Guía Banca v5-2

Investment Banking Guide

1 Ricardo Penadés & Nicolas Guardans

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Contents Introduction to the Guide ............................................................................................................ 4 What is Investment Banking? ..................................................................................................... 5 Banking Fundamentals ........................................................................................................... 5 Support functions ................................................................................................................ 6 The Investment Banking Division ........................................................................................ 9 Types of Financial Institutions ............................................................................................10 Types of Players in the Industry .........................................................................................14 League Table .....................................................................................................................16 Hierarchy ...........................................................................................................................19 Common Analyst Roles......................................................................................................20 Myths and Realities of Investment Banking ...........................................................................20 Macroeconomic and General Awareness ..............................................................................22 Macroeconomic Indicators .................................................................................................22 FT Exercise........................................................................................................................23 The Recruiting Process ......................................................................................................24 Telephone Techniques for Interviews (Recap) ...................................................................28 The Interviews: Four Things You Should Remember .........................................................29 The CV & the CL .......................................................................................................................30 How to Prepare .........................................................................................................................30 Fit Questions.............................................................................................................................31 General Awareness and Macroeconomic Questions ..........................................................31 Analytical Questions ..........................................................................................................34 Personal Questions............................................................................................................35 Future Questions ...............................................................................................................39 Character Questions Q uestions ..........................................................................................................42 Verbal and Numerical Tests ......................................................................................................47 Verbal Tests Te sts ..........................................................................................................................47 Numerical Tests ....................................................................................................................47 Some tricks and a nd formulas...................................................................................................47 Where to practice? .............................................................................................................48 Investment Theory Overview.....................................................................................................49 Modern Portfolio Theory.....................................................................................................49 2 Ricardo Penadés & Nicolas Guardans

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Contents Introduction to the Guide ............................................................................................................ 4 What is Investment Banking? ..................................................................................................... 5 Banking Fundamentals ........................................................................................................... 5 Support functions ................................................................................................................ 6 The Investment Banking Division ........................................................................................ 9 Types of Financial Institutions ............................................................................................10 Types of Players in the Industry .........................................................................................14 League Table .....................................................................................................................16 Hierarchy ...........................................................................................................................19 Common Analyst Roles......................................................................................................20 Myths and Realities of Investment Banking ...........................................................................20 Macroeconomic and General Awareness ..............................................................................22 Macroeconomic Indicators .................................................................................................22 FT Exercise........................................................................................................................23 The Recruiting Process ......................................................................................................24 Telephone Techniques for Interviews (Recap) ...................................................................28 The Interviews: Four Things You Should Remember .........................................................29 The CV & the CL .......................................................................................................................30 How to Prepare .........................................................................................................................30 Fit Questions.............................................................................................................................31 General Awareness and Macroeconomic Questions ..........................................................31 Analytical Questions ..........................................................................................................34 Personal Questions............................................................................................................35 Future Questions ...............................................................................................................39 Character Questions Q uestions ..........................................................................................................42 Verbal and Numerical Tests ......................................................................................................47 Verbal Tests Te sts ..........................................................................................................................47 Numerical Tests ....................................................................................................................47 Some tricks and a nd formulas...................................................................................................47 Where to practice? .............................................................................................................48 Investment Theory Overview.....................................................................................................49 Modern Portfolio Theory.....................................................................................................49 2 Ricardo Penadés & Nicolas Guardans

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Accounting and Financial Statements .......................................................................................51 Balance Sheet ...................................................................................................................51 Income Statement ..............................................................................................................52 Statement of Cash Flows ...................................................................................................53 Connecting the Financial Statements .................................................................................54 Putting it all in common ......................................................................................................54 Accounting and Financial Statements Questions ...............................................................56 Valuation ...................................................................................................................................59 Comparable Companies Analysis ..........................................................................................63 Precedent Transactions Analysis...........................................................................................68 Discounted Cash Flow (DCF) Analysis ..................................................................................70 Leveraged BuyOut (LBO) Analysis ........................................................................................79 Quantitative questions, Brain Teasers and Guesstimates .........................................................80 Quantitative Questions ..........................................................................................................80 Most Common Quantitative Questions ...............................................................................81 Brain Teasers ........................................................................................................................81 Common Brain Teasers and Solutions ...............................................................................82 Guesstimates ........................................................................................................................83 Common Guesstimates......................................................................................................83 Case-Studies ............................................................................................................................84 Example of a Case-Study ..................................................................................................84 Major Banks Profiles .................................................................................................................94


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Introduction to the Guide “F ai l i n g t o p r e p a r e i s p r e p a r i n g t o f a i l ”

- Michael Murdoch Success is a combination of being constantly prepared , on your feet, so that when you happen to be in the right place at the right time you are ready. We have chosen to highlight the word prepared because, out of all three (preparation, time and place) it is the one that you have full

control over - you won’t be able to choose when the right place and time are, but you sure can be prepared. Through hard work and preparation you will be able to obtain a competitive edge that will differentiate yourself from your peers, and that is what will eventually bring you success. The investment banking industry is an extremely competitive industry to get into. Since the 2008 crisis investment banking jobs have been on a constant fall (some estimates say that nearly 200,000 investment banking jobs have been shed in the Eurozone) and as of today the outlook for the industry is that this change is for the long-haul. Add to that the fact that the industry remains as the most popular place to work in for recent graduates of the worlds top universities and you get what we have today: banks that receive nearly 300,000 applications for 12,000 jobs (a 4% acceptance rate). The objective of this guide is to help you become a part of that 4%. On our behalf we can assure you that the guide covers the tools that are needed to get into investment banking. From basic accounting and valuation concepts to personal interview questions, this guide provides you with what is needed to be a successful applicant. What we ask from you is that you bring the hard work and effort to the table. We can only guarantee your success if you put your part into it. We encourage you to go the extra-mile and put in the hours as the rewards are worth it.


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What is Investment Banking? Banking Fundamentals Investment banking is a term used to describe a range of banking and investment products and services delivered to corporate clients, financial institutions, governments, agencies and, in some cases, to wealthy or ‘high-net-worth’ individuals and families. Essentially, Investment Banks connect investors (those who have the money) with companies and governments (those who need the money). Revenue generating areas:

1. Investment Banking Division (IBD) : traditionally includes the research and advisory services that banks offer to its clients for their major transactions such as mergers & acquisitions and initial or secondary offerings of their shares. 2. Sales and Trading (S&T) : is the largest area of an investment bank. It includes the development, marketing and trading of a large range of securities and other financial instruments on the world’s financial markets. These include equities, (stocks), commodities, fixed income or bonds, and currencies. All of these, which are known as ‘asset classes’, can be traded directly or by using derivative instruments such as futures, options and swaps. These instruments can help clients manage their risks and also provide investment opportunities. 3. Research : provides research into macro-economic trends and effects, and detailed analyses of the performance and factors affecting specific industry sectors and individual companies. The Research Department issues investment recommendations and ratings for the universe they cover. 4. Asset Management : Area in charge of managing investments for private funds, individuals and organizations. It’s a diverse area of the bank with many roles researchers, portfolio managers, and sales people can all be found here. Their common goal is to make their clients’ money make more money, and they do this by investing it in equities, property, foreign currency and many other types of assets. Below is an example of what % of the revenue is generated by each team for a typical investment bank:


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Source: GS annual report as of December 2011

Support functions

In order for the bank to successfully implement its revenue generating business there is a wide range of business functions that support the client-facing business, the running of a bank and the practical delivery and support of its products and services. These include technology, compliance and control and operations, among others. As every investment bank is structured differently, the precise names given to divisions vary widely.

Source: Deutsche Bank Website


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Private Side vs. Public Side

Source: Deutsche Bank Website

Investment banking has two separate areas in order to protect their clients and to undergo business in a professional manner. These two areas are the private side and the public side. 1. Private Side: This side of the investment bank is formed by those teams that have access to inside company information that is not available to the public. It is separated from the public side by “Chinese wall”. Private side is known as the investment banking side of the business. Essentially, these are the teams that are dealing directly with the company/government and have access to all inside information. It is important to note that people on the private side of the bank are strictly prohibited from using any of that knowledge for their own benefit or the benefit of others (i.e. trade on confidential information). So whenever you hear there was some case of insider trading that means that some type of private information leaked and someone took advantage of it.


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Source: Business Week

2. Public Side: In the public side employees have access only to information that is publicly disclosed (i.e. information found in the annual reports, SEC filings, etc.). Public side includes S&T and research. Although they work in the same building with investment bankers, they are not exposed to private information as there are strict regulations within every bank controlling that the S&T and research staff do not take advantage of that information.

Source: Wall Street Journal as of March 15th 2013


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The Investment Banking Division The Investment Banking Division is often referred to as corporate finance. It is comprised of five main areas: 1. Mergers & Acquisitions (M&A) : advisory on sale, merger and purchase of a company. It also covers divestiture of specific assets and other strategic options concerning a transaction between companies. This area is typically divided by industry groups, geographical groups and product groups. 2. Leveraged Finance (LevFin) : provides a platform for firms to issue high-yield bonds (“junk bonds”) to f inance acquisitions and other activities. 3. Equity Capital Markets (ECM) : assists companies in the issuance of common stock, whether in the form of an Initial Public Offering (IPO) or a Seasoned Equity Offering (SEO). 4. Debt Capital Markets (DCM): assists companies in the issuance of bonds and other type of debt to fund company activities. 5. Derivatives team: The team works with corporations to develop customized risk management strategies. The Investment Banking Division is said to be in the “private side” of the markets, since it works with sensible and insider information that the “public side” doesn’t have. Therefore, it is essential for a bank to guarantee the confidentiality of the information the IBD works on. Banks do so by establishing a chinese wall , that is, a series of security protocols that ensure the information is not leaked between departments. Industry, Geographical and Product Groups vary by bank, but they are essentially the same. Industry Groups focus on specific industries (Telecommunications, Healthcare, Financial Institutions, etc.), Geographical Groups focus on specific countries or regional areas (UK, Germany, CIS, EMEA) and Product Groups focus on specific advisory services (M&A Execution).


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Types of Financial Institutions In order to fully grasp the role that the investment banking industry has, it is necessary to understand the other types of players. Hence, lets take a closer look at the different types of institutions that play a role in the financial arena: Depository institutions ●

Commercial Banks: An institution which accepts deposits, makes loans, and offers

related services. ○

Services offered : Deposits (checking, savings, time deposits, etc.), loans

(mortgages, consumer loans, etc.), services (transfer, facilitating payment, etc.) ○

Profit sources: Interest margins, fees, commissions

○ Ownership: State, firms, individuals, members or partners. ○ Examples: La Caixa, Banco Sabadell ●

Universal Banks: Universal banks are financial institutions that have both the commercial

arm and the investment banking arm. They were banned in 1933 when the Glass Steagall Act was introduced which separated commercial banking from investment banking. Nevertheless, in 1999, the Gramm Leach Bliley Act was introduced which allowed banks to have both commercial and investment banking operations. ○

Services offered : Commercial banking services (deposits, loans, etc.) and

investment banking services (advisory, underwriting, securities trading). ○


○ Ownership: Group of individuals, institutions ○ Examples: JP Morgan, Citi ●

Wholesale Banks: These banks provide services to firms and financial institutions only,

not to retail consumers. ○

Services offered : Deposits, loans (revolver facilities, etc.), services (transfer,

facilitating payment, etc.) ○


○ Ownership: State, firms, individuals, members or partners. ○ Examples: Bank of New York Mellon ●

Savings Banks: These banks were founded with the purpose of encouraging savings. In

comparison to full commercial banks, they do not pro vide overdraft facilities, FX activities, take no deposits from corporates and have re stricted lending activities.


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○

Services offered : Deposits, loans (mortgages.), services (transfer, facilitating

payment, etc.) ○


○ Ownership: State, firms, individuals, members or partners. ○ Examples: Trustee Savings Bank (UK), Erste Bank (Germany) ●

Savings and Loan Associations: A savings and loan association is a financial institution

that accepts savings deposits and makes mortgage, car and other personal loans to individual members—a cooperative venture known in the UK as a Building Society and in Spain as a Caja. These type of institutions were widely popular in the 80s in the United States, but died down after the failure of about 747 out of the 3,234 existing savings and loan associations (the S&L crisis was due to the sudden spike in oil prices). ○

Services offered : Deposits, loans (mortgages.), services (transfer, facilitating

payment, etc.) ○


○ Ownership: The depositors own the S&L ○ Examples: CAM, Catalunya Caixa ●

Finance companies: Specialized financial institution that supplies credit for the purchase

of consumer goods and services by granting small loans directly to consumers. ○

Services offered : Fixed deposits (no checking accounts), small loans - the limit

can be lifted if the loan is secured (i.e. financing fixed assets for firms) ○


○ Ownership: Group of individuals ○ Examples: GE Money

Non-Depository Institutions ●

Life Insurance Companies: Companies that are specialized in selling life insurance,

annuities and pensions products. ○

Services offered : Term life (no payment unless death within policy period),

whole life (critical illness, permanent disability), endowment, health, hospital ○

Profit sources: Premiums, insurances that are not payed out, margin on

invested premiums ○ Ownership: State, firms, individuals, members or partners. ○ Examples: Canada Life


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●

Non-Life Insurance Companies: General, or property/casualty insurance companies,

which sell other types of insurance. ○

Services offered : House insurance, cars, boats, planes, professional, third

party, damages, financial products, football players leg, etc. ○

Profit sources: Premiums and investment income

○ Ownership: State, firms, individuals, members or partners. ○ Examples: AIG ●

Pension funds: Companies that manage the retirement plans set up by a corporation,

government, labour union, or an individual for themselves. It is important to note that some pension funds are insured by an insurance company. ○

Services offered : Manage pension payments

○

Profit sources: Commissions, fees of the pension payments

○ Ownership: State, firms, individuals, members or partners. ○ Examples: Mapfre Pension Fund ●

Open-end Mutual Funds: A type of mutual fund that does not have restrictions on the

amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell ○

Services offered : Manage funds

○

Profit sources: Commissions, performance fees

○ Ownership: Investors ○ Examples: Fidelity Investments ●

Closed-end Mutual Funds: A closed-end fund is a publicly traded investment company

that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange. ○


○

Profit sources: Commissions, performance fees

○ Ownership: Investors ○ Examples: Gabelli Equity Trust ●

Hedge Funds: A fund that manages a portfolio of investments that uses advanced

investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Hedge funds are most often set


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up as private investment partnerships that are open to a limited number of rich individuals and institutions and require a very large initial minimum investment. ○


○

Profit sources: Commissions, performance fees (2% managing fee, 20%

performance fee is the industry standard) ○ Ownership: Investors ○ Examples: Bridgewater ●

Private Equity: Private Equity consists of investors and funds that make investments

directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Private equity funds are typically open to institutional investors and rich individuals and their investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. ○


○


performance fee is the industry standard) ○ Ownership: Investors ○ Examples: Blackstone ●

Venture Capital: Venture Capital funds operate by acquiring minority stakes in startup

companies in sectors with high-growth potential, such a s technology or biotechnology. ○


○


performance fee is the industry standard) ○ Ownership: Investors ○ Examples: Sequoia


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Types of Players in the Industry In the investment banking industry there are 3 types of players: bulge bracket banks, midmarket investment banks and boutiques that specialize in either small transactions or specific industries. Let’s go into them now with a brief explanation and some examples of the most significant players: ●

Bulge Bracket Banks : This is a slang term used to describe the largest and most

profitable international investment banks in the world whose banking clients are normally huge institutions, corporations, and governments. ○ Deals: Bulge bracket banks execute the biggest deals which tend to be over $1

billion USD. Occasionally they may go down to deals in the $200MM – $300MM USD range (depending on the group and the economy). ○ Geography: They’re global and have a presence in cities across all continents. ○

Services Provided: Bulge bracket banks provide both advisory and financing

services – and everything else: asset management, trading, commercial banking, insurance, and so on. ○ Examples: Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse,

Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, UBS.


