Guide Sample Sections On the following pages you will find 3 FREE samples of different sections from our investment banking guide: The Insider’s Guide To Investment Banking. These samples are just small snapshots of the 240 pages available upon purchase of our guide. We have pulled the below content from different parts of the guide, giving you a taste of the different topics covered throughout. If you like what you find and would like to purchase the entire 240 page investment banking guide for only $69.99, please visit www.ibankinginsider.com. Enjoy!

Copyright 2012-2013 iBanking Insider LLC ALL RIGHTS RESERVED. This document contains material protected under International and Federal Copyright Laws and Treaties. No part of this document may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without express written permission from the author.

(2.1) By Size Investment banks can range in size from thousands of employees to just a few individuals; bank culture and capabilities in these two scenarios are very different, as is the Analyst experience. Banks are categorized by size into bulge bracket, middle market, and boutique (which includes elite boutique). Although there is a generally agreed upon list of bulge bracket banks in the U.S., the dividing line blurs when looking internationally or distinguishing between middle market and boutique investment banks.

Bulge Bracket Recognized as the most prestigious and well-known banks, bulge bracket firms work on the largest deals, have the most employees, and provide the widest array of services to their clients. All of these banks have a global presence, with U.S. headquarters in New York City and geographic headquarters in major cities across multiple continents. These firms commonly execute deals over $1 billion, but deal sizes can be as low as $200 million: many banks have minimum thresholds in the low-hundred million dollar range. These thresholds exist because fees on smaller deals do not justify the resources and time of the larger banks. The banks in the following list are generally agreed to be “bulge bracket” in the United States:  BAML  Barclays

 Citi  Credit Suisse

 Deutsche Bank  Goldman Sachs

 JP Morgan  Morgan Stanley

 UBS  Wells Fargo

Pros & Cons  Prestigious firm and “front-page” deals.  Better exit opportunities with more headhunter exposure – these are among the first firms that headhunters reach out to regarding next steps for Analysts.  Higher pay – these firms usually set the precedent for Analyst pay each year.  Solid company infrastructure – well-established services within the bank make the Analyst’s life easier (i.e. Presentations, Copy Room, and Information Services).  Most bulge bracket banks (excluding a few notable firms) are known for accommodating (and even helping) Analysts that pursue exit opportunities.  Large Analyst classes provide better networking opportunities.  Less intimate setting – you are an ant in the grand scheme of the firm; it is harder to get noticed and more likely that you get lost or stuck in a bad staffing situation.  Usually associated with longer hours.  More regimented structure – when trying to complete a deal or win business from clients, you will need to clear many internal hurdles and must complete a multitude of memos.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

Middle Market Middle market is the most amorphous investment bank categorization, with some firms acting more like boutique banks and others closely resembling bulge bracket banks. Most of these banks provide a full range of advisory and financing services to clients, but some do not offer all of the services that bulge bracket banks can provide. Middle market banks typically have a decent international presence but are not as global as bulge bracket banks. They range in size from several hundred employees to tens of thousands (in rare cases). As a general rule, middle market deals range from $200 million-$1 billion (with occasional multibillion dollar transactions), but smaller middle market firms execute deals valued as low as $50 million. Examples of middle market banks include: Jefferies, RBC, Piper Jaffrey, Houlihan Lokey, HSBC, William Blair, RBS, BNP Paribas, Rothschild, Harris Williams, Macquarie and many more. Pros & Cons      

More intimate office setting often leads to more senior exposure. Leaner deal teams – Analysts get the opportunity to take on more responsibility. Less red tape – less time is spent working on materials required for internal compliance. Lower pay (although larger middle market firms usually pay equivalent to or just below Street). Less well-known brand name – your friends and family may not have ever heard of your firm. Less willing to do “two and out” – middle market firms allow Analysts to work their way up within the firm more often, and therefore are not always accommodating of Analysts going through exit opportunity recruiting. Some firms may even threaten to fire you if they hear that you are going through the recruiting process.

