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What is Investment Banking | A Primer

The moment you hear the term Investment Banking many perceptions and
questions may arise like

What exactly an Investment Banker do ?

What is the difference between an investment bank and commercial bank?

What are the prerequisite for being an Investment Banking professional ?

How much salary one can expect in this field of Investment Banking?

Is it true that Investment Bankers earn money in tonnes and their bonus is 3-4 times
that of their very handsome salary?

Investment Banker Analogy of a Property Broker


Let us first take an analogy of a property broker in order to understand
Investment Banking in an easier way..
A property brokers job is primarily two folds
1.

Help buyers find clients and interested sellers to buy the flat, negotiate the lowest
price, do the supporting paper work, ensure that the title is clear

2.

Help sellers find the clients and interested buyers to sell their flat, negotiate the
highest price, do the paper work, get the registration done etc
So how does property brokers earn commissions (maybe 1% to 10% of the
transaction value).
Now in this context think about Investment Bankers as Financial brokers.
Investment Bankers help companies raise capital for projects, expansion etc and
companies may look at various channels like Initial Public Offerings (IPO), Followon Public Offering (FPO), Private Placements etc. In addition, Investment Banking
job also includes Mergers and Acquisition Activities where they play the role of
Financial Brokers and help companies find suitable acquisition targets or suitable
buyers for their companies.
So how does Investment Bankers earn obviously commissions (maybe 1% to
10% of the transaction value). Are you thinking how much Investment Bankers
may have made in the recent Twitter IPO?
The above analogy is very simplified and in technical terms Investment Banking
involves the following

1.

Raising Capital through IPO, FPO, Private Placements, Bond Placements

2.

Underwriting and Market Making activities

3.

Mergers and Acquisitions

4.

Pitch Book Preparation

5.

Restructuring and reorganization


Our investment banking overview training provides detailed analysis of
Investment Banking roles, Investment Banking hierarchy, Investment Banking
jobs etc.

Investment Banking Definition


An Investment bank is a financial intermediary which helps companies, agencies
and government for raising money by issuing and selling securities in the
primary market. They help public and private companies in raising funds (equity
as well as debt) in the capital markets.

Investment Bankers Job and Roles


Investment Banker plays a crucial role virtually in every major Financial Process
in Financial Market ,So its definition is different for different people .Investment
Bankers are involved in lots of activities like assisting corporations or individuals
in raising money by underwriting,they are involved in Mergers and Acquisitions,in
Initial Public Offer (IPO), they can also connect people with potential good ideas
and investors etc.It is not the complete list of their activities but just major
outlines.
So in formal language if we want to define function of an Investment Bank then it
can be given as follows
1.

Underwriting of Securities Underwriting is a process which requires investment


bankers to purchase the securities at a predefined price and then they are supposed to
resell those securities in the market at higher price. In this process investment bank charges
fees or commission.In other words Investment Banks takes the burden of distributing the
security of a company and in case they fail to find enough investors who are interested in
buying the security ,the bank may have to hold the security on their own till the time
favorable market conditions emerges so they can earn the profit.So this process involves
some risk.

2.

Advisory Services Giving advisory services to the corporate for carrying


out mergers and acquisitions. Investment bank represents the side of the seller or the buyer
for carrying out Mergers and acquisition. In this the bank helps in determining a fair value for
both the parties involved in transaction.

3.

Sales & Trading of Securities Investment banking people link with buyers and
sellers for the purpose of buying and selling of securities from their own account for trading
the securities.

4.

Fund or Debt Raising for companies Investment Banks also help companies to
determine the best strategy or the best place to raise the debt and also helps companies to
prepare corresponding documents .The banks also takes care of regulatory compliance .

Investment Banking Basics

If you are a student or a professional wanting to gain entry into Investment


banking, then you must master the below mentioned core investment banking
skill sets
1.

Master Excel for Investment Banking In your career as an Investment Banker, you
would be using Excel day and night. So you should be very comfortable with using excel, not
only that you should know the advanced techniques and shortcuts, which would save a lot of
your time. The primary objective here should be that you are able to perform Financial
modeling using Excel efficiently.

2.

Accounting and Economics This includes the understanding of Financial Statement


Analysis. The typical approach to financial analysis includes professional measures like
Vertical Analysis, Horizontal Analysis, Ratio Analysis. However, before the calculation starts,
the key challenge is to get the right data from various sources. Additionally, the ratio analysis
done on wrong set of numbers will lead to results which will mislead the analysis. Hence, as
an analyst the primary challenge is to fetch the right data. The main focus should be to
populate the historical figures from the Annual Reports and create a proper analyst specific
infrastructure and perform ratio analysis. You must master these concepts on Accounting
and Economics as many technical questions may be asked in your Investment Banking
interview on these.

3.

Corporate Finance and Valuations Equity Valuation is the process of estimating the
potential market value of a financial asset or liability. Valuations are required in many
contexts including investment analysis, capital budgeting, merger and acquisition
transactions, financial reporting, taxable events to determine the proper tax liability, and in
litigation. You must learn two important methods of Investment Banking valuations (a)
Intrinsic Valuation Method (DCF) which means primarily determines the value by estimating
the expected future earnings from owning the asset discounted to their present value (b)
Relative value models determine the value based on the market prices of similar assets.

4.

Investment Banking Financial Modeling Financial Modeling includes professionally


forecasting future financial statements like Income Statements, Balance Sheets & Cash
Flows. Firstly we apply financial modeling forecasting techniques on a hypothetically built-up
case (Financial Modeling Using Excel). You must try to prepare a professional forecast of a
Live company in Excel and gain confidence in Investment Banking modeling.

5.

Mergers & Acquisitions Modeling & Pitch Book Mergers and acquisitions modeling
is one of the most important work of Investment Bankers. It include excel based accretion
dilution analysis, synergy analysis etc. In this you must learn how to merge two balance
sheets using Purchase method of Accounting, do synergy analysis, accretion dilution
analysis on practical case studies. Also, you must try to gain learn how to prepare Pitch
Book of merger modeling.