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●

Mid-Market Investment Banks: Mid-market investment banks are “bigger” than boutiques

but “smaller” than bulge bracket banks – which isn’t wrong , necessarily, but also doesn’t tell the full story. ○ Deals: The deals they work on are in between bulge brackets and boutiques – a

larger deal at a middle-market bank might be around $500MM USD, whereas a smaller one might be about $50MM USD. ○ Geography: Middle-market banks are also in the middle in terms of geography:

they operate in many cities, but are not as global as bulge bracket banks. Often they have a strong presence domestically, but aren’t quite as st rong internationally. ○

Services Provided: Middle-market banks also provide the full range of services:

M&A advisory, ECM, DCM, Restructuring, and other variations on those. ○ Examples: Houlihan Lokey, Cowen, Jefferies, Houlihan Lokey, KBW, William

Blair. ●

Boutiques: Regional boutiques are, as their name suggests, the smallest type of

investment bank. Regional boutiques tend to have anywhere from one person to a few dozen or more. ○ Deals: The deal size is typically below $100M USD. ○ Geography: They’r e are limited to one city or region; a few of the bigger ones

might be in several cities, but if the bank has a global presence it’s no longer a regional boutique. ○

Services Provided: The services provided by regional boutiques tend to be

advisory ones (that could be both in restructuring or in M&A). Very rarely do they offer any sort of financing services. ○ Examples: GBS Finanzas, Coram Clairfield, Pipper Jaffray, C. K. Cooper &

Company, Dresner Partners, etc.


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League Table

Source: Thomson Reuters as of May 2013



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Hierarchy The hierarchy in an Investment Banking Division is very well defined, although it can vary by bank and region: ● Analyst : the very bottom of the ladder. You can start in an analyst position right out of college or after successfully completing an internship in a bank. The Analyst does all the grunt work (i.e. valuation, modeling and pitch books) as well as any other tasks that are required by the team. The typical work week ranges from 80h to 100h. ● Associates: they are in charge of both coordinating the work of the analysts as well as doing some of the work themselves (don’t expect a lot of help from their side). Analysts are typically promoted to Associate after finishing the Analyst program which typically lasts between 2-3 years (varies on the bank) or straight out of an MBA after completing an associate internship. ●

Vice President : they are in charge of overseeing that the work that is required by the

senior people in the team is prepared on time by the associates a nd the analysts. VP’s are also expected to begin to develop client relationships and generate revenue for the firm as well as other managerial work. ●

Senior Vice President/Director/Executive Director : they focus mainly on deal execution

and client relationships. 19 Ricardo Penadés & Nicolas Guardans

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●

Managing Director (MD) / Partner : this is the highest level, the top of the ladder. They

are in charge of bringing the business to the division and focus exclusively on client relationships and making sure that the deal execution is on track.

Common Analyst Roles As an Analyst, you will be expected to perform and work long hours. You will basically do the “grunt” work, going from valuation and modeling to administration tasks. Below is a list of the typical Analyst roles:

Role

Activities

Team Support

Printing services, creative services, markup corrections, benchmarking, “comps” and basic financial analysis

Business Development (“Pitches”)

Slide preparation, research, team meetings, information outputs, basic financial analysis, company research (trade relationships, organisational charts, subsidiaries) and valuation and valuation updates

Admin tasks

Internal reporting using APIs and updating the team about relevant news concerning the companies or sector you cover

Execution (“Deal”)

Valuation of the deal, bookbuilding, document and filings preparations, negotiation between parts, closing of the deal

Myths and Realities of Investment Banking Myth: Get a job in banking and you’ll be a millionaire within a few years. You’ll earn so much

money you can retire at 30 with a jet, yacht and country mansion. Not really. Not all bankers are millionaires (especially before they are 30). Most have Reality: normal, down to earth lives. You may earn more than similar level roles in other industries, but not as much as for a private jet.

Myth: You've got to be a certain type of person to work in banking. There’s no diversity, with few

women or minorities represented. False. Even though there tend to be more men than women within the industry, banks Reality: are working really hard to increase the number of women and ethnic minorities to both their


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graduate schemes as well as to more senior positions. Recently some banks’ graduate intake is

up to around fifty-fifty men versus women. Myth: There are only two cities to work in if you're serious about banking – London and New York. London and New York City are important financial centers but there are many more Reality: across the globe. To name just a few: Hong Kong, Singapore, Tokyo, Frankfurt, Shanghai, Chicago, Zürich, Geneva and Sydney, with new ones appearing all the time. Myth: Banking’s one of the most cut -throat industries around. Sink or swim, that’s the choice. If you’re not good enough, you’re out.

Yes, employers are looking for the brightest , most talented people and once you’re in, Reality: you’ve got to give one hundred percent. But graduates are often surprised about the reality of the banking culture: how people look out for each other and how much support they get. It’s hard work, but you’re all in it together.

Myth: Graduates get all the boring jobs. You'll be making the tea and filing paper for the first year. Graduates are actually grunt workers of the team. The more junior you are, the more Reality: there is to learn – it’s the same in any industry. But in lots of banks you’ll find you get a surprising amount of responsibility. Anyone who’s skilled and willing is recognized.

Myth: It’s all work work work in banking. The hours you work are extremely long. You have to

give up your personal life, your boyfriend or girlfriend, your family, your hobbies. Yes, you have to work very hard. But the number of hours you work vary dramatically. Reality: For example, if you work on the trading floor you’ll do an intense 10 -hour day. On the other

hand, if you are in Corporate Finance and you’re on a big deal you can pull all -nighters. Getting ahead in any new career requires long hours and dedication; banking is no different (except that the hours might be just a little bit longer). Myth: The financial c risis hit the industry hard. Banks haven’t yet recovered. There’s no point in applying for jobs anytime soon. There just aren’t any available.


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Reality: It’s true that the financial crisis did indeed hit the industry hard and many banks froze

recruitment. But that doesn’t mean confidence isn’t now growing again. Competition may be even fiercer than before, but there are opportunities out there.

Macroeconomic and General Awareness Macroeconomic Indicators What you basically have to know is the state of the economy at the time of your interview. Be prepared to answer questions about general market conditions and expectations, and their effect in the general economy and the firm (FT Exercise). Practitioners often use three types of macroeconomic indicators that you should take into consideration in order to give informed answers to macroeconomic and general awareness questions. These indicators can be leading indicators (they precede the business cycle), coincident indicators (they run coincident with it) and lagging indicators (they confirm the trend and thus lag the business cycle). The main indicators by type are listed below: Leading Indicators Indicator

Reason

They capture business sentiment, since Manufacturers’ new orders for consumer manufacturers try to anticipate the demand goods and materials for their goods Stock prices usually anticipate economic S&P 500 Stock Index (or relevant benchmark) turns, since they depend in great part of expectations of the business cycle Long-term yields reflect market expectations Interest rate spread between 10-year yields about the direction of short-term interest rates and overnight borrowing rates and the overnight borrowing rate follow the economic cycle Index of Consumer Expectations

Gives insight of future consumer consumption


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Coincident Indicators Indicator

Reason

Employees payroll

Once recession or recovery is clear, businesses adjust they payroll accordingly

Aggregate real personal income

Captures current state of the economy

Industrial Production Index

Measures industrial output

Lagging Indicators Indicator

Reason

Inventory-sales ratio

Inventories accumulate as sales initially decline and become depleted as sales pick up, confirming changes in the economy

Change in CPI

Inflation generally adjusts to the cycle late

Change in GDP

Self explanatory

You should also check country specific indicators to back your answers if you are asked about the state of your local economy, like the spread between 10-year German bonds and 10-year Spanish bonds (Spanish risk premium), in the case of Spain.

FT Exercise The FT Exercise is often used to assess the candidate’s capacity to analyze and synthesize general market news. You are given 30 minutes to pick 3 news you consider interesting from the Financial Times and are asked to expose the new to the interviewer following predetermined general guidelines, which usually are: ●

General comprehension : what is the new about? What’s going on?

●

Macroeconomics : what is its effect on the general economy?

●

Microeconomics : what is its effect on the company? What implications does the news

story have for the specific sector? ●

Miscellaneous : how can our firm profit from this new information? Which department

should be concerned about this particular article? What new opportunities do you see for the firm given this article?


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The Recruiting Process

Decide the industry and bank

Prepare your CV and CL

Submit your online application

First Round:

Online test

Phone interview

Second Round:

Assessment

Local office

Center

interview

! R E F F O

The process of obtaining an offer to work for an investment bank is a long one which typically takes several months to complete. Like in any other application, the first step that one must take is to do some background research on the industry and the different investment banks. This step is very important as it will help one see if the skills that are required by the industry match those of the candidate, and it will also help him/her find the bank and team that best fulfill those needs. Even though this guide is a great start, you should do further research on your own. We strongly advise that you take a look at some of the information that we recommend at the end of the guide. Once the candidate has done some background research they must prepare their cover letter and curriculum vitae (See How to prepare the CV & CL Section). The CV and the CL are submitted online through the portal of the investment bank where the candidate is automatically prescreened by a computerized program. This first check serves as an initial filter for spelling mistakes, inconsistencies throughout the application, grades, etc. If the candidate passes this initial prescreening then they are typically sent an online test which they must complete within the next few days (See Test Section). Please note that not all banks send candidates an online test, so if you don’t receive one it does not mean that you have been automatically discarded from the process. If the candidate meets the minimum requirements from the online test then they advance onto the next stage: the telephone interview. Telephone interviews typically last 20 to 30min and are conducted by analysts and/or associates in the investment banking division. Candidates are not 24 Ricardo Penadés & Nicolas Guardans

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given much time to prepare for telephone interviews, so it’s important that they begin preparing before they are assigned an interview slot. Telephone interviews are pretty standard across the interview and they typically cover the following questions:



Tell me about yourself?



Why do you want to be an Investment Banker?



Why do you want to work at this Investment Bank?



Tell me about the classes you are taking? Favorite and least favorite classes?



Biggest Strengths and Weaknesses?



What are the main ways investments bankers values a company?



Walk me through a DCF?



What are the different valuation techniques?



Walk me through the major lines of an Income Statement? Balance Sheet? Cash Flow?

These questions are covered in the typical telephone interview so candidates must be ready to answer them thoroughly. The questions are reviewed in detail in their respective sections. On top of that, here are some other tips that can be useful when conducting the telephone interview:



The interviews are very predictable so make sure to be 100% prepared



The technical questions cannot be missed. These concepts are considered to be the basic building blocks that all successful candidates should understand.



Book a room that has good telephone coverage.



Use a phone that can be used with “no hands” as it is important that you are comfortable and can write down things without a problem



Be ready 10 to 15min prior to the actual telephone interview as your interviewer may call you beforehand



For those candidates that are applying to countries that have different time zones (i.e. London from the rest of Europe) clarify the time zone in which the interview will happen



Speak clearly and confidently over the telephone: remember that your voice will be the only “image” that they will have of you



You may have materials with you during the interview (i.e. a printed version of your CV). It is important that these are ready and laid out correctly before the interview - looking for 25

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your CV in a mountain of papers during a phone interview is not the best approach to conducting the interview. 

Last but not least: have a positive attitude! Even though interviews are not the most comfortable of situations you must remember that you are being given an opportunity to be interviewed and that the person that is interviewing you is taking time off of their extremely busy schedule to interview you, so be positive and grateful.

If candidates complete the telephone interviews successfully they then move onto the second round which must be conducted in person. These rounds are either done on the university campus or in the closest office. For example, if a candidate is in Lyon, because most banks only have offices in Paris, the candidate is flown into Madrid for the interview. The second round usually has anything from one to five interviews and the length can vary from 20min to a full hour per interview. The questions that are asked in second rounds can vary much more than those asked in first rounds so it’s difficul t to have an exact guideline of the questions that will be asked to candidates. Nevertheless, as a broad guideline you should expect the following: 

All the questions that were asked during the phone interview



Technical focus: o

o

o



Markets Banking fundamentals Valuation

Competence questions

Second round interviews tend to be the most technically focused ones as they are typically conducted by associates and junior VP’s, although one may be interviewed by more junior or senior people (i.e. Senior Analyst or a Managing Director). Here are some useful tips for second round interviews that all successful candidates should k eep in mind: 

Be prepared, these interviews are more extensive than telephone ones



The technical questions cannot be missed. These concepts are considered to be the basic building blocks that all successful candidates should understand.



Read the Financial Times from page to cover on the days leading to the interview, it is very probable that you will be quizzed on recent macroeconomic events



Arrive slightly early to the interview, DO NOT arrive late



Be confident and clear when you communicate. Try to avoid being overly nervous.



Bring a calculator in case you are tested 26


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

Last but not least: have a positive attitude! Even though interviews are not the most comfortable of situations you must remember that you are being given an opportunity to be interviewed and that the person that is interviewing you is taking time off of their extremely busy schedule to interview you, so be positive and grateful.

Candidates that manage to succeed in the second round interviews are then faced with the assessment center. The assessment center, also known as “super -days” are a full day of different kinds of interviews, tests, and case studies. The goal of the assessment center is to culminate the recruiting process with a final set of interviews to conduct a final evaluation of the candidate. Assessment centers typically cover the following items: 

Test



Interviews



Case study



Guesstimates



Focus group



Other – Some assessment centers may contain other kinds of evaluation methods

As assessment centers are the culmination of the interview process, candidates will be evaluated on all of the skillsets that have been required of them up until the moment. Therefore, it is important that candidates prepare thoroughly for the assessment center, reviewing all of the materials that they have been preparing up until the moment. The questions that are covered may vary greatly, so it is important that you review all of the questions that are covered in the guide for this round. Here are some general tips that you should keep in mind during the assessment center interview: 

Be very prepared, you have worked so much to get here, you really have to nail it



Don’t get overwhelmed by the other candidates, you are here to play your own game and you should not get distracted by the others



Read the Financial Times from page to cover on the days leading to the interview, it is very probable that you will be quizzed on recent macroeconomic events



Arrive early to the interview, under no circumstance should you arrive late



Be confident and clear when you communicate. Try to avoid being overly nervous.



Bring a calculator and a pen for the test, if you forget your calculator you will have to take the test without it, trust me you do not want that to happen.


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

Last but not least: have a positive attitude! Even though assessment centers are not the most comfortable of situations you must remember that you are being given an opportunity to be interviewed and that the person that is interviewing you is taking time off of their extremely busy schedule to interview you, so be positive and grateful.

Below is a rough guideline of the schedule of the different events

Se

Nov

Oct

Phone interviews be in

Prepare CV &CL

Offers for internships

Second rounds be in

Submit Applications

Dec

Feb

Jan

First Assessme nt Centers

Spring Weeks

Mar

A r

Ma

Spring Weeks

Jun

Summer Internships be in

Telephone Techniques for Interviews (Recap) These are some techniques for the preparation of telephone interviews. Be sure you do the most of them, even if they sound dumb! 1. Preparation for phone communications : a. Have the necessary information (this guide, for example) at the ready, in front of you. b. Tape information to the wall and have it open on your computer (you can do yourself a dashboard with all the information you consider relevant). c. Keep all your research close at hand. d. Have a notepad and a calculator ready. e. Keep a mirror nearby (reason below). f.