Boutique Boutique banks are typically smaller than middle market banks and usually provide only advisory services; their small or non-existent Balance Sheets exclude them from providing financing services. The number of employees at boutique banks varies widely, but can be as high as a few hundred and as low as a dozen. These banks tend to be regional and have only a few major offices. Most boutique banks execute smaller deals, typically below $100 million, and often specialize in a particular type of deal or focuses on a specific industry (i.e. healthcare, media, etc.). Examples of these types of banks include CSG Partners, Silicon Valley Bank, Soneshine Partners, Stone Key Partners, and thousands of others. Research boutique investment banks in your area to get a better idea of which firms are near you. Pros & Cons  Very intimate/lean deal teams – by nature, deal teams tend to be smaller at these smaller firms, leading to more responsibility and senior exposure for Analysts.  Fewer hours – although this is not always true, many boutique banks have more laid-back cultures and give Analysts a better work-life balance.  Significantly lower pay – usually in the form of lower bonuses.  Lack of infrastructure – these firms typically do not have the same auxiliary services that bulge bracket and middle market firms have. Analysts will have fewer resources to help them on the job, and might find themselves printing and binding their own pitchbooks.  Minimal buyside exit opportunities – headhunters rarely reach out to Analysts at these firms.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

Elite Boutique A few banks are designated as “elite boutiques”; these firms do bulge bracket deals ($1 billion+) and have global a presence despite being small in size and offering fewer services. A few well-known elite boutique banks have upwards of one thousand employees, but are considered boutique due to their small (or non-existent) Balance Sheet which prevents them from offering financing and other services. Elite boutique investment banks are well-respected across Wall Street and are known for paying Analysts the same as bulge bracket banks. They also provide similar, if not better, exit opportunities compared to most other firms. Examples of elite boutique banks include: Moelis & Co., Lazard, Blackstone Investment Banking, Evercore, Centerview, Qatalyst, and Greenhill. Pros & Cons  Share most of the same pros as bulge bracket banks – prestigious deals, better exit opportunities/headhunter exposure, strong name brand (within finance), and very accommodating for Analysts seeking exit opportunities.  Additional benefit of a lean/intimate deal teams, resulting in more Analyst responsibility.  Very little infrastructure coupled with high fees results in greater profits for the firm and often high bonuses for the firms employees.  These firms are uniquely positioned for growth, and upward mobility may be expedited.  Known for having longer hours/intense cultures – these firms often become prestigious because of the intensity and drive of the senior bankers that work there. This can translate to much more work for the Analyst.  Limited/no exposure to financings – because most of these firms do not have financing capabilities, Analyst experience will come exclusively from advisory roles.  Relatively unknown outside of the finance world – these firms do not look as prestigious to nonfinance employers or the general public.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

(16.2) Excelling On The Job Below, we have compiled a list of the essentials for you to become a successful Summer Analyst. The junior year Summer Analyst internship is one of the most grueling 8-10 weeks of your professional career, but there is a lot to be gained from the experience. Treat this internship as your do or die moment and give it your all. Ideally, you will sign a full time offer upon completion of the internship and have a relaxing senior year.

Leave A Good Impression In investment banking, first impressions are everything. Set precedents early: prove that you are reliable in your first few weeks. If coworkers do not feel they can trust you early on, it will likely carry with you for the rest of your internship. Follow the tips below to ensure you leave a good impression: •

•

Pay attention to detail. The easiest way to blow a first impression is by making stupid mistakes. This means that you should not have any formatting errors, spelling mistakes, missed comments, or overall lazy errors. LITERALLY, double, triple, quadruple check your work, particularly in the first few weeks of the internship. The extra few minutes will pay off. Never be late to work or to meetings. Insider Insight

Being Late To Work As An Intern

 Full-time Analysts get frustrated when interns constantly show up to the office after them. It is an unspoken rule that interns should be the first ones in the office. • • •

