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Quiz 17 Investment Banking Questions and Answers

Question No 1

1. What do Investment Bankers do?

  • Advise for financing through public or private placements
  • Underwrite deals
  • Advise for M&A activities
  • All of the above

Answer: All of the above

Investment bankers typically advise and execute deals for public or private sector organizations, rather than individuals. During the 2008 economic crisis, this profession had come under severe criticism...

Question No 2

2. What are the typical activities undertaken by an analyst at an Investment Banking firm?

  • Preparing financial models
  • Preparing pitch decks for clients or investors
  • Updating pitch decks
  • All of the above

Answer: All of the above

An analyst typically does the grunt work for an investment banking firm. It will be less of client interactions and more of research and updation of models and pitches.

Question No 3

3. Suppose that the market price of Company X is 45 per share and that of Company Y is 30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:

  • 0.667
  • 1.0
  • 1.125
  • 1.5

Answer: 1.125

¾ of Stock X at 45 for 1 Stock Y at 30. Hence the ratio is
¾ *45/30 = 1.125

Question No 4

4. By using a __________, the firm can independently control considerable assets with a very limited amount of equity.

  • joint venture
  • leveraged buyout (LBO)
  • spin-off
  • consolidation

Answer: leveraged buyout (LBO)

A leveraged buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company's cash flow is the collateral used to secure and repay the borrowed money.

Question No 5

5. You prepared a DCF model for valuing an IPO ,What will be the value per share, if the company has 60 million outstanding shares?

Image
  • $ 95.00
  • $ 78.33
  • $ 79.17
  • $ 74.00

Answer: $ 78.33

Value of Equity = 3200+2300+250-1000-50 = 4,700 mn
Value per share = 4700/60= 78.33
Explanation
The Black Scholes model, is a mathematical model for pricing an options contract. It is used to value the ESOPs issued to employees as when the same as exercise, they will dilute equity and hence ESOPs value must be reduced from Equity

Question No 6

6. In Investment Banking, Valuation Models are highly sensitive to expected growth rates. This Sensitivity Analysis forms the core of the valuation exercise for IPOs . Uber is planning an IPO. In FY 18, the company currently has a fleet of 200,000 cars on its platform. Each Car makes 50 trips daily with average fare of 3$ Uber charges 20% of the collections as Platform fee. Assume 300 working days in a year. Uber’s competitor Lyft starts offering incentives to drivers and hence growth rate has decreased to 2% p.a. What would be the expected Revenue in FY 21?

  • USD 1.5 billion
  • USD 3 billion
  • USD 1.91 billion
  • USD 2 billion

Answer: USD 1.91 billion

Solution
FY 18 revenues from 200,000 cars = 200,000 * 50 * 3 *20% * 300 = USD 1.8 billion
FY 21 Revenues = 1.8*1.02^3= USD 1.91 billion

Question No 7

7. Which tools in Excel are best for undertaking a sensitivity analysis?

  • Scenarios and Solver
  • Data tables and Scenarios
  • Data tables and Goal seek
  • Scenarios and Data tables

Answer: Data tables and Scenarios

Experimenting with different values to observe the corresponding variation in results is required for financial modeling. Data Tables and Scenario Manager in Excel enable you when you have either single or multiple variables and you want to see the change in results.

Question No 8

8. Calculate the ROE of the company (rounded to nearest decimal) with the use of following information: EBIT = Rs.4500, Tax rate = 35%, Interest rate = 15%, Outstanding debt = Rs.10000, Equity value = Rs.20000.

  • 15%
  • 14%
  • 10%
  • 8%

Answer: 10%

Solution: PBT = EBIT – Interest = 4500-10,000*15% = 3,000PAT = PBT * (1-Tax) = 3000*(1 - 35%) =1,950
ROE= 1950/20000= 9.75% - rounded to 10%

Question No 9

9. A company has a D/E of 0.6. As per the balance sheet, the outstanding debt is Rs.10000 bearing an interest rate of 12%. The cash and cash equivalent is Rs.1500. The net income of the company is Rs.5500 and the tax rate is 30%. The depreciation and amortization amount is Rs.2500. Calculate the EV/EBITDA of the company. Consider the book value of equity same as the market value of equity of the company.

  • 5.48
  • 4.42
  • 3.49
  • 2.17

Answer: 2.17

D/E=0.6 ,Equity=16666.67
Debt=10000
Cash=1500
EV=25166.67
PAT=5500
PBT=7857.14
Dep=2500
Int=1200
EBITDA=11557.14
WV/EBITDA=2.17

Question No 10

10. If you are valuing a firm’s equity based on ‘Enterprise Value to Revenue Ratio’ of similar firms, which of the following is not relevant?

  • Revenue growth
  • Demand supply growth
  • Debt
  • EBITDA Margin

Answer: EBITDA Margin

The Enterprise Value-to-Revenue (EV/R) is easily calculated by taking the enterprise value of the company and dividing it by the company's revenue. It is useful for companies which are generating revenues but are still not generating profits...