Have a metaphorical “Do Not Disturb” area to work in.

g. Turn off all noise, if possible. That includes email notifications, cell phones... h. Warm up your voice while waiting for the call, before the call, and earlier that day. i.

Have a glass of water handy.

j.

Try not to have others in your “call” environment.

k. Try to use a headset for your phone so you have free movement in both hands.


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l.

Dress comfortably. Do not put too much clothes on in case you get nervous, it will suffocate you!

2. The Stand and Deliver Technique : stand up and move around the space for as much of the phone conversation as you can. You will become more animated, you will gesture, your blood will circulate, and you will have considerably more energy. 3. The Vanity Technique : if you have purchased a phone message machine and read the directions you will see that some of them tell the owner to smile while they are recording the answer message. The reason for this is that when we smile while speaking it warms the quality and tone of the voice. If you hang a mirror in your phone environment, every time you walk by it and you see yourself it can remind you to smile while speaking. This technique may seem silly, but it really works.

The Interviews: Four Things You Should Remember 1. The entrance a. The true interview starts the moment you can be seen and it does not end until you are both out of eyeshot and earshot of everyone associated with the interview environment (usually about two blocks away from the site). b. Walking into the room: always maintain eye contact with your interviewer 2. The Introduction a. The Handshake must be firm, but don’t crush your interviewers bones. b. Speaking your name: only about 60% of people’s names are understood in introductions. 3. Dealing with: a. The chair: sit on an angle to the interviewer, it will capture his/her attention more effectively. b. To regain attention, you can move in the chair and change the angle. c. Use gestures, but keep them in the upper plain of the body. 4. The Exit a. Be sure you thank the interviewer for his/her time. If you can, get his/her business card to send a post-interview email thanking again for the interview. It is very important that you send such email.


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The CV & the CL

How to Prepare All you have to do is a bit of research and prepare your answers. Your main goal here is to fit in the corporate culture, so you have to make sure you find a common ground between yourself and the stated company values and culture, which can be usually found in their website. This part requires you to sit and think about yourself: your strengths, your weaknesses, your different reactions to different situations, your behaviour, etc. It is important that you make a list of all these personal traits and know them by heart, you will sure be asked questions about them. You should always be ready to link the information on your CV (education, work experience, extracurricular activities, etc.) with the competencies required to be in banking. You can talk about the specific skill-set you acquired in your internships or the basic conceptual background you learned at your university. You have to be the best candidate and the best fit and the only tools you have to demonstrate that are your Cover Letter, your CV and your interview, so do your homework! Also, when facing questions about specific situations and how you managed them, you should use the STAR Technique: ●

Situation: what was the situation and when did it take place?

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Tasks: what task was it, and what was the objective?

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Action: what action did you take to achieve this?

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Results: what happened as a result of your action?

Try to choose an example that is relevant and describes the competency the interviewer is trying to assess, has a positive outcome, is specific and answers the question.


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Fit Questions General Awareness and Macroeconomic Questions In all of the interviews there will be some general awareness and macroeconomic questions that will be asked. Essentially bankers want to see that you are genuinely interested in the industry and that you have done your research on the subject. Aside from the information that you will find below it is important that you keep yourself updated by reading financial press such as the Financial Times. What does an analyst do?

Analysts work on pitches and deals most of their time. A “pitch” is a proposition made by the bank to a company about a specific transaction, and the deal is the execution of the transaction itself. Other tasks include support and administrative tasks. In a “pitch”, the an alyst is in charge of the “grunt” work (model, valuation, slides, etc.); in a “deal”, the analyst is in charge of assisting in the execution of the deal. What does an investment banker do?

An investment banker assists companies in their search for funds and provides advisory services for the companies’ transactions. An investment banker advises companies on mergers and acquisitions, issuance of bonds and equity, and provides advisory services in restructuring. Essentially, an investment banker connects the individuals / companies who have the money (investors) with those who need the money (companies / governments). What's the lifestyle of this industry? How many hours do we work per week?

Investment bankers typically work 80h - 100h per week, depending on the business needs. This involves very little hours to sleep and a lot of stress, since you are working in a competitive and highly demanding environment. This question will surely be followed by “will you be able to cope with it?”. What was our firm yesterday's close?

If you don’t know it, try to remember the last time you checked (shouldn’t be more than a couple of days) and give an approximation (“somewhere in the neighborhood of...”). However, you should ALWAYS check the price of the firms stock before going to an interview.


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What is the IBEX35/DJIA/S&P500? What was its yesterday's close?

●

The IBEX35 is the Spanish Market Index, comprised by the 35 most liquid stocks of the Continuous Market.

●

The DJIA is the Dow Jones Industrial Average, comprised by 30 major companies in the US (traditionally, they were heavy industry stocks).

●

The S&P 500 is the most closely watched Index in the US. It is comprised by the 500 biggest companies in the US.

What has happened on the market the last 3/6/12 months?

This is your turn to show how update you are of the markets. You should try to explain major events in the US Market, the European Market and the Emerging Markets in general. The interviewer is not asking for an in-depth analysis of the situation of the markets, he/she only wants to make sure that you follow the markets and you are up-to-date. Do not bore your interviewer with too much information, but do not omit anything relevant. Where is the market going?

This question wants to assess your capacity to understand the markets and its underlying trends. The best way to answer this question is by breaking up your predictions in different scenarios: optimistic, base case and pessimistic. Do not take a lot of time in your answers, the whole question shouldn’t be mor e than 2 minutes long. Other question similar to this: ●

Where will the stock market will be in 1/3/6/12 months?

What financial press do you usually read? What's on the front page today?

If you usually read financial newspapers, you should be clear on this one. If you don’t, it’s never too late to start! If you don’t want to start (you will have to eventually), try at least to read the major headlines at least 4 or 5 days before your interview. Can you identify any recent trends in our industry in the last 12 months?

On the line with the above, it’s just about reading and understanding the underlying trends of the market. For example, the major trend during 2007-2009 was the consolidation of the banking industry, with the big banks acquiring the bankrupted banks (JPM - Bear Stearns, BofA - Merrill Lynch, Nomura / Barclays - Lehman Brothers, etc.).


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What is a bulge bracket firm? And a boutique?

A Bulge Bracket (BB) firm are the largest financial institutions with presence all over the globe. Their clients are governments and big companies and institutions. A Boutique is a small investment bank which is regionally focused and takes part in deals with a lower value. What do you think the ECB will do in the next 6/12 months concerning interest rates?

Again, just checking if you are able to “read” the markets and see their trends. As long as you don’t sound stupid with your predictions, an opinion is just an opinion and there is no correct answer for this one, just be sure you can throw some arguments in. What is the EURIBOR/LIBOR/Fed Funds Rate? What is it's current level? ●

EURIBOR: EURopean InterBank Offered Rate, it’s the interest rate banks use to lend money to themselves. It is often the benchmark rate for floating rate securities and mortgages.

●

LIBOR: London InterBank Offered Rate.

●

Fed Funds Rate: the overnight rate of the Federal Reserve.

Which company would you invest in? Why?

This is an easy question if you are prepared. Before the interviews, do a little bit of research and choose a company you think is a good investment. It is very important that you know the general facts by heart (i.e. scope of business, products or services, last share price, etc.). You will be asked to explain why you think that specific company is a good investment, so be prepared to back your opinions.


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Analytical Questions The purpose of analytical questions is to try to assess your basic analytical skills. Interviewers don’t want a nuclear physicist but they do want to see that you have certain ability with numbers. Essentially they are looking for you to demonstrate your communication abilities and make sure you can express abstract concepts clearly. Can you tell me about the process you used to analyze a project that you have done recently?

For all the analytical questions you must always try to use the STAR technique that was discussed in the previous section. Basically, you should try to break down the method of analysis that you used how you came up with the initial estimates, and the results that were obtained. Can you tell me about a time when you submitted a report or project with mistakes?

It is highly unlikely that you have always submitted perfect reports with no types of errors therefore you should try to think of an example of a project where you made a mistake and were able to either fix it or learn from it. Remember to use the STAR technique to answer this question; focusing on what you gained from it rather than the mistake itself. How well can you multi-task?

When you use the STAR technique in this question try to find a concrete example of time when you were really flustered with all the work that you had on your shoulders. Again, you must pick an example where you eventually succeeded in meeting the deadlines. Can you tell me what kind of analytical skills you developed in your latest internship?

If you haven’t interned anywhere previously or in your last internship you did not learn any meaningful analytical skills then try to answer this question in the context of a relevant course that you may have taken in university. Have you ever worked on a project that was shown to a large group of people?

Once again you must focus on using the STAR technique and look for an example where the end result was a successful one. If the example that you give happens to involve working with a team then even better.


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Personal Questions Personal questions are straightforward questions that are asked by the interviewer because they want to further understand your drive for investment banking. It’s important for you to understand that the purpose of these questions is for the interviewer to have a better understanding of the person that they are looking to hire and how their personal experience has led them to have an interest in investment banking. It’s important that you keep the big picture in mind so that you direct all of the answers to these questions in that direction. Tell me about yourself.

You are bound to get this question in all interviews. It can be asked differently (i.e. walk me through your resume, tell me about your background, who are you) but essentially they are looking for the same thing: for you to go through the major events that have taken place throughout your life and how they have led you to want to be an investment banker. It sounds simple, but you really have to nail this question as it will usually be the first question that you will be asked in all interviews and it can have a profound effect on how the rest of the interview turns out. The key aspects that you must keep in mind when answering this question are: 

Be brief, aim for something under than 2-3min



Go through your resume in a chronological order



The question should be answered as a story, always explaining why each event made you interested in investment banking

You cannot have your resume in front of you, so it’s important that you know your story and that you have practiced it thoroughly so that you are not caught off guard. Why did you attend your university?

Regardless of what university you are attending its important that you make it clear that you chose it after evaluating several options and going for the best one. You should have a reason as to why you chose that university over any other and you must show that you thought about all the alternatives – not just randomly picked a university. For example, if you are attending a university that is especially strong in finance then mention how you picked the university that would best prepare you for a future career in investment banking.


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Have you ever lived in another country or studied abroad? If so tell me about that experience.

Once again explain why you chose to live/study abroad and what you learnt in that experience. Try to come up with something that is either relevant (i.e. discovered how the Singapore stock exchange worked whilst studying abroad in Singapore for a semester) or interesting (i.e. crossed the Amazon river whilst on exchange in Brazil). Its important to note that if in your CV you have mentioned that you can speak the language of the place where you went on exchange there is a high probability that you will have to answer this question in that language at some point. For example, if you say that you can speak Chinese and you happened to go on exchange to Shanghai, there is a large possibility that you get asked to answer this question in Chinese by a fluent Chinese interviewer. Can you multi-task?

They are not looking for the perfect multi-tasker, but what they want to see is that you are an organized person that can tackle different projects at the same time. Always give specific examples that show how well have you been able in the past to coordinate different activities at the same time. What do you do for fun?

There is no correct answer for this question. The interviewer is trying to know whether you are a bookworm or if you have any life outside your university. Your answer should be honest and direct, but try not to say things that can offend your interviewer. This is a simple question, don’t blow up your interview by trying to be cool (in your opinion). What was your favorite class in college?

You don’t have to say Accounting or Finance or Financial Markets Fundamentals. Try to pick a class that you truly enjoyed (either because of the content or the teacher). What are your favorite movies/books?

As long as you are balanced with your answers, this question shouldn’t be a problem. Tell me something interesting about you that's not included in your resume

This question is quite tricky. Since you always try to include every piece of worthy information in your CV, you can feel there is nothing interesting about you not included there. You should do


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the effort to think about a couple of things and explain them. As always, give an answer that is neither strange nor boring. Do you have any questions for me?

You have to prepare for this one, as you will always be asked this question at the end of the interview. It’s a very good opportunity to learn about the firm and the position, and even to get ideas for your the answer for a question in the next interview. Examples of questions: ●

What’s your background / work experience?

●

What do you like about working here? What would you change?

●

What kind of responsibility am I supposed to expect during my internship / as an Analyst?

●

And any specific questions about the industry, financial markets and so to turn the interview into a (friendly) conversation.

Can we continue this interview in XXX language?

Again, this question should be extremely easy unless you have lied on your CV, which is not advisable (they usually discover it quite quickly). If the interviewer asks you to continue the interview in a language you are not fully comfortable with (let’s say you have an intermediate level of French and the interviewer wants to continue in French), you should try to explain as clear and simple as you can what level you have in that language (specifying your experience with it) and that you would prefer to continue in English because you express yourself better in that language. It is quite rare to be asked to continue an interview in a language in which you are not fluent, but you never know. Why did you choose to go to XX university?

Give reasons that are somehow linked to IB. Your goal is to come up with a story where you have focused you career into IB, and that you focused your past work experience and education to reach your goal. You should state that you chose your university for its quality, reputation and because you felt that the education you were going to receive was top-notch. Why did you major in XX?

This is a good way to introduce your genuine interest in finance, the markets and the business world in general.


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What was your overall GPA?

Although it’s clearly obvious, you should not lie in this question. Banks undergo screening processes prior to hiring you, so lying in this question is not acceptable (nor in any other question...). If you have a good GPA, you’re clear. If you do not, don’t panic and try to explain why your grades are not as good as they could be, without implying any strong weaknesses (“I’m a bit lazy / I have problems concentrating”). Also, try to stress the competencies you have acquired during your education and how you could apply them for the position. Other question similar to this are: ●

What courses did you do the best/worse in?

●

What awards did you win in university?

●

Have you held any leadership positions in university?

Tell me about your college experience

Your answer should be the one a balanced person would give. You have to show you are a responsible person who does the work and studies hard, but you still have social life. It’s all about balancing work and personal life.


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Future Questions Contrary to what you might think because of the number of hours that you work, nearly all interns, and the first year or so of an analyst typically cost the bank more than what it receives in return. Therefore because the bank is investing quite a sizable bit of money in you it wants to make sure that you’re planning on staying there for a while. That is why it’s impor tant that you respond to these questions showing that you are committed to the bank for quite some time. Nobody expects you to know what you’re going to be doing in 10 years, but they do want to know that you plan on staying at the bank for the foreseeable future. What are your long-term plans?

They are trying to measure your degree of commitment to the industry. It is OK to say that you don’t have plans for very long-term, but that you are thrilled by the perspective of becoming an Investment Banking analyst. It’s just about showing commitment, but don’t sound as if IB is the only job you would consider to do in the rest of your life. With what other banks are you interviewing?

You should state the other banks you are interviewing with and the round you are in their processes. In the means of possible, you should try to sound as if other banks are very interested in you (without showing off). This is all about personal marketing, but you have to be careful with what you say, you don’t want to sound as if you are applying to their bank without any interest in the position. Why do you want to be an investment banker

Whatever you do, just don’t say it’s for the money. You can emphasize your interest in the industry and the discipline, past working experience and extracurricular activities you have done in the past. It is important that you show enthusiasm (not too much!), motivation (again, not too much!) and proactivity. They will want to know if you have the attitude, the mindset, the willingness to sacrifice and the attention to detail. Why do you want to work for our bank?

Here is where your previous research comes into action. You should demonstrate that you have done your homework and that you know what does the bank do. Always structure your answer 39 Ricardo Penadés & Nicolas Guardans

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around three key pillars: the reputation of the bank, its strengths and its “unique” corporate culture (in which you fit perfectly!). If you are applying to a BB, tell them how excited you are to get a broad experience in the industry. If you are applying to a Boutique, tell them how much you like a smaller firm where there is more client interaction. What do you know about our bank?

Similar question to the one above, but you will have to be way more specific here. You should focus on league table rankings, strengths of the bank, major events and recent transactions and company-specific information (divisions, countries in which it operates, scope of business, etc.). Other similar question might be: ●

Can you tell me some specifics about our departments/company organization?