6.

Initial Public Offering (IPO) Modeling & Fund Raising Option All companies require
capital for investment in Projects, expansion, hiring etc. Investment Bankers help companies
raise capital through equity dilution like IPO, FPO or private placements. You should learn
about the basics of IPO modeling and how IPO valuations are done using Relative and DCF
valuations.

Investment Banking Band Chart


Topic

Why Investment Banker and Equity Research Analyst prefer Band


Charts?

Band chart Sample data

While working as a equity research analyst, we make various valuation related graphs. The
above data can be used to make the Price to Earnings Graph (PE graph). We can plot the
historical PE ratios. However, just the PE ratio graph may not give us the required
interpretation.
We may look at even a better version of the PE ratio graph known as Band Charts which is
essentially made on the same data.

What are band charts?


Band Charts are also made on the same data as the Ratio Charts. However, the Y-axis of
band charts provide the Price Per share as compared to PE ratio as given in the Ratio
Graph. This kind of a graph is one of the most important graphs used by Research Analysts
for their reports. The Band is drawn between the maximum PE and the minimum PE for the
stock.

The excel download explains you the basics of Band Chart. The following Steps are
employed for making the Band Chart
Step 1 Download from Bloomberg or other related databases, the Price and the forward
EPS for historical data
Step 2 Calculate the PE ratio for the historical data
Step 3 Calculate the average, maximum and the minimum of the PE ratios
Step 4 Find the implied price at average, maximum, minimum PE ratio using the following
formula

Price (corresponding to Average) = Average PE x (Historical EPS)

Price (corresponding to maximum) = Average PE x (Historical EPS)

Price (corresponding to minimum) = Average PE x (Historical EPS)

For better visual effects, you may like to add one PE line between maximum and
average (called as Upper) and likewise a line between minimum and average (called as
Lower)

Interpretation of Band Charts


Currently, the Price Line (colored in BLUE) is touching the Maximum PE Band Line of 20.2x.
If we trace backwards the Maximum PE Band Line till March02, we find the Price range at
which the stock would have traded. For example, as of March02, the stock would have
traded at Rs600/- if the PE of the stock at that point in time was 20.2x
For solved excel sheet click at below link :
[download id=465]

What is Financial Modeling?


Financial Modeling is a tool that can be used to forecast a picture of a security or a financial
instrument or a companys future financial performance based on the historical performance of the
entity. Financial Modeling includes preparing of detailed company specific models which are then
used for the purpose of decision making and performing financial analysis. It is nothing but
constructing a financial representation of some, or all, aspects of the firm or given security. OR it is
mathematical model of different aspects of financial health of a given company and this model can be
made on a simple not book paper or in excel, with later it is easily possible to analyse the impact of
different assumptions or change in value of various variables hence gives the more flexibility.
Financial modeling is a mirror which shows whether

An Organization is in need of additional funds (debt or equity) or not

how a business will react to different financial situations or market conditions

In which company we should make investment for better returns i.e. comparative analysis

Analyzing and defining the risk level

Has the company had a change in direction that is loss of customers, expansion etc.

Identifying of Strategic and Business Plans through finding strengths and weaknesses.

Its a technique to value and analyze Firms, IPOs and FPOs


A good financial model should

Be relatively simple

Focus on key cash flow drivers

Clearly convey assumptions and conclusions

Evaluate Risks
Financial Modeling forms a core of various other Finance areas like Equity Research,Investment
Banking, Credit Research etc. If you are searching for a Financial Modeling Online Course/Training
then you may consider one of our Financial Modeling courses here.

Applications of Financial Modeling


The purpose of Financial Modeling is to build a Financial Model which can enable a person to take
better financial decision.The decision could be affected by future cash flow projections , debt
structure for the company etc. All these factors may affect the viability for a project or investment in a
company.The Applications of Financial Modeling mainly includes the followings :

One applications of Financial Modeling may be Business Valuation that is deciding the fair
value for a business . Financial Modeling will help participants to reach to a price they are willing to
pay or accept for the selling business.

Second applications of financial modeling is Organizations decision making and scenario


preparation .Financial Modeling is used by organizations for future planning their long term goals
according to different situations that may arise.

To decide the Cost of Capital if a company is going to invest in a new project then Financial
Modeling for it will give analysis for debt/equity structure and expectation in return by investors ,thus
setting benchmarks for project to meet .

Capital Budgeting -Financial Modeling helps companies determine alloting resources for
major expenditure or investment etc.Purpose increasing the value for the firm.

Project Finance

Financial Statement Analysis


Basic Financial Analysis tools include

Common size financial statements

Analysis of Various Ratios

Trend or Pattern analysis

Industrial comparatives

Best Practices in Financial Modeling


In Financial Modeling it is desired that the working should be error less and should be easier to read
and understand for audit purposes. By following these key principles, model will be easier to navigate
and check, and reliable.

For most obvious results we need to follow the Firms standard format

Maintaining appropriate number of sheets

Using page breaks wherever required

Writing Executive Summary on top if desirable

Maintain versions of documents if future up gradations are expected


The following points should be kept in mind:
Spreadsheet Design

Using modular spreadsheet blocks will make changing each sheet easier without affecting
others.

Proper protection should be given to the sheets and workbooks from unauthorized usage.

Labeling sheets, columns and rows with their applicable headings so that files will become
easy to follow.
Better Document your assumptions

Assumptions documentation helps with validation & avoids misinterpretation.

Listing assumptions will be helpful for easier and quicker understanding.

Adding source data as well as calculations will provide a good map.


Use Linking and not hard-coding

Linking wherever required will be a good practice such that when the inputs change, the
outputs will be changed automatically
It will save lots of hassles at final stage or at working stage
Facilitate Data entry at one place only

Avoid retyping of data, entering it once as a source and referencing it will make good sense.

