Deutsche Bank IB Interview Questions

Because the top and bottom of a multiple have to describe the same claim on the business. Revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) are struck before any interest is paid, so they belong to everyone who funded the company, lenders and shareholders alike. That whole-company value is Enterprise Value. Equity Value is what is left for shareholders once the lenders have been paid, so putting it over a pre-interest metric like Revenue or EBITDA sets a partial claim against a full-company profit stream.

Under US GAAP (the US accounting rulebook), a drug company generally expenses its internal R&D (research and development) spending as it happens. That is the prudent treatment, because most drug candidates fail and their future benefit is uncertain. For valuation, though, R&D behaves like an investment that builds the drug pipeline. So many analysts capitalize it: they record it as an asset and amortize it (spread its cost) over a useful life. That gives a truer picture of invested capital, operating income and return on capital.

A discounted cash flow (DCF) analysis values a company at the present value (what future money is worth in today's terms) of the cash it is expected to generate. You project its unlevered free cash flow for about five to ten years. That is the cash left after taxes and reinvestment, available to both lenders and shareholders. Then you estimate a terminal value for all the years after that and discount both back to today at the weighted average cost of capital (WACC), the blended return that debt and equity investors require. The sum is enterprise value, the value of the whole business. Subtract net debt and other non-equity claims to reach equity value, then divide by diluted shares for an implied share price.

A bank valuation is built on the income statement lines that drive earnings: net interest income, fee income, operating expenses, pre-provision operating profit (PPOP) and loan-loss provisions. On top of those sit the balance-sheet and capital lines that limit growth and payouts: tangible book value per share and the CET1 capital ratio. The main multiple is price to tangible book value (P/TBV), read against return on tangible common equity (ROTCE). P/E and a dividend discount model are the cross-checks.

Start at revenue. Subtract COGS and operating expenses to reach EBIT, also called operating profit or operating income. Tax-effect EBIT by multiplying it by one minus the tax rate, which gives NOPAT, net operating profit after tax. Then add back D&A (depreciation and amortization, a non-cash charge that reduced EBIT), subtract capital expenditures, and subtract the increase in net working capital. That gives unlevered free cash flow, the cash the business generates before paying any lenders.

A capital lease (called a finance lease under current US GAAP, ASC 842) is treated like buying the asset with borrowed money. The company records an asset and a lease liability, then expenses depreciation plus interest. An operating lease is treated like renting: the income statement shows one straight-line rent expense. Companies have typically preferred operating leases because reported debt and leverage stay lower. Under ASC 842, operating leases now also put a right-of-use asset and a lease liability on the balance sheet. Lenders and credit agreements often still leave that liability out of debt, so finance leases usually add more to reported leverage.

A PE firm makes more money on an LBO (leveraged buyout: buying a company with a large share of borrowed money) by raising what its equity stake is worth at exit relative to the cash it invested at entry. It has four main levers. Grow EBITDA (earnings before interest, taxes, depreciation and amortization, a rough measure of operating profit) through higher revenue and margins. Sell at a higher multiple of EBITDA than it paid. Use the company's free cash flow (cash left after running and reinvesting in the business) to pay down debt. Fund the purchase with more debt and less equity. Getting cash back sooner also raises IRR, the annualized return on the equity.

Minority interest, now called non-controlling interest, is the slice of a consolidated subsidiary's equity owned by shareholders other than the parent. It shows up when the parent controls a subsidiary, usually by owning more than 50% but less than 100%, because accounting rules make the parent consolidate 100% of that subsidiary's revenue, EBITDA and assets even though it does not own all of it. You calculate it as the outside ownership percentage times the subsidiary's equity value on the books, and you add it to equity value when bridging to enterprise value.

In a dividend recap, a company borrows new debt and pays the money out to its shareholders as a one-time dividend. Private equity owners often use it to take cash out without selling the company. In Year 0 the income statement does not change. On the cash flow statement, the debt raised and the dividend paid cancel out. On the balance sheet, debt goes up and equity goes down by the same amount. In Year 1 the new debt costs interest. Net income falls by the after-tax interest, and cash and retained earnings fall by that same amount. If the loan requires principal repayments, cash and debt also fall by the amount repaid.

Start by rebuilding what the cart really earns. Add back the owner's own pay and any personal or one-time costs. That gives seller's discretionary earnings (SDE). Then subtract a market wage for running the cart. What remains is what the business earns beyond pay for the owner's labor. Small owner-run businesses like this typically sell for roughly 2-4x SDE. Expect the low end when the value depends on the owner, or on a permit whose transfer is uncertain. The resale value of the cart, equipment, and inventory sets a floor, and value falls toward it if the permit or spot cannot transfer. Compare the offer to that range and to what the owner gets by keeping the cart.

Take the building's stabilized net operating income (NOI) at market rents, with rent imputed if the owner occupies it, and divide it by a market cap rate (capitalization rate): value equals NOI divided by the cap rate. NOI is the property's rent and other income, minus vacancy and the costs of running the building. It is measured before mortgage payments, depreciation and income taxes. The cap rate is the yield buyers of similar buildings in that market currently accept. Then check the result two ways: a discounted cash flow (DCF) of the property's unlevered cash flows, and recent comparable sales per square foot.

You improve cash flow in an LBO by growing EBITDA and by cutting the cash that leaves the business below EBITDA. That means lower cash taxes, less capital expenditure (capex), tighter working capital and lower cash interest. An LBO is a buyout funded mostly with debt. More free cash flow pays that debt down faster and raises the equity value at exit.