Is your interest in finance genuine? Can you prove it?

Your interest in finance is genuine and you can prove it. You are not one of those who came to Investment Banking because “everybody did it” or because your university told you, you wer e interested in the markets and the industry way before that. You should also try to prove your interest giving examples of past work experiences and university qualifications. What motivates you?

Your motivations, your ambitions, your goals... Try not to sound like you’re going to step on every colleague to reach to the top. Instead, you can explain your future professional goals and that you have the drive and the initiative needed to achieve your goals. Are the hours a problem for you?

Do not answer this question saying that you can cope with all the hours easily and that they are not a problem for you. Nobody will believe you. Investment Banking hours are very tough and even the most prepared analysts suffer the lack of sleep. To answer this question, try to smooth the problem by saying that the hours are just part of the job and that you are ready to “pay that price” for the training, the insight, the broad experience and the opportunities investment banking and the firm offer for your professional career. What would you do if you did not have to work for money?

It won’t be Investment Banking, you need a convincing answer for this one. It would be advisable to step a little bit out of the crowd, but don’t exaggerate. This is completely up to you, give your best shot and know your story! Also, try not to sound superficial in your answer. 40 Ricardo Penadés & Nicolas Guardans

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Describe your ideal job

Again, a linking question. Try to link your “ideal job” with the job you are applying to, but do not sound too obvious (that would be a huge mistake). You can say that you ideal job is doing what you like to do, For example, if you could talk about how your ideal job would be one where you could do the type of work that you would be doing in investment banking but with shorter hours. Private equity firms are starting to recruit analysts straight out of college. Why don’t you apply there where the pay is higher and the hours are better?

Trick question! Even though many people go into banking hoping that they can later move onto private equity it’s important that you stay committed to the bank that you are interviewing for. In this case you should mention how your interest is not in buying companies but advising many companies and how the exposure that you would get in an investment bank is not comparable to the exposure that you would have in a private equity firm as an analyst where you would maybe analyze a few companies’ vs. investment banking where you would get to analyze many. Hence, even though the pay and the hours are slightly better, you learn much more in investment banking. What appeals to you about this position?

Go with everything here. There are three key points that you should include in your answer: 1) the bank itself (its reputation, leading position, worldwide perspective, its values and corporate culture...), 2) the people in the bank (because they are great!) and 3) the position itself (exposure to real deals, learning opportunities, etc.).


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Character Questions Even though mainstream media portrays investment bankers as some immoral sharks that prowl wall street only thinking about their paychecks, the reality is that investment banking is a job like any other, and the people that are going to hire you want to make sure that they are hiring somebody that has character that fits in with the culture and values of the firm. Essentially bankers want to see how you would react in different situations and what kind of personality traits you have. What are your strengths?

You are usually asked to list 3 personal strengths. As an analyst, you are expected to have strong quantitative/numerical skills, ability and willingness to learn quickly and attention to detail, among others. Again, try to do a little research on the values the company states in its website and try to translate them into strengths. If the company is team-oriented, you should be a team player. It’s that simple. What are your weaknesses?

Like above, you are usually asked to list 3 weaknesses. There are two important things you should bear in mind in answering this question: 1) the weaknesses you state should not be a dealbreaker for the interviewer (“I am a heavy drinker”), and 2) you should state in a quick line how you are trying to improve on that point. It is also important that you do not state weaknesses that are “hidden” strengths, you will come off as arrogant and petty (so avoid “I work too hard” and stuff like that). You spot a typo in a pitch book that has already been sent for printing, what would you do?

What the interviewer wants to know is whether you are resourceful in dealing with a problem or not. You can answer by stating your action plan, which could be something like this: “I would tell my Analyst / Associate / VP so they are aware of the typo and try to propose solutions for it, like 1) make sure the pitch book is not sent to the client with the typo, 2) check if the printing job has already been done and if you can correct the typo without significant delays, 3) if not, ask for permission to correct the typo and send the work again to the printing services.” Tell me about a time when you failed to honor a commitment

Tough question. Try to keep the situation as subjective as possible, that is, try to make the commitment as irrelevant to the interviewer as possible, without the commitment being stupid. 42 Ricardo Penadés & Nicolas Guardans

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Also, try to smooth it up by specifying any situation beyond your control and emphasize all the efforts you made to correct it. You can use the STAR Technique in this question to structure your answer, but don’t forget the “learning from my past errors” part! In your most recent internship, what feedback did you get? What are the key competencies you acquired? What were your responsibilities?

The key in this question is give examples and associate them with the competencies the position requires. They will want the feedback to know how did you get along with your colleagues, and the competencies and responsibilities to know how well did you perform and how much were you able to learn from the internship. Describe yourself in 3 words / What would a friend say about you? What about a university colleague?

Easy question if you are prepared. Give 3 characteristics about yourself and back them up with examples. As always, try to link them with the requirements of the position and the general “fit profile” of the firm. There is nothing difficult in these questions, the only thing you have to worry about is the strength of your arguments. Why should we hire you today?

This question is a unique opportunity to directly sell yourself. You should link your key competencies and your CV experiences with the requirements of the position and the reasons of why you feel you will be a good fit in the organization. If you can back it up with short, clear examples, it will be a plus. Other question which is similar to this one is: ●

What do you think this position requires? How well do you match?

Why should we not hire you today?

You have to be careful with this one. You don’t want to completely discard yourself, but you also don’t want to sound arrogant (“I don’t see a reason why you shouldn’t hire me”). Maybe you can simply say that it could be because the bank is not hiring today (i.e. hiring freeze). What has been your greatest failure?

As in the question about failing to honor a commitment, you should try to find a failure that’s not a dealbreaker for the interviewer, but that it is serious enough to be considered a real failure. You can use the STAR Technique in this question, explaining the situation and what was at 43 Ricardo Penadés & Nicolas Guardans

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stake, your action in the situation and the results. As the results will have to be negative, try to explain how you tried to correct the mistakes and learned from them. What has been your greatest achievement?

Similar to the one explained above, you should try to find an achievement that best fits in the purpose of this question, that is, assess how you act to reach success. Do not pick any achievement that the interviewer may think as stupid (“meeting-my-girlfriend” kind of stuff). Again, structure your answer using the STAR Technique to give a clear and concise answer. Tell me a joke

“A dog goes into an investment banking job interview, and the banker says to him, ‘You've got the job, but only if you can do three things. First, you have to be able complete an LBO model in 30 minutes.’ So the dog runs to a computer and astoundingly creates a full model in 30 minutes. That's very nice! Next, you must be able to spread 10 comps manually in under an hour. Immediately, the dog sits down at the computer and completes everything in only 30 minutes. ‘That's perfect! Lastly, you must be bilingual.’ So then the dog says, ‘Meow!’ ” Teach me something in 2 minutes

This question is aimed to evaluate your ability to summarize information in a clear and structured way. Try to pick a topic which is not too difficult to understand, but stay away from kindergarten stuff. For example, try to teach them about a project that you have presented recently. Sell me this stapler / this chair / something in 2 minutes

Similar to the one above, this question assesses your capacity to come up with good arguments and defend a position in a quick, structured and clear way. Do not give arguments just for the sake of it, try to be creative and persuasive, but keep it real. You can talk about the technical specifications of the stapler, the superior comfort of the chair, etc. What does it take to succeed in our business? Do you think you can succeed?

This is another “linking” question. What does it take to succeed? Attitude, motivation, team work, etc. You should demonstrate that you have these qualities by referring to previous experiences where you have needed to use them and how they have turned out. In other words you should bring up the most important skills that you have and back them up with examples. 44 Ricardo Penadés & Nicolas Guardans

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Explain your role in a team project or any other group activity

The key in this question is the STAR Technique. Pick a group activity where you had a leadership or close-to-leadership position. The interviewer will want to know if you are a team player, if you can organize your tasks and other people’s tasks and if you are good coordinating a team. Describe a situation where teamwork failed

STAR Technique again. As in other similar questions, explain how did you manage the failure, how did you try to correct it and what were the results; and what lessons did you learn so you don’t repeat past errors. Can you think of any ethical conflict you have encountered? How did you act?

Although you may think ethics are not important in banking, all banks make a lot of efforts to be ethical. Using the STAR Technique, you should explain the situation and the ethical conflict, what was your responsibility and your tasks, how did you take action and what were the results. Try to choose an ethical conflict that would also be a conflict to th e interviewer, don’t make it too subjective. It’s all about giving an example that is not extreme, where the interviewer can see him or herself involved. What's your leadership style? Are you a leader or a follower?

The key to this question is flexibility. The question will try to test your capacity to step aside when the situation needs it. You have to make clear that you have the leadership skills to lead a group of people and work together to achieve your objectives, but that you also recognize those situations where other people are leaders and that you are the collaborative type of person who pushes for the team. Give me an example where you came with a creative solution to a problem

This is a classical “situation” question, so use the STAR Technique and give an example that adjusts to what they are looking for, which is your ability to think outside the box and come up with innovative or “creative” solutions to problems. Try giving an example of a situation in a business context, it will add value.


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What events have had the most impact on your life?

The only advice here is keep it real, with your feet on the ground. The example must be tangible in the sense that the impact on your life should be measurable for someone who doesn’t know you. A balanced situation is key. How do you define stress and how do you manage it?

Everybody will have their own definition for stress, so we won’t impose that. This question is about your ability to work under pressure, so what you have to make sure is to ace it in the “how do you manage it” part. You want to project the image of a person who will not freak out when you’re under a lot of pressure and that you are able to organize yourself and work with tight deadlines without compromising the quality of your work.


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Verbal and Numerical Tests After submission of the online application, you will be asked to sit an online verbal and numerical test (tests vary by bank, verbal tests are not done in every bank). Banks typically outsource the pre-screening process to two main providers: Kenexa and S HL. Kenexa’s test are friendlier than SHL’s in the sense that you can go back to past questions, so you can skip or return to check your answers. You will typically be given 20 minutes to answer 15-18 questions.

Verbal Tests Verbal tests are designed to test your reading comprehension in a foreign language. The test consists in a series of texts of which you will be asked 3 questions, answers being True, False or Cannot Say. Although it may seem easy, these tests are also timed and a quick understanding of the text is crucial. Hint: you should answer your questions based on the information provided in the text, and ONLY on that information. It doesn’t matter if you know the answer, if it’s not in the text you don’t know it. It is also common to find questions that can be influenced by a personal opinion.

Numerical Tests The best way to ace these tests is by practicing. However, there are some formulas and tricks you should use to speed things up in the easy questions, so you have more time for the tougher ones. Remember: it is very important that you practice this tests, because apart from testing your numerical skills they also test your time-managing skills.

Some tricks and formulas 1. Growth between Year 1 and Year 2: (Year 2 / Year 1) - 1 2. Value given growth: a. Year 1 x (1 + Growth) = Year 2 b. Year 2 / (1 + Growth) = Year 1 3. Geometrical growth or Year on Year (YoY) growth between Year 1 and Year N: Growth = (Year N / Year 1) ^ (1 / (N - 1)) - 1 4. Value given geometrical growth: a. Year 1 x (1 + Growth) ^ N = Year 2 b. Year 2 / (1 + Growth) ^ N = Year 1 5. Number of years to reach X value: 47 Ricardo Penadés & Nicolas Guardans

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a. Number of years = ln (Year N / Year 1) / ln (1 + Growth) b. Rule of 72: to calculate what it takes to double an amount, just divide 72 by the growth rate expressed in 100’s to have an approximation of the number of years. Example: an investment to double at a 15% rate would take (72 / 15) = 4.8 years. 6. Proportions i.

Odds: when you have X:Y, the proportion of X is X / (X + Y)

7. You will be asked to use spot and forward rates to calculate a certain amount of money. It’s all about practicing with the exchange rates of the bridge currency.

Where to practice? The key to verbal and numerical tests is practice so we strongly recommend that you train online using the various websites that provide this sort of information. Here are some useful links: http://www.shldirect.com/practice_tests.html http://www.psl.com/practice/ http://www.assessmentday.co.uk/ http://practicetests.cubiks.com/default.htm http://students.efinancialcareers.co.uk/numerical_test.htm


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Investment Theory Overview Investment theory covers what tools that are needed to cover the decision-making process of choosing investments. We will cover Modern Portfolio Theory, the Capital Asset Pricing Model and the Efficient Market Hypothesis.

Modern Portfolio Theory The Modern Portfolio Theory (“MPT”) is an investment theory that aims to maximize the expected returns of a portfolio for the level of risk that is assumed by the manager of that portfolio. In order to be able to relate the expected returns with the equivalent levels of risk the portfolio manager has to carefully select proportions of different assets. The MPT’s primary innovation was to recognize that risk must be measured, not in terms of each security, but by how the risk of each security relates to those of other securities in the portfolio (Chernoff, 2002).

The Modern Portfolio Theory gained great importance in the latter part of the 21st century and its creator, Harry Markowitz, won the Nobel Prize for Economics in 1990. However, since then the model has been heavily criticised because of the assumptions that it makes. Let’s take a closer look at the model in order to fully understand its strengths and its flaws. Basic Assumptions1: The Underlying Assumptions of Modern Portfolio Theory In order for

Modern Portfolio Theory to function, it requires several underlying assumptions. These assumptions have been challenged in the recent market activity of 2007 to 2009 and include: 1. Investors act rationally: Clearly, the liquidity-lead bull market escalation in asset values from 2002 to 2007 could be described as “irrational exuberance”. The market, which is a clearinghouse for risk and not a measure of risk in and of itself, was not pricing risk appropriately. As more money flowed into the capital markets, leverage increased and expected returns were distorted from reality. As the markets seized up in late 2007 and ultimately collapsed in 2008, investors again acted irrationally as securities were liquidated regardless of relative valuation. 2. There is no friction in the market and capital flows freely between a buyer and seller. As the capital markets seized up in 2008, leverage was forced out of the financial system faster than the system could handle. Examples of this deleveraging included: banks stopped lending to each other; banks stopped lending to businesses and consumers; corporations could not place commercial paper; and corporations could not borrow in the public market. As a result of this unprecedented seizing in our capital markets, the U.S. Source: Winthrop Capital Management


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government implemented several programs that were designed to transfer the leverage in an orderly manner from the private sector to the government. The existence of these programs gnaws at the feet of free market capitalism. They also fly in the face of this important assumption that allows Modern Portfolio Theory any p ractical application. 3. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. This implies that historic returns are representative of future expected returns. And, since investment returns are deemed to be random, it is fair to say that expected returns are random as well. This is much like driving a car while looking in the rear view mirror. 4. There is a positive relationship between risk and return. Over long time frames, there has been a positive return to both stocks and bonds. However, this relationship can breakdown over short and intermediate time frames. There is no axiom in the investment business that investment returns will always be positively correlated to risk. 5. Investor s estimate risk on the basis of the variability of expected returns. Markowitz’s theory assumes that all investors desire to reduce the variability of their investment returns. The value of MPT was that it brought a measure of risk into the analysis of expected returns in financial assets. It accomplished this through the notion that it would be a good thing for investors if the variability of returns was minimized over a measured time period. The variability of returns is measured by the variance or standard deviation. While we would agree that standard deviation is a measure of risk, it is not the measure of risk. Investors may have other risk measures, such as a need to maximize the liquidity of a portfolio, the need to protect a portfolio from rising interest rates the need to maximize the income of a portfolio while minimizing its exposure to default risk, or the need to protect the portfolio from permanent value impairment


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Accounting and Financial Statements Questions regarding Accounting and Financial Statements require you to have basic accounting knowledge and to understand the connections between the three statements. Generally, the questions you are expected to answer require you to explain the impact on the financial statements of a given situation. Complete information about a company’s financial statements can be found in quarterly results and yearly results, usually found in the company’s website or in the local financial regulator website. For example, for quarterly data on US companies you can refer to form 10-Q by searching in the SEC Database (EDGAR).