Its always better to link cell value rather than writing numeric value for calculations.
Good Practice is using Consistent Formulas

Using formulas and functions will be accurate and will save time.

Do not copy formula from one sheet to another as it will create links in files.

Avoid unnecessary blank columns and rows as this can be tedious at the time of making
tables or other charts.
Creating Templates will be beneficial
Formatting Charts

Be precise with chart axes scale

Creating a VBA Style Guide containing rules and details about coding standards is good
Format and Label Clearly

Its very important to format cells appropriately i.e. we should follow standard practices eg. we
should use symbols for currency , percentages values etc. , which will make model easier for reading.

In Financial Modeling clear labeling is very important to improve readability

Try using different background colors for distinguishing input areas and calculation parts

Common Financial Modeling Approaches


Financial Modeling Income Statement: Line Item Drivers
a) Financial Modeling Revenues Projections For most companies revenues are a fundamental driver
of economic performance. A well designed and logical revenue model reflecting accurately the type
and amounts of revenue flows is extremely important. There are as many ways to design a revenue
schedule as there are businesses. Some common types include:
1.

Sales Growth: Sales growth assumption in each period defines the change from the previous
period. This is simple and commonly used method, but offers no insights into the components or
dynamics of growth.

2.

Inflationary and Volume/ Mix effects: Instead of a simple growth assumption, a price inflation
factor and a volume factor are used. This useful approach allows modeling of fixed and variable costs
in multi product companies and takes into account price vs volume movements.

3.

Unit Volume, Change in Volume, Average Price and Change in Price: This method is
appropriate for businesses which have simple product mix; it permits analysis of the impact of several
key variables.

4.

Dollar Market Size and Growth: Market Share and Change in Share Useful for cases where
information is available on market dynamics and where these assumptions are likely to be
fundamental to a decision. For Example: Telecom industry

5.

Unit Market Size and Growth: This is more detailed than the preceding case and is useful
when pricing in the market is a key variable. (For a company with a price-discounting strategy, for
example, or a best of breed premium priced niche player) e.g. Luxury car market

6.

Volume Capacity, Capacity Utilization and Average Price: These assumptions can be
important for businesses where production capacity is important to the decision. (In the purchase of
additional capacity, for example, or to determine whether expansion would require new investments.)

7.

Product Availability and Pricing

8.

Revenue driven by investment in capital, marketing or R&D

9.

Revenue based on installed base (continuing sales of parts, disposables, service and addons etc). Examples include classic razor-blade businesses and businesses like computers where
sales of service, software and upgrades are important. Modeling the installed base is key (new
additions to the base, attrition in the base, continuing revenues per customer etc).

10.

Employee based: For example, revenues of professional services firms or sales-based firms
such as brokers. Modeling should focus on net staffing, revenue per employee (often based on
billable hours). More detailed models will include seniority and other factors affecting pricing.

11.

Store, facility or Square footage based: Retail companies are often modeled based on the
basis of stores (old stores plus new stores in each year) and revenue per store.

12.

Occupancy-factor based: This approach is applicable to airlines, hotels, movie theatres and
other businesses with low marginal costs.
b) Financial Modeling Costs projections Drivers include:

1.

Percentage of Revenues: Simple but offers no insight into any leverage (economy of scale or
fixed cost burden

2.

Costs other than depreciation as a percent of revenues and depreciation from a separate
schedule: This approach is really the minimum acceptable in most cases, and permits only partial
analysis of operating leverage.

3.

Variable costs based on revenue or volume, fixed costs based on historical trends and
depreciation from a separate schedule: This approach is the minimum necessary for sensitivity
analysis of profitability based on multiple revenue scenarios
c) Financial Modeling Operating expenses

1.
2.

General and Administrative: Generally treated as % of Revenues


Sales and Marketing: Generally modeled as % of Revenues. In some cases, it is actually a
revenue driver and not driven by revenues. For example, brokerage business or pure plays trading
and marketing firms.

3.

R&D: Generally R&D costs are treated as % of revenues.


d) Financial Modeling Interest expense (or Net interest expense):

1.

This is one of the few income statement items that is driven by balance sheet information. A
interest schedule is generally developed to i) calculate interest received on cash and short term
investments and ii) calculate interest expenses arising from all types of debt. Interest rate
assumptions are needed.

2.

Ending balance of previous year can be used to calculate interest expenses to avoid circular
reference in excel

3.

Average balance can be used as well (it will give circular reference though)
e) Financial Modeling Income taxes:

1.

Effective tax rate is generally used. Effective rate is calculated as Taxes paid / Pre-Tax
income.

2.

For future years, either the marginal tax rate equivalent to the country of incorporation is
taken or if the effective rate is much lesser than the marginal tax rate then during the initial years, tax
rate can be low but gradually would have to be moved to marginal tax rate. For example, In India,
marginal corporate tax rate is 33%.

Balance Sheet: Line Item Drivers (Assets)

Cash and Cash Equivalents:

Linked to cash from Cash Flow Statement


Accounts Receivable (Part of Working Capital Schedule):

Generally modeled as Days Sales Outstanding;

Receivables turnover = Receivables/Sales * 365

A more detailed approach ma include aging or receivables by business segment if the


collections vary widely by segments

Receivables = Receivables turnover days/365*Revenues


Inventories (Part of Working Capital Schedule):

Inventories are driven by costs (never by sales);

Inventory turnover = Inventory/COGS * 365; For Historical

Assume an Inventory turnover number for future years based on historical trend or
management guidance and then compute the Inventory using the formula given below

Inventory = Inventory turnover days/365*COGS; For Forecast


Other Current Assets (Part of Working Capital Schedule):

Modeled as % of sales
Fixed Assets (Property, Plant and Equipment)
Separate schedule is prepared taking into account various components

