This document provides an overview of an investment banking technical interview workshop. It discusses the interview format, common valuation methods like discounted cash flow (DCF), public comparables, and precedent transactions. Sample technical questions are provided on these topics as well as accounting questions. General interview tips are offered such as thinking through questions logically and having follow up questions prepared.

1. Investment BankingTechnical Interview Workshop Tuesday, January 19, 2010 Presented by: Justine Erickson With contributions by Jessica Delfino, Mike Hudgin & Ekaterina Petrovitch

2. Introduction Justine Erickson Investment Banking Full-Time Analyst RBC Capital Markets, Toronto justine.erickson@mail.mcgill.ca

3. Agenda Interview Format Valuation DCF Public Comparables Precedent Transactions Sample Technical Questions The Infamous Accounting Question General Interviewing Tips

4. Deutsche Bank’s Interview Tips http://www.youtube.com/watch?v=3CsL1rcENH0

6. 30-45 minutes

7. Behavioural and lots of technical

8. One to six interviewers

9. Second Round

10. 3-4 hours

11. Expect even more technical (reactions under fatigue/pressure)

13. Three General Ways to Value a Company: Discounted Cash Flow Public Comparables Analysis (Relative Valuation) Precedent Transaction Multiples For each method, interviewees should address: Basic overview (why this method is used) How it’s practically used (mechanics) Pros & cons of method

14. DCF – Overview DCF is the method of valuation that allows for the most flexibility (and possibly precision) in coming up with the intrinsic value of a firm The DCF method that we use is FCFF (you might know it as WACC method, but refrain from calling it this…) Mapped on many assumptions Based on future expectations of a firm’s cash flows (numerator), and the risks associated with those cash flows (denominator)

15. DCF – Basic Steps First determine WACC = D/V * Rd (1-T) + E/V * Re Effect of capital structure Use target (optimal) D/E ratio Re , Beta  CAPM Rd (1-T)  discuss importance of tax shield Mechanics of FCFF FCFF = EBIT(1-T) – CAPEX + NCC +- Δ NWC Explain that CAPEX and NWC are all cash sources/uses that don’t affect EBIT, therefore we must adjust. Analyze historical performance to come up with future set of assumptions (COGS, SG&A, R&D, “DEP”, “CAPEX”, “NWC” as a % sales) Therefore, we need to use revenue as a driver, and determine its growth from year to year during our explicit forecast period (5-10 yrs)

16. DCF – Basic Steps (cont’d) Determine FCFF’s each year using assumptions driven off of revenue Determine TV at last year of forecast period 2 methods Growing perpetuity Assumes constant growth rate (2-3%) – not really used Terminal multiple Assumes an exit multiple of an operating metric like EBITDA or FCFF, to determine a value for the enterprise at that point in time Bring everything back to present value at WACC

17. DCF – Basic Steps (cont’d) Now we have the value of the enterprise (Enterprise Value = Net Debt + Equity + Minority Interest) In order to determine Equity Value, we must first subtract Net Debt & Minority Interest At this point we have Equity Value Divide by Shares Outstanding to obtain PPS Sensitivity analysis provides for flexibility in model WACC / Growth Rates / Terminal Multiples

19. The model is only as good as your assumptions

20. Know sources of info used to develop assumptions

21. Allows for flexibility

22. Firm can improve margins over time - DCF models are usually optimistic

24. Relative Valuation – Basic Steps Determine the target company’s EPS, EBITDA, and Sales for current year and possibly forward year (using research analyst estimates) Determine the set of comparable companies (comp universe) and their trading multiples Similar companies based on industry, size, business model, risk, capital structure – anything you can control for Separate lists if company is a conglomerate Multiply average industry multiple by current or forward performance of target company to determine the relative value of the firm

26. Don’t have to make assumptions that are necessary for DCF

27. Not a gauge of intrinsic value

28. Reflects the market’s current opinions on value – average could be skewed based on company-specific factors, especially in this economic environment

