Investment Banking Workbook

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JOSHUA ROSENBAUM

JOSHUA PEARL

JOSEPH GASPARRO

www.investmentbankingbook.com

http://www.investmentbankingbook.com

Copyright © 2021 by Joshua Rosenbaum, Joshua Pearl, and Joseph Gasparro. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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v

Contents

About the Authors vii

INTRODUCTION 1Target Audience 2Content and Applications 2

CHAPTER 1Comparable Companies Analysis 3

Questions 3Answers and Rationale 28

CHAPTER 2Precedent Transactions Analysis 55


CHAPTER 3Discounted Cash Flow Analysis 93


CHAPTER 4Leveraged Buyouts 149


CHAPTER 5LBO Analysis 169


CHAPTER 6Sell-Side M&A 205


vi Contents

CHAPTER 7Buy-Side M&A 225


CHAPTER 8Initial Public Offerings 259


CHAPTER 9The IPO Process 277


vii

About the Authors

JOSHUA ROSENBAUM is a Managing Director and Head of the Industrials & Diversified Services Group at RBC Capital Markets, where he also serves on the Management Committee for the U.S. Investment Bank. He originates, structures, and advises on M&A, corporate finance, and capital markets transactions. Previously, he worked at UBS Investment Bank and the International Finance Corporation, the direct investment division of the World Bank. He received his AB from Harvard and his MBA with Baker Scholar honors from Harvard Business School. He is also the co-author of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.

JOSHUA PEARL is the Founder and Chief Investment Officer of Hickory Lane Capital Management, a long/ short equity asset manager. He focuses on public equity investments and special situations utilizing a fundamentals- based approach. From 2011 to 2020, he served as a Managing Director and Partner at Brahman Capital. Pre-viously, he structured high yield financings, leveraged buy-outs, and restructurings as a Director at UBS Investment Bank. Prior to UBS, he was an investment banker at Moe-lis & Company and Deutsche Bank. He received his BS in Business from Indiana University’s Kelley School of Business. He is also the co-author of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.

CONTACT THE AUTHORS

Please contact JOSHUA ROSENBAUM and JOSHUA PEARL with any questions, comments, or suggestions for future editions at josh@investmentbankingbook .com

mailto:[email protected]

mailto:[email protected]

ix

JOSEPH GASPARRO is Head of Americas Capital Services Content at Credit Suisse. He advises on capital raising and operations for alternative asset managers. Previously, he executed M&A and capital markets transactions in the firm’s Investment Banking Division. Prior to Credit Suisse, he worked at BofA Securities and UBS. He received his BA from Gettysburg College and his MBA from Rutgers Business School. He is a two-time recipient of the President’s Volunteer Service Award, bestowed by the President of the United States. He is also an editor of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.

RAYMOND AZIZI is a Portfolio Manager at Weiss Multi-Strategy Advisers where he manages a long/short equity portfolio. Previously, he was an investment professional at Lehman Brothers Merchant Banking where he focused on leveraged buyouts and growth capital investments. Prior to his private equity role, he worked in the Investment Banking Division at Lehman Brothers. He received his BS in Business from Rutgers University and his MBA from The Wharton School of the University of Pennsylvania. He is also an editor of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.

About the Authors

1

Introduction

T his workbook is designed for use both as a companion to our book, Investment Banking: Valuation, LBOs, M&A, and IPOs, Third Edition, as well as on a

standalone basis. Investment Banking focuses on the primary valuation methodologies currently used on Wall Street—namely, comparable companies analysis, precedent transactions analysis, discounted cash flow (DCF) analysis, leveraged buyout (LBO) analysis, mergers & acquisitions (M&A) analysis, and initial public offering (IPO) valuation from both a sell-side and buy-side perspective. Our workbook seeks to help solidify knowledge of these core financial topics as true mastery must be tested, honed, and retested over time. We envision the workbook being used as a self-help tool for students, job seekers, and existing finance professionals, as well as in formal classroom and training settings.