Ending Balance for PPE = Beginning balance + Capex Depreciation Adjustment


for Asset Sales

Balance Sheet: Line Item Drivers (Liabilities)

Financial Modeling Current Liabilities Projections

Accounts Payables (Part of Working Capital Schedule):

Payables turnover = Payables/COGS * 365; For Historical

Assume Payables turnover days for future years based on historical trend or
management guidance and then compute the Accounts Payables using the formula given below

Accounts Payables = Payables turnover days/365*COGS

Short Term Debt: Usually modeled as part of debt schedule

Accrued Liabilities: Kept constant most often; Can be modeled as % of sales

Deferred taxes: Kept constant most often; Can be modeled as % of sales

Other Current Liabilities: Can be modeled as % of COGS or as % of Sales


Long term Liabilities:
Deferred taxes: Kept constant most often; Can be modeled as % of sales

Post retirement Pension Cost: Kept constant most often

Long term Debt: Usually modeled as part of debt schedule (please refer debt
schedule on next page)

Key feature of the debt schedule is to use the Revolver facility and how it works so
that the minimum cash balance is maintained and ensures that the Cash account does not become
negative in case the operating cash flow is negative (Companies in investment phase who need lot of
debt in initial years of operation Telecom cos for example)

Overall range of Debt to equity ratio should be maintained if there is any guidance by
the management

Debt balance can also be assumed to be constant unless there is a need to increase
the debt

Notes to the accounts would give repayment terms and conditions which need to be
accounted for while building the debt schedule

For some industries, like Airlines, Retail etc Operating Leases might have to
capitalized and converted to debt. However, this is a complex topic and beyond the scope of
discussion at this point

Who should study Financial Modeling?


The Financial Modeling could be beneficial to a vast majority of peoples,Some of the cases
are summarized below

The aspirants of Financial Modeling Course can be everybody who wants to explore the world
of finance and get involved in money related decision making. These people can be Executives,
Business planning and strategy deciders, Managers working with Banks, Equity Researchers, Project

Managers , Research Analysts, Investment Banking people, Portfolio Managers, Commercial


Bankers, Risk Managers, Accountants, and all those who are part of the finance department in all
types of the firms

Its an added advantage for those people who are pursuing CA, MBA, CFA, FRM and
Commerce graduates

Also the candidates having Degree, Diploma, in technical fields like B .TECH or Engineering
who wants to make a career in finance

Any individual who just want to gain knowledge out of passion or curiosity
Now after knowing Who can do Financial Modeling Course now let us look at what all it need , to go
for a financial modeling training .

Who can do Financial Modeling OR Financial Modeling Prerequisites:


The following points could be advantageous :

Basics of Finance and accounting concepts (e.g. fundamental, valuation concepts etc.)
Thirst to learn financial conceptual terminology, general business procedures and self
confidence.
Usage of Excel
Though even if you know nothing about above mentioned knowledge then do not get dishearten it
simply means that you are supposed to take a course which starts from basics and covers MS Excel
in detail as Excel is very essential for Financial Modeling so there is no escape and this part should be
strong If you want to check out one such Online Course offered by us which covers everything
exhaustively then you can click here

What Is Equity Research?


In financial world most investors and investment decisions are totally dependent upon the
accurate information. So these decisions may include which company to be invested into,
when to come out from particular stock, what has to be stop loss etc. In order to find out
answers to these questions, there are special divisions formed under financial intermediaries
and these divisions or departments are called as Equity Research divisions.
In short equity research is a study and analysis of equities or stocks for doing investments. It
also includes research on commodities, bonds.

Who is involved in this Equity Research ?


The person who carries out this analysis is called an equity researcher, and his job includes
carrying out detail analysis of a company, entity or sector. The information provided by equity
researcher is used by investors (to decide how to allocate their funds), by Private

Equity firms, investment bank (to value companies for mergers, LBOs(Leveraged Buyout),
IPOs(Initial Public Offering) etc).
Generally an equity research department is divided into departments, to cover the various
sectors of market eg. banking, mining, I.T., energy, healthcare, consumer sectors.

What Exactly do We Do In Equity Research?


As discussed, the team/ individuals are delegated with the work of covering different sectors
in a market for performing research activity. The work consists of research, reporting and
projections.
Research work consists of analysis of company, competitors and the industry. Also
Forecasting or Projections for finding out future value of companies will be carried out.

Equity Research Methods


To carry out Equity Research analysis two methods are used namly

Fundamental Analysis

Technical Analysis
Fundamental Analysis Fundamental Analysis deals with finding out intrinsic worth of a
company stock, financial strength and comparing it with the market price to identify whether
that stock is more or less in weight age as compared to the market value. In technical
language whether the stock is overpriced or under priced.
For better results, analyst would suggest buying financial security if it is underpriced and sell
if it is overpriced because there is a possibility that the market price will be equal to intrinsic
worth of the stock.
Technical Analysis Technical Analysis is the study of past price changes in the hope of
forecasting future price changes. It is mainly considered by carrying out two factors which is
price and volume. It is generally observing the trend that how the stock price is moving i.e.
whether it is going upwards, downwards or in the same limit range. This is very simple
technique of predicting the price movement as per the past performance.

Steps in Equity Research Process


Equity research process comprises of multiple steps.
1.

Economic Analysis

2.

Understanding Industry or sector analysis

3.

Company Analysis for investment purpose

4.

Financial Statement Analysis of a Company

5.

Performing Financial and Valuation

6.

Writing Report showing the result of analysis

7.

Presentation or recommendation

Corporate Finance Theory


Very general meaning of CORPORATE FINANCE is Financial activities associated with
running a business and I am sure everybody is well versed with this definition of
Corporate Finance. But do you know which are the actual theories and practices that are
involved in real life Corporate Finance?
Here is the article which will give you a glimpse of real world Corporate Finance theory.