Have a great attitude. Be positive when receiving new assignments. Attitude is particularly important when judging interns and is a way to stand out early-on during your summer. Know your place in the office and be humble, nothing is beneath you (get coffee if you are asked to, though this will hardly ever happen). Avoid complaining to full time bankers. Quote “ It is always unnerving to hear Summer Analysts complaining. Everyone is working hard and you’re the only one who will be getting a nice long break when your program ends. ” - Vice President, Bulge Bracket Investment Bank

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

• • •

Manage expectations by under promising and over delivering: give yourself a cushion when accepting new projects. When asked how long a project will take for you to complete, build a buffer by giving yourself more time than you anticipate the task needing. Avoid constant use of your personal cell phone. If coworkers walk by and always see you texting, it will reflect poorly on their view of your work ethic. If you see a senior banker doing something menial, offer to help. Their time is much more valuable than yours; if you see them doing an administrative task, offer to provide assistance.

Stay Organized Investment bankers love Analysts that stay organized; it is a necessary component of the job, and it makes everyone’s life easier. • • • •

Keep a running to-do list at all times. Tasks will begin to pile up, and it is vital that everything necessary is completed. Cross off items as you finish them, and review your to-do list for completion every night before leaving the office. Version control: when working in any document, periodically and systematically save new versions (i.e. v1, v2, v3…). After any big change or addition, save-up. If you mess up a live version of a model and accidentally save over it, you will be in BIG trouble. Keep email and deal folders well organized. Learn the best way to categorize and subcategorize from fellow Analysts. Always ask for a deadline or timeline on assigned projects. This aids in managing expectations and prioritization.

Practice Proper Email Etiquette As an investment banking Summer Analyst, you send a countless number of emails throughout the day (sometimes hundreds). Understanding the “ins and outs” of email etiquette is essential. Below, we detail some important points: • • • • • •

Understand the email hierarchy: put the highest ranking individual on the email chain first, and then go in descending order (although this may sound ridiculous, some bankers care a lot). Be careful when replying to one individual versus replying all. Keep every email professional: no slang, nicknames or abbreviations. Save casual or personal conversations for offline mediums. Double check email addresses before sending ANY emails to ensure you are sending it to the intended recipient. Triple check the email and recipients when sending confidential information or when a client is on the thread. Fill in the “To” addresses last: this prevents sending unfinished emails on accident or before adding attachments. Double check to make sure that attachments are included and that they are the correct files before sending. It does not look good to have to send a follow-up email after forgetting to attach a document. Quote

“ Whenever there is a name in the ‘To:’ field and I need to tweak an attachment or the body of an email, I consider myself in the ‘danger zone’! Avoid this as much as possible. ” - Analyst, Bulge Bracket Investment Bank

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

Practice Proper Phone Etiquette Summer Analysts do not receive a high volume of inbound business calls, but practice a simple greeting (i.e., “Hello, this is [John]”), which sounds infinitely more professional than “Hello”. Be concise and courteous. Try to end conversations by thanking the other party for their time and/or offering further assistance, if applicable.

Always Be Learning Along with getting a full-time offer, an end goal of your internship is to learn as much as possible (this is a major perk of the job). Recognize that, at first, you will be more of a burden than a help to full-time Analysts. Follow the below best practices as you learn on the job. Before asking any questions, try to find answers online. Bankers hate being asked questions that can be easily answered on your own: • • •

For basic questions that cannot be found online, ask fellow interns. For more meaningful or job-specific questions, always ask full-time Analysts first. They will direct you to an Associate if they cannot answer it. Take notes so you do not have to ask the same question twice. Quote

“ It surprises me how often interns will come and ask me questions directly. I like interacting with them, but answering basic questions cuts into my time. ” - Vice President, Middle Market Investment Bank “ I don’t mind when Summer Analysts ask me questions, in fact I encourage it. However, it bugs me when they ask the same question twice. I’m too busy to repeat myself. ” - Associate, Elite Boutique Investment Bank • • •

Ask for feedback: do this after a specific project, after a few weeks on the job, etc; it shows a desire to improve. Be a problem solver: “I don’t know” is an acceptable answer, but even better is “I don’t know, but I’ll try to find out”. Leverage all possible resources: knowing where to find the answer is often more important than knowing the answer itself.

