered FCF yield, the
denominator would be enterprise value to match the cash flows.
Unlevered Free Cash Flow Yield = Unlevered Free Cash Flow / Entry Enterprise Value
The unlevered FCF yield would tell the investor how the overall company is performing on an
operational level, and it can tell us how much FCF remains to reinvest into the business and pay
a dividend to equity holders, as well as the amount that can be used to paydown debt.
How does the accounting treatment of financing fees differ from transaction fees in an LBO? -
ANSWERS-Financing Fees: Financing fees are related to raising debt or issuing equity. These fees
are capitalized and amortized over the debt's maturity (~5-7 years).
Transaction Fees: Transaction fees refer to the M&A advisory fees paid to investment banks or
business brokers, as well as the legal fees paid to lawyers. Unlike financing fees, transaction fees
cannot be amortized and are classified as one-time expenses deducted from a company's
retained earnings.
If an acquirer writes-up the value of the intangible assets of a target, how are goodwill and
amortization impacted? - ANSWERS-During an LBO, intangible assets such as patents,
copyrights, and trademarks are often written-up in value. Recall that goodwill is simply an
accounting concept used to "plug" the difference between the purchase price and fair value of
the assets in the closing balance sheet - so a higher write-up means the assets being purchased
,are actually worth more. Therefore, a higher write-up of intangible assets means less goodwill
will be created on the transaction date.
Publicly traded companies cannot amortize goodwill under US GAAP - however, private
companies can opt to amortize goodwill for tax reporting purposes. This question is specifically
regarding the purchase accounting on the closing date of the transaction.
What does a cash sweep refer to in LBO modeling? - ANSWERS-A cash sweep is when the excess
free cash flow after revolver repayments is used to make optional repayments on debt,
assuming the debt tranche allows early repayments. In most cases, this optionality to repay
debt early comes with a prepayment penalty fee since the lender receives reduced interest
payments.
What is the purpose of the minimum cash balance in an LBO model? - ANSWERS-Companies
need a certain amount of cash for daily operations and meet their net working capital (NWC)
requirements. The debt schedule will contain logical functions that ensure the cash balance
never dips below this specified amount. The minimum cash balance will increase the amount of
funding required since this cash on the company's balance sheet cannot help fund the
transaction.
You've never worked in finance before. How much do you know about what bankers actually
do? - ANSWERS-I've done a lot of research on my own.
Based on that, I know that bankers advise companies on transactions - buying and selling other
companies, and raising capital. They are "agents" that connect a company with the appropriate
buyer, seller, or investor.
The day-to-day work involves creating presentations, financial analysis and marketing materials
such as Executive Summaries.
Let's say I'm working on an IPO for a client. Can you describe briefly what I would do? -
ANSWERS-You meet with the client and gather basic information - such as their financial details,
an industry overview, and who their customers are. You meet with other bankers and the
lawyers to draft the S-1 registration statement - which describes the company's business and
,markets it to investors. You receive some comments from the SEC and keep revising the
document until it's acceptable. You spend a few weeks going on a "road show" where you
present the company to institutional investors and convince them to invest. The company
begins trading on an exchange once you've raised the capital from investors.
How much do you know about the lifestyle in this industry? Do you know how many hours
you're going to work each week? - ANSWERS-I've done my homework and I understand it's
going to be an 80-100 hour per week job but I'm not afraid of that.
Can you tell me about the different product and industry groups at our bank? - ANSWERS-Being
a bulge bracket bank, Credit Suisse offers pretty much anything a client could ask for.
Restructuring, M&A, LevFin, Debt and Equity Capital Markets. Some specific groups - Financial
Sponsors, ECMS, DCMS, Ultra High Net Worth (UHNW). Some specific industries - healthcare,
industrials (my previous interviewer), financial institutions, etc.
What's in a pitch book? - ANSWERS-It depends.
1. Bank "credentials" (similar deals they've done to "prove" their expertise).
2. Summary of a company's options ("strategic alternatives" in banker-speak).
3. Valuation and appropriate financial models (for example, if you're pitching for an IPO you
might show where the IPO proceeds would go).
