How do you account for convertible bonds in a DCF?
If the convertible bonds are in-the-money, meaning that the stock price is higher than the conversion price, then the bonds will convert into equity. This means more shares will be created, which will dilute the share price since the same enterprise value has to be spread over a larger share count. If the convertible bonds […]
What makes a good LBO candidate?
The most important characteristic of a good LBO candidate is stable cash flows since the PE owner will have to service the debt and stay within covenants in order for the investment to be successful. This means recurring revenue is very valuable, meaning that the revenue is “sticky” and it’s hard for customers to switch […]
If the balance sheet doesn’t balance, what does that mean? How can you fix that or prevent that while building a 3-statement financial model or LBO model?
Assets = Liabilities + Shareholder’s Equity Above is the balance sheet equation, which is saying that all assets must be funded by either liabilities (e.g. debt) or shareholder’s equity (e.g. money from private or public investors). If the equation does not balance, that means there is an error in the balance sheet. In order to […]
What is net working capital?
Net working capital represents the money tied up in the daily operations of the business. This includes both current assets and current liabilities. On the current assets side, we typically include accounts receivable, inventory, and prepaid expenses as part of net working capital. All these items will tie up cash, but are generally necessary for […]
What are the most important items to due diligence in an LBO?
Some of the most important due diligence is done on the industry, and this can include competitor analysis, pricing trends, volume analysis, and speaking with industry experts. Due diligence will also be done on the company’s growth and cost strategy, customers, customer contracts, products, distribution chain, risks, etc. There are many other common due diligence […]
What are the most important items to due diligence in an M&A deal?
The due diligence process for an M&A deal typically involves questioning and confirming all key aspects of the business, especially the growth trajectory of the business and industry. PE firms will often hire 3rd parties to help out with different aspects of due diligence. Some of the most important due diligence is done on the […]
How do you find the cost of debt when building a financial model?
If it’s a public company, you can look up the cost of debt on Bloombergor in their company filings. Different types of debt are often listed in thenotes to the financial statements in a quarterly or annual report and theinterest rate is sometimes provided. If it’s a private company, you can create “debt comps” by […]
What are beta comps and how do you unlever and relever beta?
Beta comps can be used to find beta for a private company or a newcompany with not enough public trading history. The four steps to do this are:
Why shouldn’t we hire you?
This is a trick question to test your confidence in being hired. Rather than making up reasons you shouldn’t be hired, you should say “there’s no reason you shouldn’t hire me.” Then you can list the reasons why they should hire you, similar to the answer above, and give examples for each of those key […]