The workbook provides a mix of multi-step problem set exercises, as well as multiple choice and essay questions. We also provide a comprehensive answer key that aims to truly teach and explain as opposed to simply identify the correct answer. Therefore, the answers themselves are an effective learning tool. The level of difficulty for these exercises and questions ranges from basic to advanced. The format of the workbook is designed to optimize mastering the critical financial tools discussed in Investment Banking and therefore corresponds to its chapters, as shown below:

■ Chapter 1: Comparable Companies Analysis ■ Chapter 2: Precedent Transactions Analysis ■ Chapter 3: Discounted Cash Flow Analysis ■ Chapter 4: Leveraged Buyouts ■ Chapter 5: LBO Analysis ■ Chapter 6: Sell-Side M&A ■ Chapter 7: Buy-Side M&A ■ Chapter 8: Initial Public Offerings ■ Chapter 9: The IPO Process

2 IntroductIon

TARGET AUDIENCE

We are confident that this workbook will enable users to take their learning to the next level in terms of understanding and applying the critical financial tools necessary to be an effective finance professional. Consequently, our target audience for the workbook overlaps with Investment Banking—namely current and aspiring investment bankers, students, career changers, private equity and hedge fund professionals, sell-side research analysts, and finance professionals at corporations (including members of business development, finance, and treasury departments). We also believe our workbook is highly beneficial to those attorneys, consultants, and accountants focused on M&A, corporate finance, capital raising, and other transaction advisory services.

At the same time, our workbook is designed to serve as the ultimate teaching tool for finance professors, instructors, and trainers. The multiple choice questions are complemented by rigorous multi-step exercises designed to ensure mastery of key modeling conventions and financial calculations. It is the perfect complement to classroom or online instruction, as well as core course reading materials. In fact, Investment Banking and this workbook are designed in an integrated manner so as to provide a foundation around which a professor, instructor, or trainer can build an entire course.

CONTENT AND APPL ICATIONS

The multi-step exercises are instrumental for learning the calculations and modeling skills behind the core valuation, LBO, M&A, and IPO tools. Once mastered, these exercises provide a solid foundation for financial modeling (including crafting financial projections), and performing comparable companies, precedent transactions, DCF analysis, LBO analysis, merger consequences analysis (including the creation of pro forma financial statements), and IPO valuation. They also provide a sound understanding of more complex calculations and nuances involving accretion/ (dilution) analysis, exchange ratios, premiums paid, treasury stock method (TSM), capital asset pricing model (CAPM), weighted average cost of capital (WACC), goodwill, tangible and intangible write-ups, deferred tax liabilities, and numerous other critical topics.

The multiple choice questions are designed to be used on both an individual as well as collective basis. In other words, individual questions from each chapter can be mixed and matched to accommodate any testing, learning, or training format. At the same time, taken collectively for a given financial topic, the questions and exercises provide an integrated and multidimensional approach that can be used to teach and learn the material, whether individually, in the classroom, or for a training program.

3

Comparable Companies Analysis

1) Using the information provided for Gasparro Corp., complete the questions regarding fully diluted shares outstanding

Company Name Gasparro Corp.Ticker JDGStock Exchange NasdaqFiscal Year Ending Dec-31Moody's Corporate Rating Ba2S&P Corporate Rating BBPredicted Beta 1.30

Marginal Tax Rate 25.0%

General Information

(shares in millions)AssumptionsCurrent Share Price $50.00Basic Shares Outstanding 98.50

Options/WarrantsNumber of Exercise

Tranche Shares PriceTranche 1 1.250 $10.00Tranche 2 1.000 30.00Tranche 3 0.500 40.00Tranche 4 0.250 60.00

a. Calculate Gasparro Corp.’s in-the-money options/warrants

________________________________________________________________

b. Calculate proceeds from in-the-money options/warrants

________________________________________________________________

c. Calculate net new shares from the options/warrants

________________________________________________________________

d. Calculate fully diluted shares outstanding

________________________________________________________________

CHAPTER 1

4 CHAPTER 1 QUESTIONS

2) Using the prior answers and information, as well as the balance sheet data below, calculate Gasparro’s equity value and enterprise value