4. Potential acquisition targets (buy-side M&A deal) or potential buyers (sell-side M&A deal).
This is not applicable for equity/debt deals.
5. Summary and key recommendations.
How do companies select the bankers they work with? - ANSWERS-Usually based on
relationships. When it comes time to do a deal, the company calls different banks it has spoken
with and asks them to "pitch" for the business. This is called a "bake-off" and the company
selects the "winner" afterward
, Walk me through the process of a typical sell-side M&A deal. - ANSWERS-1. Meet with
company, create initial marketing materials like the Executive Summary and Offering
Memorandum (OM), and decide on potential buyers.
2. Send out Executive Summary to potential buyers to gauge interest.
3. Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed
information like the Offering Memorandum, and respond to any follow-up due diligence
requests from the buyers.
4. Set a "bid deadline" and solicit written Indications of Interest (IOIs) from buyers.
5. Select which buyers advance to the next round.
6. Continue responding to information requests and setting up due diligence meetings between
the company and potential buyers.
7. Set another bid deadline and pick the "winner."
8. Negotiate terms of the Purchase Agreement with the winner and announce the deal.
Walk me through the process of a typical buy-side M&A deal. - ANSWERS-1. Spend a lot of time
upfront doing research on dozens or hundreds of potential acquisition targets, and go through
multiple cycles of selection and filtering with the company you're representing.
2. Narrow down the list based on their feedback and decide which ones to approach.
3. Conduct meetings and gauge the receptivity of each potential seller.
4. As discussions with the most likely seller become more serious, conduct more in-depth due
diligence and figure out your offer price.
5. Negotiate the price and key terms of the Purchase Agreement and then announce the
transaction.
Walk me through a debt issuance deal. - ANSWERS-1. Meet with the client and gather basic
financial, industry, and customer information.
2. Work closely with DCM / Leveraged Finance to develop a debt financing or LBO model for the
company and figure out what kind of leverage, coverage ratios, and covenants might be
appropriate.
3. Create an investor memorandum describing all of this.
All Technicals Exam Questions and
Answers247
If we had not deducted interest and the mandatory debt amortization in calculating the free
cash flow above, what metric would we be measuring? - ANSWERS-If that were the case, we
would have calculated the unlevered free cash flow. To get to the unlevered FCF yield, the
denominator would be enterprise value to match the cash flows.
Unlevered Free Cash Flow Yield = Unlevered Free Cash Flow / Entry Enterprise Value
The unlevered FCF yield would tell the investor how the overall company is performing on an
operational level, and it can tell us how much FCF remains to reinvest into the business and pay
a dividend to equity holders, as well as the amount that can be used to paydown debt.
How does the accounting treatment of financing fees differ from transaction fees in an LBO? -
ANSWERS-Financing Fees: Financing fees are related to raising debt or issuing equity. These fees
are capitalized and amortized over the debt's maturity (~5-7 years).
Transaction Fees: Transaction fees refer to the M&A advisory fees paid to investment banks or
business brokers, as well as the legal fees paid to lawyers. Unlike financing fees, transaction fees
cannot be amortized and are classified as one-time expenses deducted from a company's
retained earnings.
If an acquirer writes-up the value of the intangible assets of a target, how are goodwill and
amortization impacted? - ANSWERS-During an LBO, intangible assets such as patents,
copyrights, and trademarks are often written-up in value. Recall that goodwill is simply an
accounting concept used to "plug" the difference between the purchase price and fair value of
the assets in the closing balance sheet - so a higher write-up means the assets being purchased
,are actually worth more. Therefore, a higher write-up of intangible assets means less goodwill
will be created on the transaction date.
Publicly traded companies cannot amortize goodwill under US GAAP - however, private
companies can opt to amortize goodwill for tax reporting purposes. This question is specifically
regarding the purchase accounting on the closing date of the transaction.
What does a cash sweep refer to in LBO modeling? - ANSWERS-A cash sweep is when the excess
free cash flow after revolver repayments is used to make optional repayments on debt,
assuming the debt tranche allows early repayments. In most cases, this optionality to repay
debt early comes with a prepayment penalty fee since the lender receives reduced interest
payments.