Balance Sheet Provides information on a company’s assets and its capital structure (equity and liabilities/debt). The basic equation underlying the BS is Assets = Liabilities + Equity. The basic elements of the Balance Sheet are explained below: ● Assets: what the company owns. Assets are the resources the company uses to generate profits. ●

Liabilities : what the company owes. Liabilities are the sources of funds have been

borrowed by the company to fund operations. ●

Equity : represents the funds that the shareholders used to fund the company and start

the business. The basic components of the BS are divided in two different groups: current and non-current accounts. Current accounts refer to assets and liabilities that are to be held in the balance sheet for up to one year or one operating cycle of the business. Non-current accounts refer to assets and liabilities that are not expected to be sold or settled within one year or one operating cycle of the business. A balance sheet with separated classified current and non-current accounts is referred to as classified balance sheet (in opposition of the liquidity-


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based presentation , which ranks the balance sheet accounts in liquidity order).

Income Statement The Income Statement presents the financial results of a company. It gives information on revenues, costs that had to be paid and the net profit (loss). Therefore, the basic equation underlying the IS is Revenues - Costs = Net Profit (Loss), ignoring the effect of gains and losses that can arise from non-recurring events or extraordinary activities. The major lines of the Income Statement are: ●

Revenues: what the company has sold during the year

●

Expenses: what were the costs incurred in the production and selling of the products/services and the costs incurred in operating the business.

●

EBIT: Earnings (Revenues - Expenses) Before deducting Interest expense on debt and other interest bearing liabilities and Tax.

●

EBITDA: EBIT + Depreciation and Amortization of tangible and intangible assets.

●

EBT: Earnings Before deducting corporate Tax.

●

Net Income (Loss): what is left for the shareholders of the company after deducting all costs and taxes.


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Statement of Cash Flows The Statement of Cash Flows reflects all the cash movements (cash receipts and cash payments) the company has had in a period of time. Although income is very important to assess the financial viability of a company, cash flow is also essential, since it gives you information about the cash position of the company and its ability to transform business in cash. Therefore, the Cash Flow Statement reconciles the cash in the beginning of the period and the ending balance at the end of the accounting period. There are three major types of cash flows: 1. Operating Activities: includes all cash receipts and payments made in relation of the normal business activities and operations, such as net income, changes in accounts receivable, changes in inventory and changes in accounts payable. 2. Investing Activities: includes all activities considered as an investment for the company, like the purchase (or sale) of a long-term asset. 3. Financing Activities: includes all cash transactions that are made to obtain or repay capital, whether it is equity or debt. It includes cash inflows from equity issuance and cash outflows from repayment of debt.


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Connecting the Financial Statements The three Financial Statements are dependent on one another, either directly or indirectly, so you are expected to know the links between the Statements. There are some basic accounting rules that can help you linking them. These are: ●

Asset UP = Cash Flow DOWN / Asset DOWN = Cash Flow UP

●

Liabilities UP = Cash Flow UP / Liabilities DOWN = Cash Flow DOWN

The major connections of the Financial Statements follow the BASE rule (Beginning, Additions, Subtractions, Ending). ●

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

●

Beginning Cash Balance + Net Change in Cash = Ending Cash Balance

●

Beginning PP&E + Capital Expenditures - Depreciation - Write-downs = Ending PP&E

●

Beginning Debt Balance + Debt Issuance - Debt Repayment = Ending Debt Balance

●

Cash Flow from Operating Activities includes Net Income and changes in Current Assets and Liabilities (or changes in Working Capital)

●

Cash Flow from Investing Activities includes changes to Long-Term Assets

●

Cash Flow from Financing Activities includes changes to L/T Liabilities and Equity

Putting it all in common What do interviewers expect from us? It’s simple, they will want you to explain the impact of an economic or financial event (increase in revenue, an asset write-down, etc.) in the three financial statements. You should always explain the changes in the following order: IS, CFS and BS. Hint: remember the tax effect on some of the changes! IS/BS Changes Change in...

Impact

Revenue

IS: Revenue, Gross Profit, EBIT, EBT and Net Income CFS: Net Income, CF Operating and Change in Cash BS: Cash and Equity


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COGS

IS: Gross Profit, EBIT, EBT and Net Income CFS: Net Income, Working Capital, CF Operating and Change in Cash BS: Cash, Inventory and Equity

Operating Expenses

IS: EBIT, EBT and Net Income CFS: Net Income, CF Operating and Change in Cash BS: Cash and Equity

Depreciation

IS: EBIT, EBT and Net Income CFS: Net Income, Depreciation, Operating and Change in Cash BS: Cash, PP&E and Equity

CF

Asset/Liability Write-Down

IS: EBT and Net Income CFS: Net Income, Write-Down, CF Operating and Change in Cash BS: Cash, Asset/Liability and Equity

Current Assets

IS: No Changes CFS: Working Capital, CF Operating and Change in Cash BS: Cash and Current Assets

Current Liabilities

IS: No Changes CFS: Working Capital, CF Operating and Change in Cash BS: Cash and Current Liabilities

Cash Flow Statement Changes

Changes in...

Impact

Capital Expenditures

IS: No Changes CFS: CapEx, CF Investing and Changes in Cash BS: Cash and PP&E

Investments

IS: No Changes CFS: Investments, CF Investing and Change in Cash BS: Cash and Investments

Dividends

IS: No Changes CFS: Dividends, CF Financing and Change in Cash 55


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BS: Cash and Equity Issue (Repay) Debt

IS: No Changes CFS: Issue Debt, CF Financing and Change in Cash BS: Cash and Debt

Issue New Shares

IS: No Changes CFS: Issue Shares, CF Financing and Change in Cash BS: Cash and Equity

Accounting and Financial Statements Questions What's the difference between the IS and the CFS?

The Income Statement gives information about the economic situation of the company, how much has it earned as a result of its operations in an accounting period. The Cash Flow Statement gives us information about the cash inflows and outflows of the company. What are the links between the BS and IS? BS and CFS? IS and CFS?

You have the major links in the previous table. It is not common for an interviewer to ask this question expecting you to know every single link. How would a machinery all-cash purchase affect the three statements in year 0? Value: $100

Assuming that we purchase the machinery on Jan 1: ●

IS: there will be no effect on the Income Statement.

●

CFS: a use of cash of $100 in Cash Flow from Investing Activities.

●

BS: cash decreases by $100 and PP&E increases by $100.

How would a machinery all-cash purchase affect the three statements in year 1? Value: $100 ● IS: assuming a 10% amortization with no residual value and a 30% tax rate, net income

would decrease by $7 ●

CFS: cash flow from operations would increase by $3

●

BS: PP&E decrease by $10, cash increases by $3 and retained earnings decrease by $7

How would the all-cash sale of the machinery affect the three statements in year 2 for $90? ● IS: assuming it’s at the beginning of year 2, no amortization applies, so no affect to IS

●

CFS: cash flow from investing would increase by $90 56


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●

BS: cash would increase by $90, PP&E would decrease by $90

Is D&A a cash expense?

Depreciation & Amortization is not a cash expense. It’s a provision you make (you set aside some funds) to replace your equipment / intangible assets when they become useless. What are the three major lines of the Cashflow Statement?

The three major lines of the CFS are the Cash Flow from Operating Activities (what the business generates), the Cash Flow from Investing Activities (the capital expenditures the company makes) and the Cash Flow from Financing Activities (the cash inflow and outflow resulting from the financing activities of the company, like bond issuances, dividend payments, etc.) What is FIFO? How does it affect the three statements?

FIFO means First In, First Out. If a company manages its inventory using FIFO, in an environment of rising prices, we will have lower COGS, higher gross profit and higher net income, higher inventory balances, higher working capital and lower cash flows. What is LIFO? How does it affect the three statements?

LIFO means Last In, First Out. If a company manages its inventory using LIFO, in an environment of rising prices, we will have higher COGS, lower gross profit and lower net income, lower inventory balances, lower working capital and higher cash flows. LIFO is not allowed under IFRS but common under US GAAP. What are deferred tax assets/liabilities?

They are created when taxable income (on tax return) is not equal to the pre-tax income on the financial statements due to temporary differences. Deferred tax assets are created when taxable income > pre-tax income, and we must recognize a valuation allowance if it’s more likely than not that the DTA will not be recognized. On the other side, deferred tax liabilities are created when taxable income < pre-tax income. How can an aggressive revenue recognition policy affect the financial statements?

Yes. With an aggressive revenue recognition policy, a company can overstate its earnings during an accounting year, resulting in a higher Net Income for the first years. But when part of 57 Ricardo Penadés & Nicolas Guardans

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those earnings do not materialize, the company will have to restate its earnings and will incur in losses due to the revenue overstatement. An aggressive revenue recognition policy can be considered accounting fraud, as the examples of WorldCom and Enron illustrate. How do deferred/accrued assets/liabilities arise?

They arise when there is a temporary difference between the time we record a cash transaction and the time we recognize the revenue/expense on the income statement. For example, when a company pays for insurance, it must pay a lump sum per year. That lump sum is recorded as a cash expense, but the company will not recognize the expense until a full month has passed. During that period, the company will account for it as a prepaid expense, an asset. Why do we test goodwill for impairment?

Goodwill is the difference between the price we paid for a company/asset and its fair value. We will test goodwill for impairment annually and will recognize a loss when the value of the goodwill on the balance sheet is higher than its fair value. How would a machinery debt purchase affect the three statements in year 0?

Assuming that we purchase the machinery on Jan 1 and that debt is non-amortizing with a 5% interest payment: ●

IS: there will be no effect on the Income Statement.

●

CFS: a use of cash of $100 in Cash Flow from Investing Activities and a source of $100 in Cash Flow from Financing Activities, so cash balance remains neutral

●

BS: PP&E increases by $100, long term debt increases by $100

How would a machinery debt purchase affect the three statements in year 1?

●

IS: assuming a 10% amortization with no residual value and a 30% tax rate, net income would decrease by $10.5

●

CFS: cash flow from operations would decrease by $0.5

●

BS: PP&E decreases by $10, cash decreases by $0.5 and retained earnings decrease by $10.5

How would the sale of the machinery affect the three statements in year 2 for $90?

●

IS: assuming it’s at the beginning of year 2, no amortization applies, so no affect to IS

●

CFS: cf from investing would increase by $90, cf from financing would decrease by $100


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●

BS: cash would decrease by $10, PP&E would decrease by $90 and debt would decrease by $100

Valuation You will be expected to know some specific details about some of the most commonly used valuation methods in the industry. These are: comparable companies (or “comps”), precedent transactions, discounted cashflow (DCF) and leveraged buyout (LBO) analyses. There are other valuation techniques, like Sum Of The Parts (SOTP), liquidation value, etc. Interviewers will ask you all types of valuations questions, from simple questions (like defining a valuation method) to more tougher ones (perform a simple LBO valuation). These interviews are known as “technical interviews”. You are not expected to be a valuation geek, but it will surely make you stand out of the crowd if you demonstrate your interest and your knowledge in valuation, since it is one of the core tasks in this industry (recall the “Common Analyst Tasks” we discussed earlier). These valuation methods should be combined when valuing a company, since each method has its advantages and constraints when giving a meaningful valuation. The typical valuation analysis will combine these methods in a football field, which is a graph in which you plot the different value ranges these methods have given in order to judge and perform a final analysis to reach to a final valuation of a company, business or group of assets.

General Valuation Questions What are the major valuation techniques?

They are Comparable Companies, Precedent Transactions, DCF and L BO. Rank the valuation techniques

Precedent Transactions, Comparable Companies or DCF, LBO. Precedent transactions usually ranks first because of the synergies and control premium, Comparable Companies and DCF usually share the position (depending on the market sentiment and assumptions made), and LBO usually ranks last because since the financial sponsor requires a high IRR for the transaction, the purchase price is usually lower.


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What could a company do with excess cash on its balance sheet?

It can engage in positive-NPV projects or return cash to its shareholders via dividends or share repurchase plans. It can also engage in strategic takeovers or any other M&A activity. What can you do with a non-performing part of a company?

You can divest the assets to the shareholders or sell them in the market. To sell them, you would ask an investment banker to search for a buyer. If more than one buyer is interested in the assets, the investment bank and the company will negotiate with them, either by private negotiations and a “bidding war” between the companies or by a simple auction. What is a strategic buyer?

A strategic buyer is typically a company from the same sector of the target company (usually a competitor). The strategic buyer is usually willing to pay more for a company than the financial buyer, due to its ability to realize synergies from the transaction. What is a financial buyer?

A financial buyer or financial sponsor is typically a Private Equity or Hedge Fund. A financial buyer cannot compete in price with the strategic buyer, due to its IRR requirement that pushes the financial sponsor to offer a lower price. What are the possible considerations for a merger or acquisition?

A merger or acquisition can be paid both in cash or stock, or a mix of both. What are synergies? What types of synergies are there?

Synergies can be either cost synergies or revenue synergies. Cost synergies are cost reductions that arise from the transaction, due to the infrastructure combination or redundancies in the cost structure of the resulting company. Revenue synergies are revenues that are expected to be realized due to the combination of businesses (cross selling opportunities, new product base, R&D, etc.). Revenue synergies are very difficult to predict and are not always forecasted in the valuation analyses.


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What is a hostile takeover?

A hostile takeover is a takeover in which the management of a company does not recommend the purchase price offered by the acquiring company and the buyer decides to still pursue the acquisition. Can you explain me a recent M&A deal?

This should be obvious, but pick a recent M&A deal in which the bank you are applying is or has been involved. You should be able to give as much information as you can about the deal: companies involved investment banks involved, specific details of the transaction, valuation metrics, etc. You will find the information in Reuters, Dealbook, Bloomberg, MergerMarket, etc. Can you give me an example of two companies that should merge? Why?

This is a simple and straightforward question. Try not to propose a merger or acquisition of two very large companies, as your interviewer will ask you about possible antitrust issues. Try to pick two small companies you know well and back your answer with as much information as you can on the companies, the sector, etc. Also, pick two companies from the sector you said you are interested in (should be obvious). Why do companies pay a premium for the companies they acquire?

In a takeover, the acquiring company gains full control of a company. The existing shareholders will typically demand a control premium to the acquiring company, as a compensation for the reduction of their influence in the company’s decisions. What is a poison pill? Why is it used?

A poison pill is a strategy that some companies use to defend themselves from the attack of a company interested in acquiring the company. The strategy can be a “flip-in”, where the existing shareholders (excl. the acquirer) have the right to buy more shares at a discount; or a “flip-over”, which allows existing shareholders to buy the acquirer’s shares at a discount after the merger. What we mean when we say that a merger has been accretive/dilutive for the shareholders?

An accretive deal is an acquisition in which the shareholders of the acquiring company see a rise in the EPS of the resulting company. A dilutive deal is just the contrary. 61 Ricardo Penadés & Nicolas Guardans

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What does the concept "money left on the table" mean?

In an IPO or SEO, the money left on the table is the difference between the price at which the company started trading and the price at close, times the number of shares outstanding. For example, if a company is offered at $25 per share and closes at $50, the company has left on the table (50 – 25) = $25 per share. That money has gone to the investors who dumped the shares in the secondary market instead of going to the company. It’s the money the company could have raised should the price was the price at close at the first day of trading. What is an IPO?