Understand Office Politics Understanding office politics is essential in knowing how to interact with coworkers, managing what is expected of you, and finding out whose good side to be on. As an intern, face time is one of the most important aspects of office politics: be the first person in the office and the last to leave. Summer interns (in particular) are expected to always be around. The more someone sees you in the office, the more they associate you with commitment to the firm. Pay your dues during the summer to land a full-time offer.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

Quote “ As I always said as a Summer Analyst: face time to full-time, baby. ” - Analyst, Bulge Bracket Investment Bank

Insider Insight

Summer Analyst Face Time

 Most bankers will tell you that face time does not matter, but during your internship it does. Senior bankers love hard workers; convey this by being around the office all of the time. Other things to consider when dealing with office politics are presented below: • •

Form a good relationship with your staffer. If you have capacity, show initiative by asking to be added to different types of projects and deals. The staffer is often one of the more powerful and vocal members of your review process. Be likeable and social. Break the formal office setting when possible: get coffee or lunch with coworkers, go out at night with Analysts, etc. These are great ways to have personal conversations with peers and let your personality shine through. Forming good relationships with coworkers is very helpful in getting a full-time offer. Quote

“ Most bankers will refer to the ‘airport test’ when it comes to potential junior bankers. What this means is ‘if I got stuck sitting in an airport with the intern during a flight delay and had to make small talk, would I get annoyed with them?’ End up on the wrong end of this test and you could be out of luck come offer time. ” - Vice President, Middle Market Investment Bank

Insider Insight

Importance Of Relationships In Intern Reviews

 Strong personal relationships with other Analysts, Associates, and VP’s can make up for a lack of technical skills when being considered for a full-time offer. There are many instances where well-liked Summer Analysts are given full-time offers even though they lack proficiency in some of the technical skills required for the job. •

•

Interact with people senior to you (in the hallways, kitchen, elevator, etc.). Many interns act shy around senior bankers, so stand out by approaching them. However, avoid barging into offices or interrupting conversations; have something relevant to say or you will stand out for the wrong reason. Utilize a mentor: form a good relationship with specific full-time bankers and put yourself in a position where these individuals will go to bat for you during the review process.

Do The Little Things Employ the below to make your life a little easier during the rigorous summer internship: • •

Keep toiletries and snacks in your desk: you will most likely use them. Dress the part. You might not be able to afford Hermes ties or Ferragamo shoes, but have clean, presentable clothes. If your office does not require ties, avoid wearing a crew neck undershirt.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

•

For offices with casual Fridays, be smart about how you dress and err on the conservative side. In both situations, take cues from the full-time Analysts. Take detailed and comprehensive notes. You are the deal-team’s note taker, so be prepared in meetings and conference calls. Insider Insight

Note Taking Strategy

 A good way to go the extra mile and stand out is to email typed notes to your team after important events or meetings. •

When in doubt, print it out. Every time you have a meeting or call in a senior banker’s office, there are probably some materials you can print out and bring with you. It looks good when someone asks a question and you can provide them with the backup data.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

(21.6) Discounted Cash Flow Analysis Arguably one of the most common types of valuation, Discounted Cash Flow (or “DCF”) Analysis is a useful method to break down the value of a business’s operations. In simple terms, a DCF is a shortform model that projects out future FCF of a business and then discounts that cash flow back to the present using a set discount rate. A DCF can be broken down into three important components: 1. Discount rate (WACC) 2. Free Cash Flow 3. Terminal Value Before diving into each, it is important to understand the concepts of present value and discount rates.