($ in millions, except per share data)AssumptionsCurrent Share Price $50.0052-week High Price 62.5052-week Low Price 40.00Dividend Per Share (MRQ) 0.25

Balance Sheet Data2018A 9/30/2019

Cash and Cash Equivalents $75.0 $100.0Accounts Receivable 625.0 650.0Inventories 730.0 750.0Prepaids and Other Current Assets 225.0 250.0

$1,655.0 Total Current Assets $1,750.0

Property, Plant and Equipment, net 1,970.0 2,000.0Goodwill and Intangible Assets 775.0 800.0Other Assets 425.0 450.0

$4,825.0 Total Assets $5,000.0

Accounts Payable 275.0 300.0Accrued Liabilities 450.0 475.0Other Current Liabilities 125.0 150.0

$850.0 Total Current Liabilities $925.0

Total Debt 1,875.0 1,850.0Other Long-Term Liabilities 500.0 500.0

$3,225.0 Total Liabilities $3,275.0

Noncontrolling Interest - -Preferred Stock - -Shareholders' Equity 1,600.0 1,725.0

$4,825.0 Total Liabilities and Equity $5,000.0

0.0000.000Balance Check

a. Calculate equity value

________________________________________________________________

b. Calculate enterprise value

________________________________________________________________

Comparable Companies Analysis 5

3) Using the information provided for Gasparro, complete the questions regarding non-recurring items

Non-recurring Items$25.0 million pre-tax gain on the sale of a non-core business in Q4 2018$30.0 million pre-tax inventory valuation charge in Q2 2019 related to product obsolescence$15.0 million pre-tax restructuring charge in Q3 2019 related to severance costs

($ in millions, except per share data)Reported Income Statement

Prior Current Fiscal Year Ending December 31, Stub Stub LTM2016A 2017A 2018A 9/30/2018 9/30/2019 9/30/2019

Sales $3,750.0 $4,150.0 $4,500.0 $3,375.0 $3,600.0 $4,725.0COGS (incl. D&A) 2,450.0 2,700.0 2,925.0 2,200.0 2,350.0 3,075.0 Gross Profit $1,300.0 $1,450.0 $1,575.0 $1,175.0 $1,250.0 $1,650.0SG&A 750.0 830.0 900.0 675.0 720.0 945.0Other Expense / (Income) - - - - - - EBIT $550.0 $620.0 $675.0 $500.0 $530.0 $705.0Interest Expense 110.0 105.0 102.0 75.0 73.0 100.0 Pre-tax Income $440.0 $515.0 $573.0 $425.0 $457.0 $605.0Income Taxes 110.0 128.8 143.3 106.3 114.3 151.3Noncontrolling Interest - - - - - -Preferred Dividends - - - - - - Net Income $330.0 $386.3 $429.8 $318.8 $342.8 $453.8 Effective Tax Rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Weighted Avg. Diluted Shares 100.0 100.0 100.0 100.0 100.0 100.0 Diluted EPS $3.30 $3.86 $4.30 $3.19 $3.43 $4.54

Cash Flow Statement DataPrior Current Stub Stub LTM

2016A 2017A 2018A 9/30/2018 9/30/2019 9/30/2019Cash From Operations 400.0 450.0 500.0 360.0 380.0 520.0Capital Expenditures 170.0 185.0 200.0 150.0 155.0 205.0 % sales 4.5% 4.5% 4.4% 4.4% 4.3% 4.3% Free Cash Flow $230.0 $265.0 $300.0 $210.0 $225.0 $315.0 % margin 6.1% 6.4% 6.7% 6.2% 6.3% 6.7% FCF / Share $2.30 $2.65 $3.00 $2.10 $2.25 $3.15

Depreciation & Amortization 155.0 165.0 175.0 125.0 125.0 175.0 % sales 4.1% 4.0% 3.9% 3.7% 3.5% 3.7%