The questions which are answered by Corporate Finance are decision making
about capital, finding the sources of capital, decisions regarding payment of
dividend, Finance involved in Mergers and Acquisitions processes of the
companies.
Corporate finance includes planning, raising, investing and monitoring of finance
in order to achieve the financial objectives of the company.

Transactions involved in Corporate Finance

Raising seed, startup, expansion or development capital.

Mergers, demergers, acquisitions or the sale of private companies

Mergers, demergers, takeovers of public companies

Raising capital via the issue of other forms of equity, debt and related securities for
the refinancing and restructuring of businesses

Financing joint ventures, project finance, infrastructure finance, public-private


partnerships

Raising debt and restructuring debt, especially when linked to the types of
transactions listed above

Skeleton of Corporate Finance Theory


Capital budgeting (Investment analysis)

The capital refers to long-term assets.


The budget is a plan which details projected cash inflows and outflows during
future period
When a firm is in a plan of doing long term investments, for different purposes like, replacing
the old machinery, buying of new machinery, investing in new plants, developing new
products, research and developments, it needs to do analysis of whether these projects are
worth funding of cash through the firms capital structure. Hence this entire process of
analysis is called as capital budgeting. The capitalization structure may include debt, equity
and retained earnings.

Maximizing shareholder value

Financial management has the major goal of increasing the


shareholder value. For this managers must balance between the investments in projects
which will increase the firms profitability as well as sustainability and paying of the excess
cash in the form of dividends to shareholders.
With the resources and surplus cash managers can invest these for the purpose of company
expansion. So managers must to proper analysis to determine the appropriate allocation of
the firms capital resources and cash surplus between projects and payment of dividends to
the shareholders.

Return on investment

Whenever we do any investment in the project or in terms of cash


the purpose behind it is to earn on that investment. In corporate finance the same concept is
applied as investing in some asset such that it will yield an appreciation in value to the
organization. Return on investment is the term which is used to measure the return earned in
comparison with the capital invested.

Leveraged buyout
In terms of Mergers and Acquisitions, LBO is the very commonly used concept. LBOs can
have many different forms such as Management Buy-Out(MBO), Management Buy-In (MBI),
Secondary Buyout and tertiary buyout.

Growth Stock
A growth stock as the name suggests is a stock of a company which generates significant
positive cash flow and its revenues are expected to increase more rapidly than the
companys from the same industry.

Efficient-Market Hypothesis
The general meaning of this Efficient Market Hypothesis is, the financial markets are
efficient in terms of information. The three major forms of this hypothesis is: weak, semistrong, and strong.
The weak form titles that prices on traded assets reflect all past publicly available
information. The semi strong form reflects all publicly available information and that prices
instantly change to reflect the new public information. Strong form claims that the prices
instantly reflect even hidden information.

Capital Structure
The firm can use the self-generated fund as a capital or can go for external funding which is
obtained by issue of debt and equity. Debt financing off course comes with an obligation
which is to be made through cash flows regardless of projects level of success. Whereas
equity financing is less risky with respect to cash flow payments but has a consideration in
the ownership, control and earnings of the organization. Management should use optimal
mix in terms of capital structure with due consideration to the timing and cash flow.

Working Capital
In order to sustain ongoing business operations, corporate needs to manage its working
capital. Working capital is the subtraction of current liabilities from current assets. Working

capital is measured through the difference between cash or readily convertible into cash
(Current Assets) and cash requirements (Current Liabilities).

Assets
Assets on Balance sheet are classified as Current assets and long terms assets. The
duration for which certain assets and liabilities a firm has in hand is very useful.

Bank Loans
Depending on the duration for which the loan is availed the bank loan is classified as short
term(one year or less) loans and long term(known as term) loans.

Which are the sources of capital?

Debt capital
Debt can be obtained through bank loans, notes payable or bonds issued to the public. For
debt through Bonds requires an organization to make regular interest payments on the
borrowed capital until it reaches its maturity date after which it must be paid back in full. In
some cases, if the interest expenses cannot be made by corporations through cash
payments then the firm may also use collateral assets as a form of repaying their debt
obligations.
Equity Capital
Company can raise the capital through selling the shares in the stock market. Thus investors
which are also called as shareholders buys the shares with a hope of getting an appropriate
return (dividends and increased shareholders value) from the company. Thus investors
invest only into those companies which have positive earnings.
Preferred stock
Its a combination of properties which are not possessed by equity and a debt instruments.
These stocks do not carry voting rights but have a priority over common stock in terms of
dividend payments, assets allocation at the time of liquidation.

Cost of Capital
It is the rate of return which must be realized in order to satisfy investors. Cost of debt is the
return required by the investors who invests in the firms debt. Cost of debt is largely related
to the interest the firm pays on its debt. Whereas cost of equity is calculated as:
Cost of Equity = Risk Free Rate+Beta*Equity Risk Premium
The return from the project must be greater than the cost of the project in order for it
to be acceptable.
The weighted average cost of capital (WACC) is defined as the weighted average cost of the
component costs of debt, preferred stock and common stock or equity. It is also referred to
as the marginal cost of capital (MCC) which is the cost of obtaining another dollar of new
capital.
WACC = E/V*Re+D/V*Rd(1-Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firms equity
D = market value of the firms debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

Investment and project valuation

Projects value is estimated using a Discounted Cash Flow (DCF) valuation


and the highest Net Present Value (NPV) project will be selected. For finding out this, cash
flows from the project are measured and then they are discounted to find their present value.
The summation of these present values is NPV.
There are some other measures as well, including discounted payback period, IRR, ROI,
Residual Income Valuation, MVA / EVA.

Revenue, Expenses and Inventory


An organizations income is calculated by subtracting expenses from its revenue.
Not all the costs are considered as expenses, hence accounting standards have made
certain specifications regarding which costs to be allocated to income statement as
expenses and which costs to be allocated to inventory account and appear as asset on
balance sheet.