What is the purpose of the minimum cash balance in an LBO model? - ANSWERS-Companies
need a certain amount of cash for daily operations and meet their net working capital (NWC)
requirements. The debt schedule will contain logical functions that ensure the cash balance
never dips below this specified amount. The minimum cash balance will increase the amount of
funding required since this cash on the company's balance sheet cannot help fund the
transaction.
You've never worked in finance before. How much do you know about what bankers actually
do? - ANSWERS-I've done a lot of research on my own.
Based on that, I know that bankers advise companies on transactions - buying and selling other
companies, and raising capital. They are "agents" that connect a company with the appropriate
buyer, seller, or investor.
The day-to-day work involves creating presentations, financial analysis and marketing materials
such as Executive Summaries.
Let's say I'm working on an IPO for a client. Can you describe briefly what I would do? -
ANSWERS-You meet with the client and gather basic information - such as their financial details,
an industry overview, and who their customers are. You meet with other bankers and the
lawyers to draft the S-1 registration statement - which describes the company's business and
,markets it to investors. You receive some comments from the SEC and keep revising the
document until it's acceptable. You spend a few weeks going on a "road show" where you
present the company to institutional investors and convince them to invest. The company
begins trading on an exchange once you've raised the capital from investors.
How much do you know about the lifestyle in this industry? Do you know how many hours
you're going to work each week? - ANSWERS-I've done my homework and I understand it's
going to be an 80-100 hour per week job but I'm not afraid of that.
Can you tell me about the different product and industry groups at our bank? - ANSWERS-Being
a bulge bracket bank, Credit Suisse offers pretty much anything a client could ask for.
Restructuring, M&A, LevFin, Debt and Equity Capital Markets. Some specific groups - Financial
Sponsors, ECMS, DCMS, Ultra High Net Worth (UHNW). Some specific industries - healthcare,
industrials (my previous interviewer), financial institutions, etc.
What's in a pitch book? - ANSWERS-It depends.
1. Bank "credentials" (similar deals they've done to "prove" their expertise).
2. Summary of a company's options ("strategic alternatives" in banker-speak).
3. Valuation and appropriate financial models (for example, if you're pitching for an IPO you
might show where the IPO proceeds would go).
4. Potential acquisition targets (buy-side M&A deal) or potential buyers (sell-side M&A deal).
This is not applicable for equity/debt deals.
5. Summary and key recommendations.
How do companies select the bankers they work with? - ANSWERS-Usually based on
relationships. When it comes time to do a deal, the company calls different banks it has spoken
with and asks them to "pitch" for the business. This is called a "bake-off" and the company
selects the "winner" afterward
, Walk me through the process of a typical sell-side M&A deal. - ANSWERS-1. Meet with
company, create initial marketing materials like the Executive Summary and Offering
Memorandum (OM), and decide on potential buyers.
2. Send out Executive Summary to potential buyers to gauge interest.
3. Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed
information like the Offering Memorandum, and respond to any follow-up due diligence
requests from the buyers.
4. Set a "bid deadline" and solicit written Indications of Interest (IOIs) from buyers.
5. Select which buyers advance to the next round.
6. Continue responding to information requests and setting up due diligence meetings between
the company and potential buyers.
7. Set another bid deadline and pick the "winner."
8. Negotiate terms of the Purchase Agreement with the winner and announce the deal.
Walk me through the process of a typical buy-side M&A deal. - ANSWERS-1. Spend a lot of time
upfront doing research on dozens or hundreds of potential acquisition targets, and go through
multiple cycles of selection and filtering with the company you're representing.
2. Narrow down the list based on their feedback and decide which ones to approach.
3. Conduct meetings and gauge the receptivity of each potential seller.
4. As discussions with the most likely seller become more serious, conduct more in-depth due
diligence and figure out your offer price.
5. Negotiate the price and key terms of the Purchase Agreement and then announce the
transaction.
Walk me through a debt issuance deal. - ANSWERS-1. Meet with the client and gather basic
financial, industry, and customer information.
2. Work closely with DCM / Leveraged Finance to develop a debt financing or LBO model for the
company and figure out what kind of leverage, coverage ratios, and covenants might be
appropriate.
3. Create an investor memorandum describing all of this.