Present Value & Discount Rates The fundamental premise behind present value calculations is simple: individuals prefer to have money today rather than money tomorrow because they can invest the money today and earn a return going forward. When calculating the present value of an amount to be received in the future, one must always assume a required rate of return that an investor would demand. This assumed rate of return is known as the discount rate, Weighted Average Cost of Capital (“WACC”), or the hurdle rate (all interchangeable). A discount rate can also be thought of as the amount of interest someone assumes they could earn on an investment. It is important to recognize that the discount rate and present value are inversely related: the higher the discount rate, the lower the present value (and vice versa). To see how this works in practice, let us look at an example. Example Assume an individual receives a gift of $100 today. If that person has an annual discount rate of 10% (in other words, he believes he can earn an interest rate of 10% per year on his money), then investing that $100 today at an interest rate of 10% would result in $110 in his bank account at the end of one year. Therefore, this individual should be indifferent between receiving $110 one year from now and receiving $100 today. Below is the formula for a present value calculation:

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

payment (1 + r) ^ t Where: payment = amount of money to be received (also known as future value) r = discount rate t = length of time until you receive the payment*** PV =

In this case, payment = $110, r = 10%, and t = 1, getting us to a present value of $100. ***Typically, this will be in years, though it is important to match the discount rate period with the time period of the payments. For example, if there is an annual discount rate of 10% but payments are monthly, then the discount rate must be converted to a monthly rate. To do this, utilize the following formula: Effective rate for period = (1 + annual rate) (1 / # of periods) – 1 Per the formula, an annual discount rate of 10% translates into a monthly discount rate of 0.797%. Discount Rate (Weighted Average Cost of Capital) With a basic introduction to present value, it is now possible to move on to a vital component of the DCF process: the discount rate or Weighted Average Cost of Capital (“WACC”). WACC is the formula used to calculate a discount rate, and it consists of several parts: cost of equity, cost of debt, and cost of preferred equity (if applicable):

Cost of Debt

Cost of Equity Cost of Pref. D E P WACC = [rd * (1 - t)] * + re * + rp * (D + E + P) (D + E + P) (D + E + P) Where: re = cost of equity rd = cost of debt rp = cost of preferred equity t = tax rate D = market value of debt E = market value of equity P = market value of preferred equity Notice above that each respective discount rate is multiplied by its proportion of the total capital structure of a company. We demonstrate this formula in the example below: Example Company A has a market value of equity of $500 million and $200 million of debt. Assuming a cost of equity of 15%, a cost of debt of 10%, and a tax rate of 40%, calculate Company A’s WACC.

WACC = (.1 * .6) * ($200 / $700) + .15 * ($500 / $700) WACC = 12.4%

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

We multiply the cost of debt by (1 – t) because interest expense paid to creditors is tax deductible. If you were to pay equity investors a return (i.e. as a cash dividend), this would not be tax deductible and would not be listed on the Income Statement (whereas interest expense is). Finding a figure for the cost of debt is relatively straight-forward: the cost of debt should be the weighted average yield on all outstanding debt within the company. If no market prices of debt are publicly available, then taking a weighted average of the company’s interest expense to its book value of debt is usually accurate enough. To find the cost of equity, we use a formula known as the Capital Asset Pricing Model (or CAPM). CAPM = rf + β * (rm - rf )

Where: rf = risk free rate (equal to U.S. Treasury Bill with maturity equal to length of DCF, usually 10 years) β = levered beta of the company’s equity rm = expected return of the stock market In the CAPM formula (rm – rf) is known as the market risk premium: this is the excess return that the market demands given the risk of equity. Historically, the expected return of the market has hovered around 7%, which results in a market risk premium in the 3-5% area. Levered Beta is a measure of the individual stock’s volatility compared to the stock market (i.e. the S&P 500). If a company has a Beta of 1.5, then for every 1% increase in the overall market, there should be 1.5% increase in that company’s stock price (and vice versa). The riskier a stock is, the higher its Beta. To find an applicable levered Beta for your stock you must: 1. 2. 3. 4.