Financial Ratios
Certain financial ratios are very helpful in evaluating firms performance. These a ratios are
used to measure:
1.

Leverage

2.

Profitability

3.

Turnover rates

4.

Return on Investments

5.

Liquidity

Cash Cycle
The time between the date the inventory (or raw materials) is paid for ant the date the cash
is collected from the sale of the inventory is termed as Cash cytcle.

The formula for calculating the cash cycle is:


Days in inventory + days in receivables days in payables.
As cash cycle affects the need for financing it is very important from corporate point of view.

Dividend policy
Payment of dividend is mainly related with the dividend policy which is determined on the
basis of financial policy of the company. All the matters regarding the issue of dividends,
amount of dividends to be issued is determined by the companys excess cash after
payment of all the dues. If the company has surplus cash and if it is not required by the
business, in that case company can think about payment of some or all of the surplus
earnings in the form of dividends.

Sustainable Growth
Companys Sustainable growth rate is calculated by multiplying the ROE by the earnings
retention rate.

Risk Premiums
As we know the risk that a firm can face is Business Risk, Financial Risk and Total corporate
risk.
Business Risk : This risk associated with a firms operations. A measure for the business
risk is the asset beta, which is also known as unlevered beta.
Financial Risk: This risk is associated with the firms capital structure. It is affected by the
firms financing decision.
Total Corporate Risk: This is the sum of Business and Financial risks and it is measured
by the equity beta which is also called as levered beta.

Share Buyback
Sometimes, firm has extra cash on hand, so it may choose to buy back some of its
outstanding shares. This eventually has an added advantage, as firm has its own information
which market doesnt have. Therefore, a share buyback could serve as as ingal that the
share price has potential to rise at above average rates.

Mergers and Acquisitions


Based on some financial or nonfinancial (expansion) reasons companies may merge. The
target firm is acquired with the purpose that synergies from the merger will exceed the price
premium.

How Corporate Finance is associated with other areas of


finance?
Though the word Corporate Finance sounds very limited, it has an association with the
activities, and methodical aspects of a companys finances and capital.
In the area of Investment banking the transactions in which capital is raised for the
organization includes:

Seed capital, startup.

Mergers and Demergers of the companies.

Management Buyout (MBOs), Leveraged Buyout (LBOs)

Capital raising through equity, debt

Restructuring of the business


Financial Risk Management
Risk management has very important role in every aspect of business. Financial risk
management is related to management of corporate value in the event of adversarial
changes in stock prices , commodity prices, exchange rates, interest rates.

All you wanted to know about Corporate Finance

You would have heard a lot about this term Corporate Finance, if you belong to the finance
domain. Corporate Finance forms the most basic component of how a business is run. I am
sure you would be interested to know why. But before we dig into the details of this broad
area, lets take this example. Suppose you want to start a business. Let me ask you this,
apart from the skills and ideas that you would require to begin with it, what is the other most
basic element required? Yes its quite simple, the answer is money. Any economic activity
whether big or small requires finance, rightly considered to be the life blood of business.
There are various sources through which you would raise funds such as your personal
savings, borrowing from friends, family etc. You would not only require finance to start your
business as promotional finance but also as development finance to sustain in the long run.
This same concept applies to corporations. Read on to get a gist of all you wanted to know
about Corporate Finance and any inhibitions you have had regarding it.
Business involves decisions which have financial consequences and any decision that
involves the use of money is said to be a corporate finance decision. Corporate finance is
one of the most important part of the finance domain as whether the organization is big or
small they raise and deploy capital in order to survive and grow. There are various roles that
corporate finance plays, which are very interesting and challenging, one of the main roles is
that of being a finance adviser. Corporate finance in investment banks is different from
departments like sales or trading, as in they are not trading or making markets but rather
they help companies with certain financial situations. In simple words they act as a broker or
consultant when companies need to raise capital, are considering to merge or buy another
company or want to issue debt all of which may enhance the value of their company. This
can comprise helping to manage investments or even suggesting a mergers and
acquisitions (M&A) strategy. Along with this, the corporate finance people at the investment
bank will help the M&A deals go through as well.
In short as a corporate financier you would be working for a company to aid them find
sources through which funds could be raised, expand business, plan the future course of
actions, manage money and ensure sound profitability and economic viability.
The objective of maximizing the value of the corporation while minimizing the
risk is the soul of corporate financial theory.

Corporate Finance Principles


Lets understand the three most fundamental principles in corporate finance which are- the
investment, financing, and dividend principles.
Investment Principle:

This principle revolves around the simple concept that businesses have resources which
need to be allocated in the most efficient way. The first and important decision that needs to
be made in corporate finance is to do this wisely, i.e. decisions that not only provide revenue
opportunities but also saves money for future. This also encompasses the working capital
decisions such as the credit days to be allotted to the customers etc. Corporate finance also
measures the return on a planned investment decisions by comparing it to the minimum
tolerable hurdle rate and deciding if the project/investment is feasible to be undertaken.
Financing Principle:
Most often businesses are funded with either debt or equity or both. In the investment
decision that we earlier discussed once we have finalized the mix of equity and debt and its
effects for the minimum acceptable hurdle rate, the next step would be to determine if the
mix is the right one in the financing principle section.
The job here for the corporate financier is to make sure that the business has right amount
of capital and the right mix of debt, equity and other financial instruments.
In order to determine the optimal mix we need to study conditions where the optimal
financing mix minimizes the acceptable hurdle rate. We also need to analyze the effects on
firm value due to the change in capital structure. After we have defined the optimal financing
mix, next we need to consider would be whether it would be a long term or a short term
financing. We then include other considerations such as taxes and land up with strong
decisions on the structure of financing.
The risk return tradeoff Riskier assets yield higher expected returns.
Dividend Principle:
Businesses reach a stage in their life cycle where they grow and mature and the cash flow
they generate exceeds the expected hurdle rate. At this stage the company needs to
determine the ways of rewarding the owners with it. So the basic discussion here is that if
the excess cash should be left in the business or given away to the investors/owners. A
company that is publicly held has the option of either pay off dividends or buy back stocks.