An Initial Public Offering is the issuance of shares in the primary market for the first time. A company will do an IPO if it needs cash to fund operations or as a means of exit for Private Equity Funds that want to monetize its investment. What is a SEO?

A Seasoned Equity Offering is the issuance of shares in the primary market, but not being the first time. The rationale is the same as IPOs. Why can a merge or acquisition fail?

There are many reasons. An acquisition can fail either because the expected synergies have not materialized regulatory issues or inability to sell specific assets that were intended to be sold. The biggest problem is integration and corporate culture tensions between the acquirer and the acquired company. What are the rationale of mergers and acquisitions?

A company may want to merge to increase its position in the market, to enter a new market or segment, to diversify its product portfolio or just because of an industry consolidation.


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Comparable Companies Analysis Comparable company’s analysis company’s analysis provides a market benchmark, against which an analyst can reach to a valuation of a company, business or assets. Therefore, this analysis captures the current market sentiment on the companies that are thought to be comparable to the one we are trying to value (more on this later). The analysis is quite simple: all you have to do is benchmark the comparable companies (peer companies) against one another based on various financial statistics and ratios. We then calculate trading multiples for this universe and apply them as a proxy to the financial statistics and ratios of our target company. The multiples use a measure of value (Enterprise Value or Equity Value) in the numerator and a financial statistic (EBIT, EBITDA, EPS) in the denominator. The rationale of this valuation method is quite simple: similar companies should trade at similar multiples. In order to get the value of the target company, we have to extrapolate the sector multiples to the target company’s specific data, and reach a valuation. There are 5 simple steps to perform a “comps” analysis: 1. Screening and Universe Selection 2. Financial information research 3. Spread financial statistics and ratios and compute compute multiples 4. Benchmark 5. Perform the valuation

Screening and Universe Selection The main goal is to identify companies that are similar to our target company, called peer companies. We will include a company in our universe if it meets the following criteria: 

Business profile: o

Sector: the company operates in the same sectors sectors and sub-sectors as the target company.

o

Products and services: the company offers similar similar products and services as the target company. 63


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o

Customers and end markets: the company has a similar customer base as the target company. The end markets (the underlying markets in which the products and services of the company are used) are also important.

o

Distribution channels: the company uses the same distribution distribution channels as the target company.

o

Geography: the company operates in the same countries or or the same geographical area as the target company. This is very important, since a company meeting the above criteria operating in the US may not face the same economic drivers, growth, consumer preferences and cultural background as other company operating in the Middle East.



Financial profile: o

Size: the company’s market capitalization must be similar to the target company. Size can vary the trading multiples (large caps do not trade at the same multiples as small caps), as well as other business-specific characteristics, like economies of scale, customers, etc.

o

Profitability: the company’s profitability (measured by ratios) has to be similar to the target company’s profitability, since more profitable companies have higher valuations than companies with low or no profitability.

o

Growth Profile: the growth profile is also very important, since the market discounts into the share price (and hence the multiples) the growth opportunities and potential profitability of a company.

o

Credit Profile: the credit profile also affects affects the valuation, since a company with a lot of debt will not have (or should not trade at) the same multiple of a debt-free company.

Financial Information Research In order to move on to the next step, we have to find all the financial information needed. This information can be found in the SEC filings (for US companies), investor relations websites, earnings announcements, annual and quarterly reports, equity research reports, consensus estimates, press releases, etc.

Spread financial statistics and ratios and compute multiples The calculation of multiples is very simple; the only thing you have to bear in mind is to use the adequate metrics and drivers. The key here is the capital structure: you will either have to deal with metrics that take into account the capital structure (usually equity metrics like net income,


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dividend yield, or EPS), or metrics that do not take it into account, that is, metrics that include both equity and debt (like sales, EBIT, or EBITDA). For the metrics that only matter to equity, we will use the Equity Value (EqV). Equity Value is the market capitalization of a company (shares outstanding x share price). You will not typically be asked to compute the fully diluted shares outstanding (includes stock options that are “in -themoney”, warrants and other convertible securities). We will not cover how to calculate it, since it is not a typical interview question, but you should know what it is. For the metrics that take into account the whole company, we will use the Enterprise Value (EV). The Enterprise Value is the value of the whole company, what a buyer would pay for a company assuming no control premium or synergies. It is calculated as follows: Equity Value + Total Debt + Preferred Stock + Non-controlling (Minority) Interest – – Cash. Intuitively, the Enterprise Value is what you would be left with if you acquire a company (note that cash is subtracted, since you are essentially buying cash for cash). After computing the Equity and the Enterprise Values, we can start computing the trading multiples. The most typical ones are: EV/Sales.



EV/EBIT.



EV/EBITDA.





EqV/Net Income, which is called Price-to-Earnings ratio (P/E).

The above multiples are the most commonly used. Note that Sales, EBIT and EBITDA are financial statistics available to all share and bond owners (the entire capital structure). Hence, they are compared to Enterprise Value. However, Net Income is only available to equityholders, so we use Equity Value to compute the multiple. Every sector has its sector-specific valuation multiples. It is advisable to review the multiples of the sectors you are most interested in to demonstrate your knowledge on specific valuation. Some sector-specific multiples: 

Telecommunications: EV/Population, EV/Subscribers, EV/Fiber Miles, etc.



Retail: EV/EBITDAR (EBITDA and Rent Expense), EV/Square Footage.


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Metals&Mining,



Natural

Resources,

Oil

&

Gas:

EV/Production,

EV/Capacity,

EV/Reserves 

Financial Institutions: EqV/Book Value, EqV/Tangible Book Value, etc.

Benchmark After spreading all the trading multiples and the necessary information, the analyst will perform a benchmark in order to come up with a multiple range. The analyst will have to discard outliers and do the necessary adjustments. The mean, the median, the 25 th percentile and the 75th percentile are useful measures analysts use to a meaningful multiple range.

Perform the Valuation After getting the multiple ranges, the analyst will apply the multiples to the financial statistics and ratios of the target company, therefore coming up with a valuation. This valuation will have the following Pros and Cons: Pros



o

Market information: is used, so the valuation captures the current sentiment on the sector.

o

Relativity: the company is benchmarked to its peers.

o

Ease of use: easy to compute and to update.

Cons



o

Market information: can be skewed, since investors are not always rational in their expectations.

o

Peers limitation: there may not be any truly comparable companies in the industry, leaving this method completely useless. Also, the use of the valuation using peers can leave out of the equation company-specific issues.

o

Intrinsic valuation ignored: market expectations can completely ignore the intrinsic value of the company (again the irrationality of the investors).

Comparable Companies “Comps” Questions What are the pros and cons of using comps? Long story short, the pros are that you capture the market sentiment and it is easy to compute, and the cons are that market information can be skewed and the fundamental value of the company may be ignored.


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What are the most common multiples for comps/precedent transactions?

The most common multiples are EV/EBIT, EV/EBITDA, EV/Sales and the P/E ratio.

Can you give some examples of industry-specific multiples?

You should have in mind one or to sectors/industries that you like before the interview. Once you have them, try to learn as much as you can of the sector dynamics. You should be able to list some of the multiples of the industries. This is a very simple question provided you have done your homework. How would you value a start-up company?

A start-up company rarely has any meaningful earnings, so the best approach to value a startup company is to use the EV/Sales multiple. If the company has no sales at all, try to use other drivers like the number of subscribers in a webpage for a technology company, or the production capacity for a power company that is just starting. Why do we use EV/EBITDA instead of EqV/EBITDA?

This is a very simple question. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Whenever Interest is included in the financial statistic, it means that the metric takes into account the bondholders of the company, and therefore we should use Enterprise Value, since the Equity Value is the value of the equity excluding debt (bondholders). What is Enterprise Value? How do you calculate it?

Enterprise Value is the value of the whole company, the value that a buyer must pay in order to acquire the company. To calculate it, you add up the Equity Value, Net Debt (Net Debt = Debt – Cash), non-controlling interests and preferred stock. What is Equity Value? How do you calculate it?

It is the value of the equity ownership of the company, the value of the residual claim the equity has in the company’s assets. The Equity Value is the market capitalization of the company, that is, the number of shares outstanding times the price of the shares. Comparison of two companies by using comps


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When comparing two companies using comps, we have to make sure they meet the criteria to be truly comparable. These criteria are detailed above. You may be asked to find the difference between companies with different EV/EBITDA multiples, for example. You should try to find the criteria that are not met in order to justify the difference in the multiple. Walk me through a comps analysis

You first screen and select the universe of comparables. After that, you will spread the financial statistics and ratios and calculate the trading multiples. After that, you will benchmark them and try to extrapolate the sector multiples, making the necessary adjustments. You will then apply them to the target company’s financial statistics and ratios and come up with a valuation. Comparison of two companies with different composition of IS, what multiple do you choose?

You will have to take into account the cost structure of the company and choose the financial statistic that fits into our analysis. For example, if a company rents its machinery and the other one buys it, you will not use EBIT, since the company that owns the machinery will have to pay for D&A and its multiple will be lower. For the sake of comparability, you will use EBITDA as your statistic (depending on how the other company pays the rent expense, since EBITDA will not be suitable if the company pays rent on an operating basis). What adjustments do you have to make to a comps analysis?

You will make the necessary adjustments to discard from your analysis those companies that have very low or very high multiples (outliers), since they can skew the valuation. What is P/E and why is it used? How do you calculate it?

The Price-to-Earnings Ratio (P/E) represents how much is paid for 1 monetary unit of the company’s earnings. The P/E ratio also reflects the market expectations of a company: when it is very high, the company is expected to grow at a faster rate than when the multiple is low. It can also reflect the general attractiveness of the company in the market. It is calculated dividing the company’s market capitalization by its earnings or, alternatively, dividing the share price by the earnings per share (note that the former accounts for the whole equity ownership and the latter is in a per share basis).

Precedent Transactions Analysis


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Precedent transactions use the same approach as the comparable companies analysis. The process is as simple as the comps process: find past transactions that are comparable (the companies involved are comparable) to the target company or the company we are trying to value. After that, we will compute specific multiples taking into consideration the total amount paid for the company. The steps for this valuation method are the same as the comps analysis: 1. Screening and Universe Selection 2. Information Research 3. Spread financial statistics and ratios and compute multiples 4. Benchmark 5. Perform the valuation The only difference in the process is that instead of looking for comparable companies, we are looking for acquisitions or transactions that involve companies that are similar in nature to the company we are trying to value. It is important to distinguish between two types of buyers: the strategic buyer and the financial sponsor. The strategic buyer will pay higher prices (Enterprise Values) for the companies than financial sponsors. The rationale is simple: a strategic buyer can realize synergies from the acquisition. The financial sponsor, however, has higher cost of capital and higher return requirements, so it is unable to compete with the strategic buyer in a bidding war. The valuation using this method will have the following Pros and Cons: Pros:



o

Market information: is used, so the market sentiment is captured in the valuation of the target company. The information will display current (if the transactions are recent) conditions concerning M&A transactions and capital markets.

o

Relativity: again, the multiples approach and the benchmark allow valuing the company relative to its peers and how much it was paid for them.

o

Ease of use: easy to compute, avoids making assumptions.

Cons:



o

Market information: can be also skewed depending on investor expectations and M&A environment. 69


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o

Time: precedent transactions may not be representative for the company or the sector itself in a given time period.

o

Existence and information: there may not be any transactions comparable for the company we are valuing or the information on the deals is very limited.

o

Acquirer’s valuation: can be wrong or can assume conditions not given in the market at the point of the valuation.

It is quite important to note (it is a must-ask question in an interview) that Precedent Transactions will generally yield a higher valuation than the rest of the valuation methodologies, due to the fact that synergies expected to be realized and the control premium for the stock are included in the purchase price, and therefore they flow into the multiple.

Precedent Transactions Questions What are the pros and cons of using precedent transactions?

No explication needed. Just list them and make sure you give a clear and concise answer. Does precedent transactions always yield a higher valuation than the other methodologies?

Precedent transactions usually yield a higher valuation than the other methodologies because the multiples used in the comparable transactions universe implicitly include the synergies expected on the deal and the control premium. However, it depends on the market sentiment: if a company’s comparable transactions were completed in a period of market turmoil and in the moment of the analysis the market is extremely high, the comparable companies analysis may give a higher valuation for the company. It would be the same for the DCF analysis if the assumptions are extremely optimistic, although this is very improbable. Walk me through a precedent transactions analysis

It is the same process as the comps question but using precedent transactions. You should have any problem with this type of questions. What adjustments do you have to make to a precedent transactions analysis?

It would be advisable to discard those deals in which the M&A market or the capital markets were extremely optimistic or pessimistic at the time of the transaction for obvious reasons.

Discounted Cash Flow (DCF) Analysis 70 Ricardo Penadés & Nicolas Guardans

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Discounted Cash Flow (DCF) is a fundamental valuation methodology, that is, it takes into account the free cash flow generating power of the company. The current market conditions do not affect as directly as in the previous methodologies, although it can affect the assumptions made for the DCF. This method yields the intrinsic value of the company, instead of the market value of the company (relative to its peers). A DCF analysis consists in projecting the three financial statements for a period of 5-10 years to calculate the company’s free cash flow for every year, the calculation of a terminal value and the discount (bring future amounts of money to present) of those values to the Weighted Average Cost of Capital (WACC), to come up with a value of the company today. This method is highly dependent on assumptions and the discount factor (WACC): a change in these significantly impacts the output of the valuation. An analyst will perform a sensitivity analysis in order to assess those impacts and evaluate how sensible the valuation is (the higher sensible, the weaker the valuation, since reality always depart from assumptions). The steps for the Discounted Cash Flow Analysis are: 1. Prepare and project the three financial statements 2. Project Free Cash Flow (FCF) 3. Calculate WACC 4. Calculate Terminal Value 5. Perform the valuation

Prepare and project the three financial statements The three financial statements are projected throughout the projection period, typically 5 to 10 years. The projections involve making assumptions (for example, regarding Days Sales Outstanding, % Working Capital over Revenues, and others) and adjusting the statements for non-recurring items, that is, income or costs that are not recurring, that they will not be incurred in a regular basis.

Project Free Cash Flow (FCF)


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The Free Cash Flow is the cash the company has in hand that can use for whatever purpose it may want. The premise of the DCF is that this cash is the cash that the company can use to repay debt and pay to the shareholders. This measure is calculated as follows: (+) Earnings Before Interest and Taxes (EBIT) (-) Taxes (=) Earnings Before Interest and After Taxes (EBIAT)

(+) Depreciation and Amortization (D&A) (-) Capital Expenditures (CapEx) (-) Increase/Decrease in Net Working Capital (=) Free Cash Flow

This formula is very important for the technical interviews, since it’s one of the main pillars of the Discounted Cash Flow Analysis. Note that the Free Cash Flow above calculated is the Free Cash Flow to the Firm (FCFF), since Interests are included (bondholders are included). To calculate the Free Cash Flow to Equity (FCFE), we will have to subtract the Interests, so instead of starting with EBIT, we will start with the Net Income. Free Cash Flow to Equity is typically used in Leveraged BuyOut Analysis (more on this later). The Free Cash Flows of the projection period represent a portion of the final valuation, since we have to project the company’s growth in the subsequent years. We will do that calculating the Terminal Value, which includes the value of the company outside the projection period.

