Greenhill Chicago Investment Banking – Summer Analyst | GFC Technical Interview Series
Greenhill Chicago Investment Banking – Summer Analyst (All rounds)
The three ways to value a company? Is there a fourth way?
Easy, fourth way was LBO although could say Residual Income or DDM
What valuation techniques give the highest valuation?
Precedent transaction then DCF then trading comps, but also mention that all methods are dependent on assumptions
Differentiate between the discretionary vs required uses of a firm’s capital
Discretionary: M&A activity, dividend payouts, share buybacks
Required: debt payments, reinvest in business/fund needed capex, operating expenses
When would a deal be accretive/dilutive (question asked only because of M&A experience on resume)?
If P/E of target higher than P/E of buyer, buyer has to pay more for each dollar of earnings and issue more shares
Need to consider financing mix and synergies to compute EPS
When would you use stock vs cash vs debt to acquire a company?
Cash usually leads to accretion, especially in current economic environment when the foregone interest on cash is low
Debt should also lead to accretion, especially in current economic environment when interest rates can be low
Stock depends but accretive if P/E of buyer is higher, best to use if buyer stock is overvalued
Also said that bottom line is to look at each financing mix and compute pro forma EPS to see if it increases. Also consider changes to line items/synergies as they affect IS
What is the risk free rate now? If the risk free rate is falling, is it a good time to raise debt?
Read the news
Yes, debt is good because of low interest rate environment—lending is cheap. Lower risk free rate also means that your WACC falls.
What levers to pull if valuation is too low?
Mainly look at terminal value (higher growth rate) and WACC (lower)
Also went into detail into the components of WACC, need to look at capital structure and beta, etc.
Warren Buffet EBITDA quote: “Every dime of depreciation expense we report, however, is a real cost. And that's true at almost all other companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet.” What do you think he means?
Adding back depreciation for certain businesses/industries understates costs
Consider if company has a lot of long-term assets on BS
Better to use EBIT/Interest expense, etc.