Understanding the Concepts

Corporate finance is a very vast area of finance. There are so many fundamentals and
concepts which need you should have a knack of. Lets understand a few of them;
1.

Capital budgeting

Capital budgeting is the process of planning expenditures on assets (fixed assets) whose
cash flows are expected to extend beyond one year. Managers study projects and decide
which ones to include in the capital budget.

The capital refers to long-term assets.

The budget is a plan which details projected cash inflows and outflows during future
period.
The most common approaches that are used in project selection are discussed below:
Net Present Value (NPV):
This method discounts all cash flows (including both inflows and outflows) at the projects
cost of capital and then sums those cash flows. The project is accepted if the NPV stands
positive.
NPV = [CFt/ (1 + k) t]
Where CFt is the expected cash flow at period t, k is the projects where CFT is the expected
cash flow at period t, k is the projects cost of capital and n is its life.

Internal Rate of Return (IRR):


It is the discount rate that forces a projects NPV to equal to zero.
NPV = [CFt/(1 + IRR)t]
Note this formula is simply the NPV formula solved for the particular discount rate that forces
the NPV to equal zero. The IRR is the expected rate of return on a project. The NPV and
IRR approaches will usually lead to the same accept or reject decisions.
Payback period:
It is the expected number of years required to recover the original investment. Payback
happens when the cumulative net cash flow equals 0. The shorter the payback period, the
better it is. A firm should establish a benchmark payback period and reject the proposal if
payback is greater than benchmark.
2.

Time value of money

A dollar today is worth more than a dollar tomorrow


If you have a dollar today, you can earn interest on it and have more than a dollar next year.
For example, $100 of todays money invested for one year and earning 8% interest will be
worth $108 after one year.
Annuity
An Annuity is a bunch of structured payments or equal payments made regularly, like every
month or every year
Perpetuity
A perpetuity is a special kind of annuity it has an infinite number of cash flows, all of the
same dollar amount. Thus, it is an annuity that never ends!
3.

Cost of capital

Capital is an essential factor of production, and has a cost. The suppliers of capital require a
return on their money. A firm must evidently ensure that stockholders or those that have lent
the firm money, such as banks, receive the return that they seek. The cost of capital is
significant for a firm to calculate, as this is the rate of return that must be used when

evaluating capital projects. The return from the project must be superior than the cost of the
project in order for it to be acceptable.
One of the methods to calculate the cost of capital is Weighted Average Cost of
Capital (WACC). The weighted average cost of capital (WACC) is defined as the weighted
average cost of the component costs of debt, preferred stock and common stock or equity. It
is also referred to as the marginal cost of capital (MCC) which is the cost of obtaining
another dollar of new capital.
4.

Working capital management

Working capital management involves the relationship between a firms short-term assets
and its short-term liabilities. The goal of working capital management is to ensure that a firm
is able to continue its operations and that it has adequate ability to satisfy both maturing
short-term debt and upcoming operational expenses. The management of working capital
encompasses managing inventories, accounts receivable and payable, and cash.
5.

Measures of leverage

Leverage, in the sense we use it here, refers to the amount of fixed costs a firm has. These
fixed costs might be fixed operating expenses, such as building or equipment leases, or
fixed financing costs, such as interest payments on debt. Greater leverage leads to greater
variability of the firms after-tax operating earnings and net income.
With this we have touched upon the important concepts of corporate finance. There is lot
more to learn in this vast area.

Corporate Finance Career Overview

As we all know that business make money which has to be managed well, which is when
corporate finance team comes into picture. Corporate finance professionals are accountable
to manage the money of the organization i.e. to know from where to source it, deciding how
to spend it to get the maximum returns at the lowest possible risk. They seek to find ways to
ensure flow of capital, increasing the profitability and decreasing the expenses. They have to
monitor the other departments on their expenditure and if the company is in a position to
take the risk of additional expenditure. They explore the best ways to help company expand
whether it is through acquisition or investing internally.
Well there is a different career profile of corporate finance in Investment Banks, here the
corporate financiers must not only be aware about the finance world, but also have clear
viewpoints on investing, stocks and how to value companies. They can use their creativity
here by listening to what the client wants to achieve and then suggesting interesting and
potentially revolutionary ways they can go about making their thoughts a reality. Yes, the
corporate finance team does get a lot of the glory and while salaries can go sky high, youll
have to work hard for it.
Are you thinking to pursue career in corporate finance and interested to know more on this?
Read this article on Corporate Finance Jobs.
A career in Corporate Finance is quite challenging, and the demand for this field is
accelerating with time. It has great career prospects if you feel you would enjoy doing all that
we have discussed above. Hope this would have helped you in understanding all you
wanted to know about Corporate Finance. All the Best!!!

All you wanted to know about Corporate Finance Infographics

Corporate Finance Jobs

What do you understand by the term Corporate


Finance? Are you thinking to pursue career in corporate finance? Interested to know what
the term actually means??? So lets get you started with the meaning of Corporate
Finance. Your Job description for Corporate Finance job will mainly include working for a
company to help it raise money to run the business, expand the business, undertake
acquisitions, manage cash and plan for the future of the company. While doing so you might
work for a large MNC or a smaller company with high growth prospects. In such cases your
problem-solving skills will be handy all the time. Your main job will always be to create value
for the company.
You can say that corporate finance jobs are relatively stable. Your performance is always
looked upon but this does not only mean that you should be the number one salesman for
the company or you are always getting good deals. Rather the key to performing well in
corporate finance is to work with vision and value creation for the company, keeping in mind
the long term prospects.