Find the levered Betas for comparable companies (located online or via paid subscription) Unlever the Betas of those companies Find the average and/or median of the unlevered Betas Re-lever the Beta using your specific company’s capital structure (using its mix of debt, equity, and preferred equity)

The formulas for unlevering and levering Beta are below: Unlevered β =

βL 1 + [(1 - t) * (D / E)]

Levered β = βU * [1 + [(D / E) * (1 - t)]]

Where: βL = levered Beta βU = unlevered Beta E = market value of equity D = market value of debt t = corporate tax rate Once levered Beta is obtained for the company being analyzing, plug in the other parts of the CAPM formula to find the cost of equity. The risk free rate is the rate that investors demand with no real default risk on their investment; the typical proxy used is the interest rate on a U.S. Treasury Note or U.S. Treasury Bond.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

Free Cash Flow After finding a proper discount rate to be applied to a DCF, the next step is calculating unlevered free cash flow and projecting it into the future. Unlevered FCF represents a company’s cash flows before the effects of interest payments on debt. For this reason, unlevered FCF represents the purely operational cash flows of the business, independent of its capital structure. This means that the exact same company with $100 million of debt vs. $800 million of debt would have the same unlevered FCF (since interest expense on the different debt levels is not deducted from cash flow figures). Note that this difference in capital structure (debt) WOULD affect the discount rate and equity value calculations, though. Unlevered FCF is calculated as follows:

(EBITDA - D&A) * (1 - t) = Tax-effected EBIT Unlevered FCF = then Tax-effected EBIT + D&A - Capital Expenditures - Working Capital Increase As described above, we use unlevered FCF because it represents the cash flows available to the business as a whole and provides the fundamental value of the business’s cash flows, regardless of capital structure and debt levels. The value obtained in a DFC using unlevered FCF is the company’s Enterprise Value. On the other hand, conducting a DCF using levered FCF will produce the company’s Equity Value; you would discount levered FCF by the cost of equity, excluding the cost of debt or preferred equity. To project unlevered FCF into the future, one does not simply add a growth rate to a company’s historical unlevered FCF. Instead, projections involve specific revenue growth, balance sheet, and margin assumptions. Typically, an Analyst will assume certain growth rates for revenues while increasing or decreasing margins (decreasing or increasing expenses as a % of revenue) to arrive at projected EBITDA. Future capital expenditures and working capital can be calculated as a % of revenue or other line items, or can be built out with detailed capital expenditures schedules and full three-statement models. In these full models, line items of the Balance Sheet are calculated year-to-year to arrive at the change in Working Capital. The tax rate should remain constant. When building a DCF, cash flows and other operating figures are typically projected out 5-10 years into the future to ensure that a company’s cash flows are stabilized by the time a terminal value is calculated. As we will discuss shortly, DCF valuation is highly dependent on the terminal value, a figure that represents a company’s cash flows to infinity (in other words, over an infinite period of time). It is very important to project out enough operating years so that this “infinite” terminal figure is stable and not inflated. Note that DCF projections can go out further (15-20 years) if dealing with a very early stage company, though this is not very common (nor are extended projections very accurate).

Terminal Value The final piece in a DCF valuation is the terminal value calculation. Terminal value represents the present value of the company’s unlevered FCF’s beyond the DCF’s projection period (into infinity). At this point, the company’s cash flows are assumed to be stabilized. Insider Insight

Present Value of the Terminal Value

 The terminal value is not the present value TODAY; it represents the present value at the end of the DCF projection (5-10 years away). For this reason, one must discount the terminal value back to the present day (today), as well. This “double present value” calculation is often forgotten when walking through a DCF during interviews.