Calculate WACC The Weighted Average Cost of Capital is the cost of the total company funds, whether they are equity or debt. WACC is calculated with a target capital structure, which is one of the main assumptions of the model. The formula for WACC is the following:

 

WACC   r d  1    

D   E     r e   D  E   D  E 

Intuitively, the WACC is the after-tax cost of debt times the percentage of debt in the capital structure plus the cost of equity times the percentage of equity in the capital structure. 72 Ricardo Penadés & Nicolas Guardans

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This is the simple WACC formula, which assumes a simple capital structure of debt and equity, excluding any convertible or hybrid securities, like preferred stock. Some interviewers will ask you the complete formula of the WACC. In that case, the formula is the same factoring in the effect of the cost of preferred securities (dividend yield) times its percentage in the capital structure.

Cost of Equity Estimation The Cost of Equity is the required rate of return that investors expect to have from the company for their funds. Unlike the Cost of Debt, that can be computed from the company’s debt, the Cost of Equity is not easily given. To compute the Cost of Equity, we will use the Capital Asset Pricing Model (CAPM). We will not discuss the suitability of the CAPM nor its limitations in this guide. Essentially, the CAPM is calculated as following:

r e  r f   L  r m  r f

Therefore, the Cost of Equity is the risk free rate (r f ) plus the levered beta times the market risk premium (the difference between the return on the market, r m, and the risk free rate, r f). The Beta is the correlation of the company with the market. A Beta can take any value (- ∞,+∞) and represents the sensitivity of a company’s stock to the movements of the market. For example, if a company has a beta of 2 and the market moves 1% up, the comp any’s stock will move 2% up. If a company has a beta of -3 and the market goes down by 2%, the company will go up by 6%. The correlation can be positive (it moves with the market) or negative (it moves contrary to the market), or have no correlation at all (beta equal 0). There are two types of betas: beta asset and beta equity. The asset beta is the correlation of a given group of assets to the market, and the beta equity takes into account the capital structure. Similar to the CAPM approach, the beta equity is the beta asset plus the effect of the capital structure on the assets, namely the leverage risk.


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The beta you will get from data vendors such as Bloomberg or Capital IQ is the beta equity of the company. If your company is privately-owned (and thus there is no beta available), you can imply the beta from the beta equity of the peer group. To do that, you have to unlever the beta equity of the peer group, that is, you neutralize the capital structure risk or leverage risk to arrive to a beta asset. That beta asset will be levered to the capital structure of the target company, yielding the beta equity. The formula to lever and unlever the beta is the following:

 

 L   U  1 

  1    E 

D

As you can see, the beta levered is the beta equity; and the beta unlevered is the beta asset.

Calculate Terminal Value There are two ways to calculate Terminal Value: the exit-multiple method and the perpetual growth method (Gordon growth model). Exit-Multiple Method This method calculates the terminal value of the company by applying an exit multiple to the EBITDA (for example). It is a very straightforward method that has two sources of value: the increase of the financial statistic or driver (a higher EBITDA at exit will imply a higher terminal value), or the multiple arbitrage (a higher exit multiple, assuming constant EBITDA, will imply a higher value). Perpetuity Growth Method (Gordon growth model) The final year’s Free Cash Flow grows indefinitely to perpetuity at a constant rate. This method is the most commonly used. The long-term growth rate is typically close to the GDP growth. The formula to calculate the terminal value under Gordon growth is the following: TV 

FCF n  1  g  WACC  g

Perform the valuation The last step is performing the valuation applying the Net Present Value (NPV) formula to the free cash flows we have calculated and the terminal value, taking the WACC as the discount rate. 74 Ricardo Penadés & Nicolas Guardans

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A simple way to do it is to calculate the discount factors and then applying them to the Free Cash Flows. The discount factor is defined as:

Discount Factor 

1

1  WACC n

After that, you apply it to the Free Cash Flow and you sum all the discounted amounts to arrive to the Enterprise Value of the company. To calculate the share price you will have to calculate the Equity Value and then divide by the shares outstanding. After performing the valuation, an analyst will typically do a sensitivity analysis to check how the valuation is affected by a change in the underlying assumptions. This methodology has the following Pros and Cons: Pros:



o

Intrinsic Value: it takes into account the cash flow generating power of the company, which is a fundamental approach to value.

o

Market independent: it is not affected by periods of investor irrationality.

o

Flexible: it allows doing multiple scenarios and sensitivity analysis.

Cons:



o

Highly dependent on assumptions: forecasts tend to never be right and the final output is usually very sensible to changes in the assumptions.

o

Terminal value: it can account for the majority of the value of the company.

o

Depends on WACC: it assumes a constant capital structure, limiting the effectiveness and meaningfulness of the valuation.

Discounted Cash Flow Questions What is WACC? How do you calculate it?

WACC is the Weighted Average Cost of Capital. It is the average cost of funds for the company. You calculate it by adding the after-tax cost of debt times the percentage of debt in the company and the cost of equity times the percentage of equity in the company. What is Beta? How do you calculate it?


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Beta expresses the correlation between a stock and the market. You should perform a regression analysis between the market (S&P500, for example) and the stock and take the slope of the expression (y = a + bx, beta is b). What's the difference between the levered and the unlevered Beta?

The unlevered beta is the asset beta, since it does not take into account the capital structure of the company, contrary to the levered beta, which is the beta equity. What are the pros and cons of using DCF?

The most important point is that the DCF uses the fundamental approach to reach to an intrinsic valuation of the company, but the other points are also worth to mention. What is CAPM?

The Capital Asset Pricing Model is the model we use to calculate the cost of equity or the return that the equity owners expect from the company for their funds. What's the difference between the levered and the unlevered free cash flow?

The levered free cash flow takes into account both bondholders and equity owners, and therefore it is known as the free cash flow to the firm. The unlevered free cash flow is the cash flow after paying bondholders, so it is known as the free cash flow to equity. Walk me through the calculation of FCF.

(+) Earnings Before Interest and Taxes (EBIT) (-) Taxes (=) Earnings Before Interest and After Taxes (EBIAT)

(+) Depreciation and Amortization (D&A) (-) Capital Expenditures (CapEx) (-) Increase/Decrease in Net Working Capital (=) Free Cash Flow

What is the EPS? How do you calculate it?

Earnings Per Share are the amount of earnings attributable to each share. You calculate it by dividing net income by the number of shares outstanding.


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What is the fully diluted EPS? How do you calculate it?

Fully diluted EPS is the amount of earnings attributable to each share taking into account the dilution effect of the convertible securities if considered converted (warrants, options, preferred stock, etc.). It is calculated as the net income divided by the fully diluted shares outstanding. What's cheaper: equity or debt?

Debt is cheaper, since investors demand a higher expected return from the company than bondholders. Bondholders typically demand the risk free rate plus a small premium, but equity owners demand the risk free rate plus the market premium adjusted to the risk of the investment (expressed by the beta). The intuitive explanation is that since debt holders have the right to claim the assets before equity, equity-holders demand a higher return on capital invested in exchange for that risk. What is riskier: debt or equity?

Debt is riskier because debt requires the payment of interest, and the failure to pay results in a default and bondholders can seize the company’s assets. However, equity cannot require payment of dividends and has a residual claim in the assets of the company, which can only seize after all bondholders have been paid. What is the terminal value? How can you calculate it?

Terminal Value is the value outside the forecasting period of the valuation analysis. You can calculate it either by the exit-multiple method (applying a multiple to the last year’s EBITDA), or by the Gordon Growth Model, that takes the last free cash flow of the forecasting period to perpetuity. What is EBITDA? Why is it useful and how do you calculate it?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. We calculate it simply by subtracting COGS and SG&A expenses to Revenue, excluding the interest expense, depreciation and amortization, and taxes. It is useful because it gives an idea of the earnings power of the company before payments that can be misleading, since interest expense and taxes are not operating expenses and D&A is a non-cash expense. What is Working Capital? How do you calculate it?


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Working Capital is the money needed to fund the regular operations of the company. It is calculated as the following: Accounts receivable + Stocks – Accounts payable. What is CapEx? How do you calculate it?

Capital Expenditures are the investments the company makes in new PP&E or non-current assets. It is calculated simply by summing up all relevant lines in the cash flow statement (in the investing cash flow) or by a simple BASE-rule (Beginning, Addition, Subtraction, Ending). For example, if the beginning balance is 100, the ending balance is 300 and the depreciation is 50, CapEx will be 250. Why do we include D&A in the calculation of FCF?

Because D&A is a non-cash expense. Therefore, it is money that can be spent in positive NPV projects or to be given back to shareholders. What's the net change in FCF if D&A goes up/down by 10?

If D&A goes up by 10, EBIT will go down by 10, EBIAT will go up by 7 (assuming a 30% tax rate), and FCF will go up by 3. You have to take into account the effect of taxes. If the tax rate is 0%, the FCF will not change. What is the market risk premium?

It is the premium that investors demand over the risk free rate for the additional risk taken by investing on the market. It is calculated as the return of the market as whole minus the risk free rate. Do negative-beta investments exist? Can you give some examples?

Negative-beta investments are investments that have a negative correlation with the market, that is, it moves up when the market is down, and down when the market is up. Although it is very difficult to find a truly negative-beta investment, some investments considered safe havens can have a negative beta in a context of market turmoil, but only for some short period of time (and therefore, not meaningful). Gold can be considered a negative-beta investment during a crisis, because usually when markets are down, investors get out of their positions and invest in gold as a safe haven, making the price of gold rise and develop a negative correlation with the market.


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Walk me through a DCF analysis

This is a very simple question that you should answer without any problem. Just study what you have learned above! What adjustments do you have to make to a DCF analysis?

You will adjust the IS for non-recurring items that cannot be forecasted and are not part of the on-going operations of the company. We will also adjust our assumptions in order to reach a conservative and reasonable valuation of the company, should we need to.

Leveraged Buyout (LBO) Analysis A Leveraged Buyout is the acquisition of a company using debt. Very rarely will questions on LBO’s go into great detail, but its always good to have some basic understanding of how the valuation method works and its key drivers. How does an LBO work?

An LBO is very similar to buying a house with a mortgage – you want to minimize the amount of initial equity and maximize the debt (as long as you can repay it). Using a similar logic, in an LBO transaction one party tries to acquire a company using the least amount of equity and the most amount of debt and then use the cash flows generated by the company to repay that debt. The goal is to, after a few years of the company repaying the debt used to acquire it, sell it and benefit from the increase of its equity relative to the debt in the capital structure. How would you model an LBO?

Unlike other forms of valuation, in the LBO model you must first make some assumptions on the price that will be paid for the company. This is typically done using the average multiple in recent transactions that have taken place in the industry. Other assumptions that have to be made are the amount of leverage (debt/equity) and the interest rate of the debt. Once this is done you must project out the company’s Income Statement, Balance Sheet and Cash Flow Statement, and determine how much debt is paid off each year, based on the available Cash Flow and the required Interest Payments. Finally, a series of assumptions regarding the sale of the company have to made, usually assuming an EBITDA Exit Multiple similar to the one used at the point of acquisition, and calculate the return based on how much equity is returned to the firm.


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What are the drivers of the LBO model?

The amount of leverage used by the company and the interest rates for the debt has a significant impact on the model. Also, the multiples assumed for entry and exit have a very important impact on the returns. Finally, regular operational characteristics also have a significant impact on the valuation. What makes a good LBO target?

Private equity funds typically look for companies that can be easily modelled so that they can use significant amounts of leverage. In other words, the more stable and predictable a company is, the easier it is to obtain financing for a private equity for the acquisition and the cheaper that financing is. Hence, the most important characteristic of a good LBO target is to have a stable and predictable business that has a lot of excess cash to repay debt. A strong management team also helps, as does a base of assets to use as collateral for debt. Why is the LBO valuation typically known as the “floor valuation” for the company?

This is sometimes called a “floor valuation” because PE firms typically pay less for a company than strategic acquirers because of a combination of two factors: i) they have no operating synergies that they can use to increase their purchase price ii) they need to obtain high returns for their investments.

Quantitative questions, Brain Teasers and Guesstimates An Investment Banking Analyst should have very strong quantitative and analytical skills, so you should expect the interviewer to test them. There are 3 main ways: 1. Quantitative questions : simple mental mathematical calculations. 2. Brain Teasers: involves a logical or mathematical problem with a creative solution. 3. Guesstimates : involves making assumptions and mental calculations to reach a result.

Quantitative Questions Quantitative questions are usually products between two two-digit numbers (i.e. 35 x 43), square roots (

√ , √ ) and fractional numbers (⅙, ⅜). Here are some useful tricks to solve

them:


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●

Separate the product into a sum of products. For example, 35 x 43 = 35 x (40 + 3) = 35 x 40 + 35 x 3 = 1,400 + 105 = 1,505. The best way to practice this is to multiply random two-digit numbers.

●

For square roots, you will have to know a few of them by heart. For example, 25 x 25 = 625, 12 x 12 = 144, and so on. If you get a number that is not a perfect square, try to approximate the result and explain your steps. For example,

√  is   , which is √ or

approximately 0.96. Obviously, you can try other approache s, this is just an example. ●

For fractional numbers, we suggest you learn the fractionals of the prime numbers, as you will be able to reach to the other numbers by simple calculation. For example, for ⅜, knowing that ¼ is 0.25, ⅛ is 0.125, times 3 is 0.375.

Most Common Quantitative Questions

Type

Questions

Product

17 x 17, 17 x 18, 25 x 24, 33 x 33, 35 x 37, 42 x 47, etc.

Square Root

Sqroot of 625, 144, 289, etc

Fractional

1/7, ⅛, ⅜, 1/11, 1/12, 5/9, etc

Powers

You should be able to do all the numbers from 1 to 10 cubed

Brain Teasers There is no real trick to brainteasers as they can come in all shapes and forms. Nevertheless practice is always a great tool and will surely get you ahead. Ideally, the best way to answer these questions is to know them beforehand, but unfortunately that is not typically the case. The best way to deal with them if you don’t know them is to say it honestly and ask for the solution (for the next time!). Also, do not lie if your interviewer asks if you already knew the brain teaser, it will be counter-productive.


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Common Brain Teasers and Solutions The balance

Q: You are given a scale of 12 marbles. The scale is an old fashion one (pictured below). The device enables you to conclude either that the contents of the dishes weigh the same or that the dish that falls lower has heavier contents than the other dish. The 12 marbles appear to be identical, but there is one unusual one ( it’s either heavier or lighter). How do you find it using the scale 3 times (not more)? A: You separate the marbles into two groups of 6 and measure them. Once you have done this, one of the sides will be heavier than the other. You then take those 6 marbles and separate them into two groups of 3 and repeat the same experiment. Finally, you take the set of the 3 heavier marbles and measure two and leave one outside of the measured group. If the two that are measured are the same weight then the remaining marble is the culprit, if not you will know by the balance which is the heavier/lighter marble.

Infinite Additions

Q: What is the sum of integers from 1 to 100? A: 100 + 1 = 101, 99 + 2 = 101, etc. there are 50 pairs of 101 = 50 x 101 = 5050 Degrees, degrees!

Q: How many degrees, if any, are there in the angle between the hour and the minute hands of a clock when the time is quarter past three?


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A: One quarter of one twelfth of 360º. That is one quarter of 30º = 7.5º Smelly socks

Q: You have 11 blue socks and 7 red socks in a drawer in a dark room. What is the minimum number of socks you need to take out of your drawer and carry into your living room (it is well lit) to guarantee that you have at least a matching pair of socks? A: 3. Think about it. Summer days

Q: A pool gets a new machine that doubles the number of liters that it can pump into it a day each day for a month. On what day of the month is the pool half full? A: The half way mark is the day before the last day of the month, so the 29th.

Guesstimates Guesstimates are designed to test your ability to make assumptions and estimate a given number. What the interviewer will want to know is if you are capable of making the necessary assumptions to reach to a conclusion. Don’t worry too much about the final answer (remember it’s a guess), but try to sound convincing in your assumptions and their qua lity. The best way to learn how to solve guesstimates is by practicing.