Fiscal Year Ending December 31,

a. Calculate adjusted LTM gross profit for Gasparro, assuming the $30.0 million inventory charge is added back to COGS

________________________________________________________________

b. Calculate adjusted LTM EBIT

________________________________________________________________


c. Calculate adjusted LTM EBITDA

________________________________________________________________

d. Calculate adjusted LTM net income

________________________________________________________________

4) Using the prior answers and information, complete the questions regarding Gasparro’s LTM return on investment ratios

a. Calculate return on average invested capital

________________________________________________________________

b. Calculate return on average equity

________________________________________________________________

c. Calculate return on average assets

________________________________________________________________

d. Calculate implied annual dividend per share

________________________________________________________________


5) Using the prior answers and information, complete the questions regarding Gasparro’s LTM credit statistics

a. Calculate debt-to-total capitalization

________________________________________________________________

b. Calculate total debt-to-EBITDA

________________________________________________________________

c. Calculate net debt-to-EBITDA

________________________________________________________________

d. Calculate EBITDA-to-interest expense

________________________________________________________________

e. Calculate (EBITDA – capex)-to-interest expense

________________________________________________________________

f. Calculate EBIT-to-interest expense

________________________________________________________________


6) Using the prior answers and information, calculate Gasparro’s trading multiples

($ in millions, except per share data)

LTM NFY NFY+1 NFY+29/30/2019 2019E 2020E 2021E

EV / Sales 1.4x 1.3x 1.2x Metric $5,000.0 $5,350.0 $5,625.0EV / EBITDA 6.6x 6.3x Metric $950.0 $1,025.0 $1,075.0EV / EBIT 8.8x C) 7.8x Metric $765.0 $825.0 $865.0P/E 9.8x 9.1x D) Metric $5.10 $5.50 $5.75FCF Yield 7.5% 8.3% E) Metric $375.0 $415.0 $455.0

Trading Multiples

B)

A)

a. Calculate Gasparro Corp.’s LTM enterprise value-to-sales

________________________________________________________________

b. Calculate 2019E enterprise value-to-EBITDA

________________________________________________________________

c. Calculate 2020E enterprise value-to-EBIT

________________________________________________________________

d. Calculate 2021E P/E

________________________________________________________________

e. Calculate 2021E FCF yield

________________________________________________________________


7) Using the prior answers and information, calculate Gasparro’s growth rates

Growth RatesEPSFCFEBITDASales

Historical1-year ('17-'18) 5.1% 13.2% 6.4%2-year CAGR ('16-'18) 9.5% 14.2% 11.6%Estimated1-year ('18-'19E) 11.1% 15.2% 24.1%2-year CAGR ('18-'20E) 9.0% 11.5% 17.6% D)

A)B)

C)

a. Calculate Gasparro’s historical one-year sales growth

________________________________________________________________

b. Calculate historical two-year EBITDA compounded annual growth rate

________________________________________________________________

c. Calculate estimated one-year FCF growth

________________________________________________________________

d. Calculate estimated two-year EPS CAGR

________________________________________________________________


8) Using the information provided for ValueCo’s peers, complete the questions regarding LTM profitability margins

($ in millions, except per share data)LTM Financial Statistics LTM Profitability Margins

Gross NetGross Net Profit EBITDA EBIT Income

Company Sales Profit EBITDA EBIT Income (%) (%) (%) (%)

BuyerCo $6,559.6 $2,328.7 $1,443.1 $1,279.1 $852.5 A) 22% 20% 13%Sherman Co. 5,894.6 1,945.2 1,047.0 752.2 507.2 33% B) 13% 9%Pearl Corp. 4,284.5 1,585.3 838.7 624.5 393.4 37% 20% C) 9%Gasparro Corp.Kumra Inc. 3,186.7 922.4 665.3 505.9 306.4 29% 21% 16% D)