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

The terminal value usually represents a majority of the value calculated in a DCF, making it a very important part of the analysis. Small changes in discount rate, growth assumptions, exit multiples, or other factors can cause major swings in overall valuation from the DCF. There are two major methods of calculating the terminal value: the perpetuity growth (or Gordon Growth) and exit multiple methods. Perpetuity Growth Method The perpetuity growth method utilizes the present value formula for a series of cash flows that are received forever (i.e. “into perpetuity”). The present value formula for a payment or cash flow received into perpetuity is below:

PV =

FCFn * (1 + g) r-g

Where: FCFn = terminal year unlevered FCF g = growth rate r = discount rate Notice in the formula above that one must multiply the final year’s free cash flow by (1 + g) to get the following year’s unlevered FCF under the assumed growth rate. How is a proper growth rate determined? A growth rate in the 2-5% range is the most common, as going any higher would infer that the company would drastically outgrow the U.S. economy (given historical GDP growth rates), and would eventually be larger than the economy as a whole. Thus, FCF projections are usually carried out until assumed growth rates reach this range in the DCF model. Exit Multiple Method The exit multiple method assumes the company will be sold at the end of the projection period and uses Enterprise Value multiples to estimate the value at this time. Depending on whether or not the company will “exit” via a sale, M&A Comparables can be used to find the appropriate Enterprise Value multiples. The most common valuation multiple used is EV/EBITDA, with EV/EBIT, EV/FCF, and EV/Revenue also occasionally being used. To find the terminal value, simply multiply the proper valuation multiple by the final year’s EBITDA, Revenue, unlevered FCF, or other statistic. Do not forget, this terminal value must still be discounted back to the present. Insider Insight

Exit Multiple Method

 The exit multiple method is more commonly used than the perpetuity growth method due to its more accurate and measurable nature.  The exit multiple method uses actual public and transaction comps to find exit multiples while the perpetuity growth method relies on a growth assumption over an infinite time period (the proper growth rate to assume is always open to debate).

Step-By-Step Below we recap the steps of completing a Discounted Cash Flow Analysis:

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC

1. 2. 3. 4. 5. 6.

Obtain the discount rate using WACC (and finding the cost of equity using CAPM). Project unlevered FCF 5-10 years into the future. Calculate the terminal value using the Exit Multiples Method or Gordon Growth Method. Discount future unlevered FCF’s and the terminal value back to the present. Sum all of the present values to reach your company’s Enterprise Value. If looking for Equity Value, simply back-solve by subtracting the company’s current debt balance and add its cash balance (from the Enterprise Value formula); adjust for non-controlling interest, preferred equity, or investments in associate companies, if applicable.

To see all of these components in action, study the following example of a short-form DCF analysis:

Discounted Cash Flow Analysis WACC

12%

1

2

3

4

5

Year 1 $100 (48) $52

Year 2 $105 (50) $55

Year 3 $110 (52) $58

Year 4 $116 (54) $62

Year 5 $122 (55) $67

Less: Depreciation & Amortization EBIT

(12) $40

(12) $43

(12) $46

(12) $50

(12) $55

Less: (1 - T) Tax-Effected EBIT

(16) $24

(17) $26

(19) $28

(20) $30

(22) $33

Plus: Depr. & Amort. Less: Capital Expenditures Less: Increase in Working Capital Unlevered Free Cash Flow

12 (15) (3) $18

12 (14) (2) $22

12 (13) (4) $23

12 (12) (2) $28

12 (11) (3) $31

Revenue Less: Operating Expenses EBITDA

Terminal Value $128

Terminal Value (Avg. of Exit Mult. Method & Gordon Growth) Present Value of FCF

$16

$17

$467 $16

$18

$17

Enterprise Value

$265 $350

Terminal Value: Exit Multiples Method Year 5 EBITDA $67 Comparable EV/EBITDA 8.0x Terminal Value $534

Formula =

EBITDA * EV / EBITDA

Terminal Value: Gordon Growth Method Year 5 FCF $31 Assumed Perpetual Growth Rate 4.0% Terminal Value $401

Formula =

EBITDA * (1 + g) (g - r)

www.ibankinginsider.com

Copyright 2012-2013 iBanking Insider LLC