Common Guesstimates that you should try How many liters of Coca-Cola are sold in the world in one year? How many tennis balls / table tennis balls can you fit in an Airbus A-320? How many mortgages are there in the UK?


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Case-Studies It is common in all processes, usually in the second or the final round, to be asked to solve a Case-Study and do an individual presentation to a senior banker. You can also be asked to discuss it in group with two senior bankers and 4 or 5 candidates. The Case-Study will typically give you an overview of the sector and the economic context in which the company operates and the major strategic challenges coming up. After the introduction, you will be provided with information about three or four alternatives (acquisition targets, expansion plans, etc.). There is no correct answer for this case-studies, the evaluation depends on your reasoning, the power of your arguments and your answers to the questions made after you present your solution. It is advisable to structure your answer around three pillars: 1. Strategic considerations : does the alternative fit into the strategic plans of the company? Will the alternative open new markets for the company? New products? New revenue streams? 2. Operational considerations : is the alternative feasible taking into account the capacities and limitations of the company? Do we need extra resources? Can we take any advantage in terms of economies of scale or synergies with our existing infrastructure? 3. Financial considerations : can we pay for it? How are we going to pay for it? How is it going to affect to our credit rating? Is it profitable? Try to use as much information as you can from the case-study and try to back every statement and conclusion you make with the relevant information. Do not take things for granted and be prepared to defend your conclusions in front of the senior banker / panel.

Example of a Case-Study Below is an example of a simple case study that you can encounter in an assessment center. Candidates would have 15 min to prepare the information in the case study and then have to


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present it to a senior investment banker. It’s important that you keep in mind that the annexes are not always important! QZE: TIME FOR EXPANSION?

QZE is the world’s largest producer and retailer of clothes. The group designs and manufactures almost everything by itself, and new designs are dispatched twice a week to its QZE stores. Most manufacturing is now shifting to low labor cost countries, mainly to Morocco, China, and Turkey, although much production continues in the UK and the rest of Europe, particularly for its X brand. In addition, QZE has a factory for shoe design, production and distribution in the town of Leeds. As of 2007, QZE’s stores have men's clothing and women's clothing, each of these subdivided in Lower Garment, Upper Garment, Shoes, Cosmetics and Complements, as well as children's clothing (QZE Kids). Currently their sizing on women's clothing goes to a US size 12 or a UK size 14. QZE is a vertically integrated retailer. Unlike similar apparel retailers, QZE controls most of the steps on the supply-chain, designing, manufacturing, and distributing its products. 50% of the products QZE sells are manufactured in the UK, 26% in the rest of Europe, and 24% in Asian and northern African countries and the rest of the world. So while some competitors outsource all production to Asia, so far QZE makes its most fashionable items —half of all its merchandise—at a dozen company-owned factories in the UK and Portugal, where labour is somewhat cheaper than in most of Western Europe. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and northern Africa. On August 16, 2011, an Indonesian television show called A WIGA (of the Bandeirantes TV network) accused the company of using suppliers who were running sweatshops for their outsourced production. On August 17, 2011, the Regional Superintendency of Labour and Employment of Jakarta, Indonesia, closed a factory that produced QZE's clothing for its poor labour conditions. Filipinos were being brought illegally to Indonesia, locked in small apartments and sewed clothes for 12 –14 hours a day. They could not leave the apartment without the consent of the supervisor and didn't have hot water for taking showers or food for lunch. The Filipinos earned about 1 USD for each dress they sewed, although the retail price in its stores was about 70 USD for the same dress. Many of the workers were forced into paying their wages to human traffickers who had smuggled them into the country.

In a statement, QZE’s

representatives said that the accusations of slave labour made against the retailer represent a 85 Ricardo Penadés & Nicolas Guardans

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“serious breach in accordance with the Code of Conduct for External Manufacturers and Workshops of QZE.” The incident had a significant impact on the company’s quarterly sales. QZE’s dominant position in the market has given it very high market shares in some of the countries where it sells its items. For example, in the UK QZE has a 70% market share in the retail segment. It also has a 60% market share in countries such as a France, Spain and Italy. In the rest of the countries in Europe it has a lower market share, and in Asia, Africa and America its market share is not that significant. QZE’s strong performance during the past few years has not only allowed it to establish itself i tself as the leading player in the sector but they have also allowed it to generate a very strong and steady cash flow. With all the cash that QZE has generated, they are looking to further strengthen their market position and acquire a competitor. QZE has mandated your bank, Merrill Lynch, to analyze strategic alternatives and to present, in a brief 10min presentation, the different options that the company has and which one you would recommend. The QZE management team allows you to use any presentation display that you may choose. ABC

ABC is one of the leading companies in Asia, with strong competitive positions in China, Japan Japa n and Singapore, where they sell all their products and have a market share of 10%, 35% and 50%, respectively. The Company’s marketing mark eting strategy is very aggressive and it has established itself as one of the “best“best -known brands” in Asia Pacific, according to Nielsen in their very recent report about the clothes sector in Emerging Markets. ABC produces its clothes in Bangladesh, where almost all its production capacity is located. ABC has recently been denounced by International Amnesty in a recent report of supporting labour slavery and very poor working conditions by producing in Bangladesh and using their supplier network. The author ities ities are looking into the case of ABC, but they haven’t reached a conclusion yet on whether to fine the company and demand the immediate close-down of the plants or not. The Company is valued at $5.0 billion, with an EBITDA of $500 million. The EV/EBITDA multiple is 10.0x. The Company has no problems concerning debt repayments and other asset/liability write-downs and has good and sustainable profit margins. JACK BLACK

In 2010, Jack Black, a young and fresh entrepreneur who had just finished his undergraduate studies in Business Administration, founded Jack Black Plc, a clothing retailer. 86 Ricardo Penadés & Nicolas Guardans

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Jack Black has enjoyed a terrific start of business with a spectacular growth in brand awareness and market share, topping 15% of the UK market last year. The Company prides itself of being an all-UK-made Company that creates jobs in England, where it sells its products. The management team is very friendly and open, and the Company has been nominated one of the “Best Companies to Work”, with the strengths focusing on the entrepreneurial spirit of the Company and the relaxed job atmosphere. Jack Black’s price in the market implies an EV/EBITDA multiple of 20.0x, with high expectations on future revenue generation attached to it. SUE’S

Sue’s was founded by Sue Chateau, a Fr ench-born ench-born American with a lot of free time. The Company has been running on a going concern since 1920 and its management consists of the members of the Chateau family, who are quite elderly by now. The Company has a strong position in the US market, where it accounts for 17% of the market. Its production facilities are located in the US, UK and North of Africa. Its clothing brand, Inedit, is experiencing problems in terms of popularity among the young, and the Company is experiencing a decrease in sales for the most recent quarter. The valuation implies an EV/EBITDA of 13.0x, which reflects the market sentiment regarding the loss of brand awareness.


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EXHIBIT A C l i n e ex ex a m i n e s h o w t h e d e m a n d f o r i n e x p e n s i v e , t r en en d y c l o t h i n g c a n l e ad ad t o d e v a s t a t in in g r e s u l t s

Rachel Brown [email protected] Varnell native Elizabeth Cline is a self- described former “cheap fashion addict.” Not unlike many American fashionistas, her closets were stuffed with dozens — OK, hundreds — of items of clothing, most of them cheaply made, trendy and ready to be thrown out or shoved to the back of the closet after just a season or two. The cycle of “disposable clothing” and Americans’ appetite for cheap fashion comes at a

high cost, thou gh, according to Cline’s recently released book “Overdressed, The Shockingly High Cost of Cheap Fashion.” In its pages, Cline writes about how consumers’ unquenchable thirst for frequently having something new at a low price has

contributed to the mass exodus of manufacturing jobs from the United States, poor working conditions for garment factory workers in many countries and lower quality goods

for

consumers.

Cline, whom close friends and relatives know as Lorri, is advocating a shift toward the “slow fashion” movement and garments produced stateside. Now a journalist living in

New York, Cline has been interviewed recently by The New York Times, MSNBC, NBC’s Brian Williams and other national news outlets about her book and her research.

Until the last couple of years, Cline said she regularly shopped at stores like Old Navy, Target and TJ Maxx, clothing retailers with a reputation for producing fun, trendy clothing at an affordable price. One day, she discovered she owned more than 350 items of clothing.


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“ I was just really curious about how retailers are able to sell clothes for so cheaply and how low price changes the way we consume,” she said. “Americans are buying more clothes than ever before.”

So Cline pitched her idea to publishers and got Penguin to sign on. She spent about two years conducting research and writing the book. Through her research, she said, she learned there are all kinds of consequences to the cheap fashion industry. There are environmental costs, human rights concerns and cultural consequences. Inside the country, she visited Los Angeles and Greenville, S.C., to see textile mills. She traveled to the Dominican Republic, Bangladesh and China. She learned about American towns that used to revolve around manufacturing and saw steep job losses once clothing makers decided to ship their operations overseas. Among the “more surprising” lessons Cline said she learned was that U.S.

manufacturers had outsourced almost every bit of the garment and textile industry. In 1990, about half of America ns’ clothing was made in the U.S. Now, just 2 to 3 percent is made domestically as manufacturers sought cheaper labor, she said. “Part of low price is associated with job loss in the U.S. and with exporting jobs to low cost countries,” she said.

Those exports can lead to conditions that sometimes produce bad consequences, Cline said. Take, for example, the building collapse at a garment factory in Bangladesh that killed more than 1,100 workers. Cline said it’s often easier to oversee working

conditions and correct dangerous practices at home than it is to get involved in what happens overseas. Cline’s grandmother, Routh Cline, said her granddaughter grew up in Varnell and

attended Westwood School in the late 1980s when she was young before moving away to Cairo, Ga. Routh Cline said Elizabeth Cline enjoys fashion, but her love of clothes wasn’t the main reason she wrote the book.


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“She’s really socially conscious,” Routh Cline said. Cline’s work has been featured in

several prominent publications including New York Magazine, Popular Science and The Nation.

The ‘cheap fashion treadmill’

Fashion cycles are speeding up compared to centuries, or even decades, earlier. Silhouettes, colors and various features used to stay “in style” for several years but are

now considered outdated after only a season or two. “We’re on this cheap fashion treadmill,” Elizabeth Cline said. Yet many people on tight budgets feel they can’t get off the treadmill. Better -made

clothes tend to be more expensive. Cline has some advice for these people, too. One piece of advice concerns quantity versus quality. Rather than buying 25 poorly constructed but low-cost shirts, for example, consumers are better served spending more money per item on a few things that are well- made and won’t wear out as quickly. Cline also advocates learning to sew — it’s easier than you think — and mending, repairing and refashioning older clothes so they last longer. Buying clothes secondhand and fitting them as necessary is another good option, she said. Many people who do buy cheaper clothing can also simply keep it longer, she said. “The easiest things people can do is not necessarily treat clothes as a disposable good, getting more use out of what you wear ...” she said. “Every time I’m in Dalton, I always

hit the thrift stores because I find really good stuff at like Providence (Ministries) and Goodwill.”

The result of these consumerism changes, she said, will be better economic consequences here and abroad and less negative impact on the environment. To make one T-shirt, for example, takes 700 gallons of water, she said, and Americans consume more than 20 billion garments per year.


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So who bears the responsibility for all the consequences cheap fashion has caused? “It

is partially consumer-driven. I think that consumers kind of have been lulled into wanting cheap products and we’re also kind of hooked on instant gratification,” Cline said. “We

got away from the value of saving up for the best dress money could buy. We lost the art of delayed gratification and investing in clothing, but at the same time I put a lot of the blame on clothing companies. They advertise heavily to us that cheap clothing. Even our first lady wears Target and H&M. It’s part of our culture now to celebrate getting really cheap things.” Yet change is possible, she said. “I think that as consumers

we have more power than we realize, and that the way we shop does have consequences on the planet and for the jobs, both here and abroad,” Cline said. “I think there’s also a personal component to it. I don’t think people get a lot of satisfaction or

long-term happiness out of just shopping cheap.” Cline says “being an ethical fashion consumer can be fun.” She’s working on scheduling appearances at colleges around

the country where she can share her i deas with students, and she’s also writing a book about

domestic

manufacturing.

For

more

information,

visit

Cline’s

website,

overdressedthebook.com.

EXHIBIT B Over 5000 Pounds of Winter Apparel Donated to Hurricane Sandy Victims

Posted By: Amatullah Guyot on May 28, 2013 1:08 pm

Earlier this month SnowSports Industries America (SIA) teamed with New York based charity Kids in Distressed Situations (K.I.D.S.) in efforts to distribute winter apparel to hundreds of families and children in the Rockaways in Queens who are still struggling after Hurricane Sandy in October 2012.


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K.I.D.S. is an organization aimed to help the snow sports industry efficiently target it’s clothing donations to children affected by Hurricane Sandy. The New Year New Start Sandy relief program was created as a response to the reduction of aid for the hurricane victims as the holidays and new year approached. In January, during the 2013 SIA Snow Show, 5000+ pounds of winter apparel were collected. To watch the highlights from the SIA Snow Show, check out The Ski Channel video on demand network! Photo: Ski Channel/ Shannon Quirk About 69 snow sports companies donated the estimated 5000+ pounds of winter clothing to help struggling families and children keep warm during next winter. The donations from the 69 companies and individuals is estimated to be valued over $100,000. The proceeds were distributed at two separate functions, ”The Winter in May” celebration and the “All In” Skateboard event. The first distribution event happened on May 10, 2013 during the “Winter in May” celebration at The Far Rockaway Community Library where K.I.D.S. distributed winter clothing. As a result, about two-hundred families received donations on a first-come, first-served basis while enjoying the festivities. On May 14, the second distribution event, The “All In” Skateboard event was held at the Queens Library for Teens, distributed many athletic and skate shoes to hundreds of children from the Rockaways, most of which were distributed by SIA members. Companies like Spyder contributed as well. “Collecting new winter apparel was a great way for the industry to use its unique resources to impact the lives of these children,” said Tom McGann, president and CEO of Spyder . Many needs of the victims have yet to be met but these distributions of winter apparel allowed for one less worry for the Hurricane Sandy victims who are now prepared for the upcoming winter season.


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EXHIBIT C

Selena Gomez: Is She Using Justin Bieber For Fame? Wed, June 5, 2013 9:50pm EDT by Jenny Pickard 6 Comments Courtesy of Twitter

Is Selena Gomez a sell-out? Being the longtime girlfriend of Justin Bieber , 19, definitely

has

it’s

perks

— especially

for

a

fellow

entertainer!

A

source

tells HollywoodLife.com EXCLUSIVELY whether or not Selena has been taking advantage of Justin to make herself more famous. “Justin is like the Michael Jackson of our era, so it’s beneficial for her,” the source explains, adding that Selena is not using Justin to boost her career. “She’s got her own talent though, she’ll be okay. They do like each other. It’s young love.” We totally agree! Selena’s talent is why her career is flo urishing, not because of her relationship with Justin. HollywoodLife.com learned EXCLUSIVELY that unfortunately, Justin and Selena have

called it quits again. “They are not together right now,” the source reveals. “They are just friends. They are always on and off.” Justin recently partied at a strip club in Miami, and it definitely seems that he’s enjoying his time as a single man. When a source close to Justin was asked if the “As Long As You Love Me” singer has been hooking up with other girls since the split, the source revealed, “He does his thing, he is low key. He is quiet about it.” HollywoodLifers, do YOU think Selena used Justin? Vote below!


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