MeanMedian

32% 16% 10%36% 20% 10%

E)F)

a. Calculate BuyerCo’s gross profit margin

________________________________________________________________

b. Calculate Sherman Co.’s EBITDA margin

________________________________________________________________

c. Calculate Pearl Corp.’s EBIT margin

________________________________________________________________

d. Calculate Kumra Inc.’s net income margin

________________________________________________________________

e. Calculate the mean EBITDA margin

________________________________________________________________

f. Calculate the median EBIT margin

________________________________________________________________


9) Using the information below, calculate the LTM leverage and coverage ratios for ValueCo’s peers

($ in millions, except per share data)LTM Financial Data

Shareholders'Company Debt Equity Cash Int. Exp. Capex EBITDA EBITBuyerCo $2,200.0 $2,480.0 $400.0 $142.4 $196.8 $1,443.1 $1,279.1Sherman Co 3,150.0 2,359.0 649.0 76.0 235.8 1,047.0 752.2Pearl Corp. 1,500.0 2,559.6 868.1 100.0 128.5 838.7 624.5Kumra Inc. 891.2 2,687.6 481.3 60.3 143.4 665.3 505.9

LTM Leverage Ratios LTM Coverage RatiosDebt / Debt / Net Debt / EBITDA / EBITDA EBIT /

Tot. Cap. EBITDA EBITDA Int. Exp. - Cpx/ Int. Int. Exp.Company (%) (x) (x) (x) (x) (x)

BuyerCo A) 1.5x 1.2x 10.1x 8.8x 9.0xSherman Co. 57% B) 2.4x 13.8x 10.7x 9.9xPearl Corp. 37% 1.8x C) 8.4x 7.1x 6.2xGasparro Corp.Kumra Inc. 25% 1.3x 0.6x D) E) F)

Mean 44% G) 1.4x 10.5x 8.4x 8.2xMedian 47% 1.8x 1.2x H) 8.7x 8.4x

a. Calculate BuyerCo’s debt-to-total capitalization

________________________________________________________________

b. Calculate Sherman Co.’s debt-to-EBITDA ratio

________________________________________________________________

c. Calculate Pearl Corp.’s net debt-to-EBITDA ratio

________________________________________________________________

d. Calculate Kumra Inc.’s EBITDA-to-interest expense ratio

________________________________________________________________

e. Calculate Kumra Inc.’s (EBITDA – capex)-to-interest expense ratio

________________________________________________________________


f. Calculate Kumra Inc.’s EBIT-to-interest expense ratio

________________________________________________________________

g. Calculate the mean debt-to-EBITDA leverage ratio

________________________________________________________________

h. Calculate the median EBITDA-to-interest expense ratio

________________________________________________________________

10) Using the information below, calculate the LTM valuation multiples for ValueCo’s peers

($ in millions, except per share data)LTM Financial Data

Company Sales EBITDA EBIT EPSBuyerCo $6,559.6 $1,443.1 $1,279.1 $6.09Sherman Co. 5,894.6 1,047.0 752.2 3.62Pearl Corp. 4,284.5 838.7 624.5 5.21Kumra Inc. 3,186.7 665.3 505.9 3.33

Current Enterprise Value / Price /Share Equity Enterprise LTM LTM LTM LTM

Company Price Value Value Sales EBITDA EBIT EPS

BuyerCo $70.00 $9,800.0 $11,600.0 A)Sherman Co. 40.00 5,600.0 8,101.0 1.4x B)

8.0x 9.1x 11.5x10.8x 11.0x

Pearl Corp. 68.50 5,171.8 5,803.7 1.4x 6.9x C) 13.1xGasparro Corp.Kumra Inc. 52.50 4,851.6 5,344.6 1.7x 8.0x 10.6x D)