Benefits of working in corporate finance jobs

You will become a team player which help you work with people

Tackling business problems will make you ready for any challenges.

Opportunities to travel and meet interesting people.

Also the packages offered are generally quite good.

Corporate finance Job Positions


Financial Analyst
Your duties as a financial analyst will include

Determining financing needs

Analyzing capital budgeting projects

Financial planning

Analyzing possible acquisitions and asset sales if any

Visiting credit agencies to explain your firms position

Working on budgets

Analyzing competitors

Preparing and implementing financial plans,

Monitoring the market price of your firms securities


Thus you will be assigned to work in areas like revenue, planning, capital budgeting or
project finance. It is indeed a challenging job which requires good analytical skills, computer
skills.
The most important thing is that you need to have absolute passion for finance with a broad
understanding of concepts.

Treasurer
Your JD as a treasurer will involve supervision of Treasury department. Treasury Department
is involved in financial planning, raising funds, cash management and acquiring and
disposing of assets.
This position commands both analytical skill and the ability to manage and motivate your
colleagues.

Credit Manager
A Credit Manager establishes policies for granting credit to suppliers, sets procedures for
collecting credit and considers whether to securitize receivables.
You need a thorough understanding of the financial statements and good knowledge of your
customer.

Cash Manager
Following will be your duties if you are a cash manager

Establishing relationships with banks.

Managing short-term credit needs.

Ensuring sufficient cash for working capital needs.

Putting excess cash into use.


Your job will be detail oriented and requires good ability to negotiate.

Benefits Officer
Excited to be a benefits officer, but dont know what you JD is? Here is a list of things on
which you will work upon

Managing pension fund assets

Setting up employee plans

Determining health care benefits policies

Working with human resources to set up cost-effective employee benefits.


If you become a Benefits Officer be sure that you have sound finance knowledge,
knowledge of human resources management and a good understanding of organizational
behavior.

Real Estate Officer


As a real estate officer you will be finding real estate locations for a company, negotiating on
lease agreements, acquiring real estate and valuating properties.
This job requires a good understanding of finance and real estate.

Investor Relations Officer


Your major duties will be

Dealing with the investing public.

Responding to queries from institutional investors.

Issuing press releases to explain corporate events.

Organizing teleconferences with investors.


This challenging job involves constant contact with top-level executives. You also need to
have understanding of finance and public relations.

Controller
A controller is mainly involved in financial planning, accounting, financial reporting and cost
analysis. You will also get involved in property, revenue, benefits, derivatives, lease and joint
interest accounting. You may also work on creating and forecasting models to project
revenues and costs.
You really require an extensive accounting experience to get this position.

The story of a Corporate finance Job!!!


Having known the various positions that are offered for a corporate finance job, let us now
understand some important points before you get into such jobs.

Team Players wanted


Corporate Finance jobs demands that you are team player, whether you are at a higher or a
lower management level. At the higher level, maintaining relationships is critically important.

Be Positively Different
Always remember that if you are good at your job then you can create enormous value.

Job with a bright future indeed!!!


Hot job categories include international and operationally-oriented positions. Hot industries
include manufacturing, high-technology, environmental management services and
distribution.

Its a world for Strategic and Global Thinkers!!!


Top CEOs will always want people who are strategic thinking, having fresh perspective, and
honesty. Hence the demand for executives who can formulate strategies and bring change
on a global scale is bound to increase.

Door Wide Open to Women


Women have made a dynamic entry in this corporate finance world and have built rapid
inroads to various corporate finance jobs.

Rising Packages
Pay throughout corporate finance areas is increasing. The compensation includes salary,
bonus, stock options exercised etc.

Be sure to brush up your Negotiation Skills


A key skill for financial professionals is the ability to negotiating. If you are able to make your
clients at ease at the negotiating table, while still getting a good price, then you are
invaluable.

Value-Based Management
Corporate finance jobs demands the professionals to get involved in value based
management. Here they find out how and where the shareholder value is being created in
each of a companys activities. Some of the most innovative firms are now using value
management.

Integrated Risk Management


There is growing attention to integrated methods of risk and liability management. Many
firms have distributed risk management activities where each division or plant can hedge
away price and interest rate risk.

Challenges must drive you!!!


Its all about taking challenges and getting the desired results.

Leadership Skills
Companys want more and more leaders. The financial leaders should have experience with
the dynamics of the financial markets and be innovators in that market as well. He should be
a strategic planner, a problem solver and an innovative leader.

Corporate Finance isnt only Bean Counting


The disparaging view of finance professionals as bean counters is changing fast, this
means that the demand for smart, communicative and thoughtful people in finance positions
is bound to continuously in the future.

Corporate finance jobs List of Job Portals

Naukri

Times Jobs

Monster India

Placement India

careerbuilder

Shine

Jobs DB India

Career Age

Corporate Finance Salaries


Salaries for the corporate finance jobs may vary according to the region and firm but the
general overview is as follows.

Starting salaries in corporate finance with a bachelors degree may range from
$35,000 to $50,000.
Starting salaries with an MBA degree may range from $55,000 to $80,000.

Entry level job with a bachelors degree will give you a position of junior financial
analyst.

Entry level job with an MBA degree will give you a position of a financial analyst.

Example of Corporate Finance Job Description

Advise on how to meet targets and create investment capital

Create financial models to predict outcomes

Negotiating and structuring financial details

Liaise with all parties involved in transactions

Preparing legal documents and prospectuses

Assessing and predicting financial risks and returns

Contribute to bid proposals and formal presentations


Person Specifications required are as follows

Strong financial modeling skills

Excellent reporting skills

Ability to make recommendations wherever possible.

Education Background

Engineers or graduates with knowledge of Financial Modeling

MBA

CFA also preferred


We hope that this article on corporate finance Jobs have added some value to you. So
looking at the various mentioned job positions as above, start analyzing where you fit well
and get your journey started.