### Quiz 17 Investment Banking Questions and Answers

#### Question No 1

### 1. What do Investment Bankers do?

##### Answer: All of the above

#### Question No 2

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

##### Answer: All of the above

#### 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:

##### 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.

##### Answer: leveraged buyout (LBO)

#### 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?

##### 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?

##### 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?

##### Answer: Data tables and Scenarios

#### 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.

##### 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.

##### 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