29. Only values companies if they were valued the same way as their peers

30. Often difficult to find exact comparables

32. Precedent Transactions – Basic Steps Find historical takeovers within industry Again, look for similar transaction size, and most recent first Try to cover at least one economic cycle in terms of precedent transactions, as some takeover premiums might reflect a takeover boom in an industry Multiply relevant multiples (P/E, EV/EBITDA, EV/Sales, etc.) by company’s figure to obtain firm’s value in event of a takeover

34. Reflects how much the company would be worth in the eyes of its industry peers

35. Often used when firm is selling off a division

36. Only useful if firm will consider takeover

38. Be prepared to discuss current events that you are following and able to respond to questions

39. Case: Housing crisis in general

40. Case: Kraft/Cadbury deal

41. Case: Drastic commodity price fluctuations

44. Why can’t you use EV/Earnings or Price/EBITDA as valuation metrics?

45. Why do you subtract cash in the enterprise value formula?

46. How would you calculate the return on equity for a private firm with no comparables?

47. What is cheaper, debt or equity?

48. If you own a start-up mining company in Canada and you require additional capital, would you rather finance your company with debt or equity? Why?

50. Do not panic!

51. Logically think through the question, interviewers are analyzing your capacity to think logically in stressful situations

52. Think out loud, don’t sit in silence

53. Ask questions if you’re confused but totally stumped (but make sure to listen to the answer well)

54. Sometimes thinking backwards is the key to many brainteasers

55. Don’t feel rushed, work through everything and they may help you along the way

56. Speak confidently and clearly

58. Order of financial statements  1) Income Statement 2) Cash Flow Statement 3) Balance Sheet (most difficult is to balance)

59. Assume the company’s fiscal year end is Dec. 31

60. This year and next year

61. The numbers are not important, but use them when learning the important underlying concepts

63. Further, since the fiscal year end is Dec. 31, we are assuming no depreciation in the first year, and there is no impact to net income, thus no impact to the income statement.

65. $100 increase in capital expenditure: therefore a $100 use of cash in cash flow from investing activities.

68. PP&E (asset) up by $100

69. Debt (liability) up by $50

71. Let’s also assume a 10% interest rate on the debt and no debt amortization.

72. Depreciation is an expense so operating income (EBIT) declines by $20 ($100/5 years).

73. $5 of interest expense (0.10 * $50).

75. No change to cash flow from investing or financing activities. (If we assumed some debt amortization, we would have a use of cash in financing activities.)

77. PP&E (asset) down $20

78. Therefore left-side of Balance Sheet down $15

79. Retained earnings (shareholders’ equity) down $15 (remember, net income decreased by $15?)

82. The last thing you want to do is go on a tangent or talk too much

83. If you don’t know the answer right away, walk through your logical thinking process

84. Always try to work out the problem. Don’t say I don’t know!!

85. Don’t stress and keep your cool

86. Be confident and comfortable

87. Always have questions to ask them

88. Don’t be cocky or pretend like you know everything about banking. Bankers, especially analysts, find this extremely aggravating and can see through it

90. Logical flow

91. Progression

92. For everything you did, explain why (i.e. I chose business school because I’ve always been fascinated about what makes a good business)

94. DO NOT get drunk

95. Try not to ask too many nerdy finance questions or talk about how bad the markets are – unless, of course, a banker asks you your opinion

96. Expect out of the blue questions about the economy and investing

97. Do not talk about things you don’t know anything about, try to learn from others, don’t be cocky

98. Try to sneak your interests into conversations that aren’t always relevant in interviews (e.g., interest in art or different cultures)

99. Goal: Try to come across as an interesting and ambitious person who can also have some fun and be enjoyable to work with

100. One slight mess up can definitely cost you your offer

102. Suggestions

103. Being able to learn a boatload in a short amount of time

104. Being surrounded by intelligent people willing to teach

105. Interest in financial markets

106. Like to work on projects and see rewarding results (even see it in the paper…)

107. Intense environment, fast-paced, pressure, multi-tasking

109. Have you seen the current economic turmoil/credit crisis affecting your everyday work? If so, how?

110. In what industries does your office see the most dealflow?

111. As a summer analyst will I be placed in one industry group or will I be a generalist?

112. How would you describe the culture of your office?

113. What, in your opinion, is the most important aspect or quality that a summer analyst should possess and display?