1.5xnaeM E) 9.8x 12.4x

9.4x7.7x1.4xnaideM F)

a. Calculate BuyerCo’s enterprise value-to-sales multiple

________________________________________________________________

b. Calculate Sherman Co.’s enterprise value-to-EBITDA multiple

________________________________________________________________


c. Calculate Pearl Corp.’s enterprise value-to-EBIT multiple

________________________________________________________________

d. Calculate Kumra Inc.’s P/E multiple

________________________________________________________________

e. Calculate the mean enterprise value-to-EBITDA multiple

________________________________________________________________

f. Calculate the median P/E ratio

________________________________________________________________

11) Using the information below, calculate ValueCo’s implied valuation ranges using the company’s LTM EBITDA

($ in millions, except per share data)

Multiple Range

8.0x–7.0x

FinancialMetric

$700

EBITDA

LTM

ImpliedEnterprise Value

A) – A)

Less:Net

Debt

(1,500)

ImpliedEquity Value

B) – B)

FullyDilutedShares

80

ImpliedShare Price

C) – C)

a. Calculate ValueCo’s implied enterprise value range

________________________________________________________________

b. Calculate ValueCo’s implied equity value range

________________________________________________________________

c. Calculate ValueCo’s implied share price range

________________________________________________________________


12) Using the information below, calculate ValueCo’s implied valuation ranges using the company’s LTM net income

($ in millions, except per share data)Fully

deilpmIdetuliDdeilpmIlaicnaniFNet Income Metric Multiple Range Equity Value Shares Share Price

LTM $300 11.0x – 13.0x – 80 B)A)A) – B)

a. Calculate ValueCo’s implied equity value range

________________________________________________________________

b. Calculate ValueCo’s implied share price range

________________________________________________________________

13) Which of the following is the correct order of steps to complete comparable companies analysis?

I. Locate the necessary financial informationII. Select the universe of comparable companies

III. Spread key statistics, ratios, and trading multiplesIV. Determine valuationV. Benchmark the comparable companies

A. II, I, III, V, IVB. I, II, III, IV, VC. II, I, III, IV, VD. III, I, IV, V, II

14) All of the following are business characteristics that can be used to select comparable companies EXCEPT

A. Products and servicesB. Distribution channelsC. Return on investmentD. Sector


15) All of the following are financial characteristics that can be used to select comparable companies EXCEPT

A. Credit profileB. Growth profileC. ProfitabilityD. Geography

16) Which of the following are key business characteristics to examine when screening for comparable companies?

I. SectorII. Return on investment

III. End marketsIV. Distribution channelsV. Return on assets

A. I and IIIB. II and IVC. I, III, and IVD. I, II, III, IV, and V

17) Which of the following are key financial characteristics to examine when screening for comparable companies?

I. CustomersII. Profitability

III. Growth profileIV. Credit profileV. End markets

A. II and IIIB. II, III, and IVC. I, II, and IVD. II, III, and V

18) End markets refer to the

A. Market into which a company sells its products and servicesB. Medium through which a company sells its products and services to

the end userC. End users of a product or serviceD. Stores that distribute a company’s product or service


19) Distribution channels refer to the

A. Market into which a company sells its products and servicesB. Medium through which a company sells its products and services to

the end userC. End users of a product or serviceD. Stores that distribute a company’s product or service

20) Which of the following is NOT a financial statistic to measure the profitability of a company?

A. Gross profitB. EBITDA marginC. EBIT marginD. Equity value

21) Which of the following is NOT a source for locating financial information for comparable companies?

A. 10-KB. 13-DC. Investor PresentationsD. Equity Research

22) Which of the following is the correct calculation for fully diluted shares outstanding when used in trading comps?

A. “Out-of-the money” options and warrants + “in-the-money” convertible securities

B. Basic shares outstanding + “in-the-money” options and warrants + “in-the-money” convertible securities

C. “In-the-money” options and warrants + “in-the-money” convertible securities

D. Basic shares outstanding + “out-of-the money” options and warrants

23) Which methodology is used to determine additional shares from “in-the-money” options and warrants when determining fully diluted shares?

A. Treasury Stock MethodB. “If-Converted” MethodC. Net Share Settlement MethodD. “In-the-Money” Method

Investment Banking Workbook

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