2. The Nuts & Bolts of Investment Banking: Understanding Key Financial Concepts Andrea O’Neal & Patrice Mitchell Investment Banking Program Managers

3. Your Goals Become familiar with major methods of analysis used by investment bankers Build your vocabulary for investment banking concepts and jargon Have a foundation for using / understanding more complex resources Become more prepared for banking interviews 2

4. FINANCIAL STATEMENT ANALYSIS 3

5. Income Statement Summarizes revenue and expense streams related to business operations Used to evaluate health of company by determining profitability Snap shot of how efficiently company runs core operations Used as basis for future quarterly or annual projections in modeling 4

6. Balance Sheet Summarizes assets, liabilities and shareholder equity (capital) of a company Used to assess capital structure and financial health – what company owns vs. owes Used in valuation methods to determine true worth of a company 5

7. Statement of Cash Flows Summarizes sources and uses of company’s cash Cash categorized as operating, investing & financing Cash is lifeblood of company; used as basis for valuation (DCF) 6

8. Commonly Used Terms & Ratios COGS = Cost of Goods Sold (or Cost of Sales) EBIT = Earnings before Interest & Taxes EBITDA = Earnings before Interest, Taxes, Depreciation & Amortization (used as a proxy for cash flow) EPS = Earnings Per Share PEG = EPS Growth Profitabilty Ratios *measures use of assets & control of expenses – Gross Margin, Operating Margin, Profit Margin, ROE, ROI Liquidity Ratios *measures availability of cash to pay debt – Current Ratio, Operating Cash Flow Leverage Ratios (Debt Ratios) *measures ability to repay long- term debt obligations – Debt Ratio, Debt to Equity 7

9. METHODS OF VALUATION 8

10. Comparable Company Analysis Method: Valuation technique that is based on the idea that companies with similar characteristics should have similar valuation multiples How-to: 1.Select the peer group Publicly traded companies with similar revenues, net income and market size 2.Gather the financial data Bloomberg, Financial Statements 3.Spread the key statistics EPS, EBITDA, EV/SALES, PE 4.Benchmark the companies 5.Determine the valuation 9

11. Discounted Cash Flow Analysis Method: Valuation technique that is based on the idea that a company’s cash flows can best help determine total value of the firm How-to: 1.Find Free Cash Flows Use the company’s financial statements to forecast into the future 2.Determine terminal value time in the future where growth is constant 3.Discount these future cash flows back to present value Use firm’s cost of capital (WACC) 4.Sum the cash flows to determine net present value of the firm (NPV) 10

12. Other Common Terms for Every Rock Star IB Intern Analyst Top ResponsibilityExplanation “Valuation” – (i.e. Comparable Company Analysis (“Comps”), Discounted Cash Flow (DCF), Free Cash Flow (FCFF/FCFE) modeling Financial analysis is at the heart of investment banking. Bankers build models to derive fair value of a company/asset based on several public, private and projected inputs “Pitchbook / RFP” (Request for Proposal) Presentation materials used for the purpose of attracting new clients or maintaining existing client relationships “Live Deal”An active transaction where a client is pursuing a capital raising or M&A “Roadshow”During a live deal, execs of the client may meet with prospective investors and sell the company’s unique investment story “PIB” (Public Information Book)Compilation of a client’s publicly available information for banking teams’ internal use “Prospectus” or “Red”Official deal document filed with the SEC 11

13. Preparation Resources There are several ways for students to increase their candidacy for IB internships:  Increase market & industry knowledge. Actively learn terms, read financial news & form a unique opinion (not just copycat sound bites) to demonstrate understanding  Beef up on technical ability. Take accounting & finance courses; hone excel, quick math and critical thinking skills  Gain practical experience. Join business/finance focused campus groups, take a leadership role to put skills in practice  Understand personal strengths. Be able to identify type of banking role that is the best fit; be able to concisely summarize personal strengths, experiences and assets that align with a great candidate for banking 12