BMO IB Interview Questions

I would value a company with three methods and compare the results. A discounted cash flow (DCF) analysis gives intrinsic value from the company's own projected cash flows. Trading comparables (comps) give market value from how investors price similar public companies. Precedent transactions give M&A value from what buyers paid for similar companies. Each method has blind spots. So the final value rests on where the three ranges overlap, often shown on a football field chart.

0%. Company B's former shareholders own none of Company A. B's equity has a market value of zero (the total value of all its shares), so at that stated value A pays nothing for it and issues them no new shares. B's 100 of debt belongs to B's lenders, not its shareholders. A takes that debt over or pays it off, and it earns B's shareholders no stake.

Levered Beta = Unlevered Beta × [1 + (D/E) × (1 – Tax Rate)]. Beta measures how much a stock moves compared with the overall market. Unlevered beta is the risk of the business alone, as if it had no debt. Levered beta adds the extra risk that debt puts on shareholders. You multiply by one plus the after-tax debt-to-equity ratio because more debt makes equity riskier, and the tax shield on interest offsets part of that risk.

EV/EBITDA is 6.75x and EV/Revenue is 2.25x. Paying $500mm for 80% implies $625mm of equity value for 100% of Company B ($500mm / 0.80). Add the $100mm of debt and subtract the $50mm of excess cash, and enterprise value is $675mm. Then $675mm / $100mm EBITDA = 6.75x, and $675mm / $300mm revenue = 2.25x.

When one public company buys another, the pitch book typically has five parts. First, a situation overview of both companies and the strategic rationale. Second, valuation of the target, including a premium analysis: how far above its current share price the buyer would pay. Third, accretion/dilution analysis, meaning whether the deal raises or lowers the buyer's earnings per share (EPS). Fourth, sources and uses of funds. Fifth, process items such as timeline, approvals and likely next steps.

You need the purchase price (initial cash outflow at t=0); with it, you set NPV to zero and solve the resulting cubic equation for r using trial-and-error interpolation, Newton-Raphson iteration, or a financial calculator.

Start with the client's situation and the strategic rationale for an acquisition. Then comes target screening, then valuation of the leading targets. After that, synergies and pro forma accretion/dilution, the financing structure (sources & uses), and last, key risks and next steps. The order works because each slide answers the question the one before it raises: why buy, whom to buy, what it is worth, what it does to the combined company, how to pay for it, and what could go wrong.

The deal is accretive. B's earnings yield (earnings divided by price, the inverse of P/E) is 1/10 = 10%. The three financing tranches have a blended after-tax cost of only about 3.8%: stock at 4.0%, debt at 4.98% and cash at 2.4%, each weighted one-third. A buys earnings that yield 10% with money that costs about 3.8%, so A's earnings per share (EPS) go up.

Two companies form a joint venture (JV), a separate business they own and control together, to share a project's risk and capital and to combine complementary strengths such as technology, distribution, or local market access. Each company gets into a new market or business without buying or merging with the other. Each stays independent, funds only its share, and still captures part of the upside.

A company buys another when owning it is worth more than the price. That gap has a few sources: cost and revenue synergies, getting a capability or market position faster than it could be built, a stronger competitive position, and sometimes tax attributes. Synergies are the extra value the two businesses make together that neither makes alone. Cost synergies strip out duplicated overhead and facilities. Revenue synergies sell more by combining products, channels or customers. Growth in reported earnings per share, a bigger balance sheet and diversification are not reasons on their own. The buyer pays a control premium over the target's standalone value, and the combination has to produce more than that premium before shareholders are better off.