Corporate Finance 101

Table of
Contents 01 02 03 04
Introduction Capital Business Mergers &
Markets Valuation Acquisitions

05 06 07
Debt Equity Careers
Financing Financing
Introduction
 Investment Investment
Banking Management

Tim Vipond
CEO
Corporate Finance Institute Corporate Corporate
Development & Finance
Strategy
Session objectives

Capital Markets Business Valuation Mergers & Acquisitions

• Understand the key aspects of • Describe the difference between • Understand the steps in the
investment banking (M&A advisory valuing a business using equity acquisition process, synergies, and
and underwriting) and enterprise value multiples transaction steps

• Outline the corporate funding life • Outline how a business can be • Evaluate an appropriate financing
cycle. valued using discounted cash flow structure for an acquisition

Equity Financing Debt Financing

• Outline the various types of equity • Describe different types of debt

finance financing, outline the impact of
leverage on returns, repayment
• Understand the role of private options
equity funds
Capital Markets
Who are the players in corporate finance?

Public Bonds or shares

accounting $
firms

“Sell side”
$
Contacts Contacts “Buy side”
Fund
Manager
$

Corporates Banks Institutions

Investors

Capital
What do capital markets do?

Secondary Wants Wants

markets to sell to buy

Stock
exchange/
OTC

Fund Investment bank Investment bank Fund

Manager Manager
Sales, trading Sales, trading
and research and research

Investment banks help facilitate the trade in shares and bonds.

The business life cycle
LAUNCH GROWTH SHAKE MATURITY DECLINE
-OUT Life cycle
$
extension

Sales

Cash

Profit

Time (years)
The corporate funding life-cycle

Debt funding

Level of risk

Sales

Business risk

Launch Growth Maturity Decline

Stage of the firm life cycle
Corporate finance

The term corporate finance typically covers two key areas:

M&A advisory Underwriting

Assisting in the negotiation and structuring Raising capital through selling stocks or
of a merger/acquisition bonds to investors (e.g. IPO)
Underwriting advisory services

Planning Timing and demand Issue structure

• Identify investor themes • Hot or cold issue market • Domestic or international

• Investment rationale • Supported by positive news-flow • Institutional investor focus

• Is IPO the • Investor appetite • Retail investor focus

• best option • Precedents and benchmark • Offer for sale

offerings
• Size of float and lock-up issues • Intermediaries offer
• Investor experience
• Preliminary view on investor • Introduction
demand
Types of underwriting

Types of underwriting commitment:

Firm Commitment Best Efforts All-or-none

The underwriter Underwriter If the entire issue

agrees to buy the commits to selling cannot be sold at
entire issue and as much of the issue the offering price,
assume full financial as possible at the the deal is called off
responsibility for agreed-on offering and the issuing
any unsold shares. price, but can return company receives
any unsold shares nothing.
to the issuer
without financial
responsibility.
Underwriting - the book building process

Prospectus
with price
range
Institutional
investor
commitment
@ firm price
Book of
demand
built
Price is
set to
ensure
clearing Allocation
Underwriting - the road show

The roadshow is an opportunity for management to convince investors

of the strength of the business cases

Areas that are critical include:

Funding
Management requirements
Strategy, both A thorough
structure, and purpose: Key Key
tactical and analysis of the
governance and competitors risks
long-term Cash in versus industry/sector
quality
cash out
Pricing the issue

Key issues in pricing

Price stability

Buoyant after market

Depth of investor base

Access to market
Pricing the issue

After market
price Under-pricing
performance
Under-pricing

There are two costs associated with a flotation:

Reduces the risk of equity overhang Ensures after market is buoyant, but

There is a temptation for the advising bank to under-price the issue - why?

this fails to make the best possible

Reduces the risk of equity Ensures after market is buoyant, returns for the current owners and
overhang. but could lead to profit-taking and
hence volatility.
The IPO pricing process

IPO
discount

Indicative maximum

Full value

10 to 15%
Pricing
range

Indicative minimum

• Relative valuation
• Absolute valuation
Business Valuation
Session objective

By the end of this session you will be able to:

Describe the difference between valuing a business using equity and enterprise value multiples

Outline how a business can be valued using discounted cash flow

Tools and techniques for valuing a business

Valuing a business for acquisition

Public company Discounted

Precedent transactions
comparatives cash flow

Equity multiples Stand-alone valuation

Enterprise value multiples Synergies

Enterprise value vs. equity value

Market value
of debt

EV/EBIT Enterprise
EV/EBITDA value
EV/Sales Market value
Price/Earnings
of equity
Price/Book
(market
Price/Cash flow
capitalization)
Unlocking the drivers of value

We can use the DCF growing perpetuity formula to unlock the drivers
of value:

Business strategy Organic growth?

Sales & marketing Growth through
Cost structure acquisition?
Asset utilization

Free cash flow x (1 + growth)

Present value =
Cost of capital - growth

Availability
Organic growth?
Risk
Growth through
Current capital
acquisition?
Macro factors
Drivers of value and price in more detail
Intrinsic Value
• EBITDA, expected growth
• Capital requirements
• Capital structure
• Cost of capital
• Income tax position
Synergies & Strategic Value
• Economies of scale
• Diversification
• Eliminate competition
• Entry into new markets
• Mgmt & employees
• Income tax synergies
• Related costs, timing & risks
Industry
Life cycle Transaction Structure
Structural changes
Competitive behaviour • Consideration
Barriers to exit/entry • Asset vs. Share
• Merger or joint venture
• IPO
• Break-up or spin-off
• Financial or M&A market conditions
• Regulation
Price Price versus Value
• Deal costs
• Process, packaging and presentation
• Negotiating positions
Company • Knowledge and information
Market share and position • Motivations
Technology • Legal or other restrictions
Competitive advantages
Brand name
Discounted cash flow valuation overview
Free cash flow
FV $100 $100 $100 $100 $100 $300*
x 1 x 1 x 1 x 1 x 1 x 1 x 1
(1+i)n 1.10 1.102 1.103 1.104 1.105 1.105

186
PV 91 83 75 68 62

2015 2016 2017 2018 2019 Terminal

value
Value of the firm = $565 million
* Value of FCF beyond 2019
Cost of capital

Net debt % net debt x Cost of debt = Contribution

Assets
Market
value % equity x Cost of equity = Contribution
of equity
Cost of capital

Widget example

$32bn 14% x 3.5% = 0.5%

$225bn
$193bn 86% x 9% = 7.7%

8.2%
Mergers & Acquisitions
Session objectives

Outline the steps in the acquisition process

Explain the difference between strategic versus financial buyers

Identify hard and soft synergies

Value financial synergies

Outline transaction costs

10 step acquisition checklist

10
9 Implementation
8 Financing
7 Purchase &
Sales Contract
6 Due
Diligence
5 Negotiation
4 Valuing &
Evaluating
3 Acquisition
Planning
2 Searching
1 for Target
Acquisition
Criteria
Acquisition
Strategy
Strategic versus financial buyers

Strategic buyers Financial buyers

Horizontal or vertical expansions Private equity

Involves identifying and delivering operating synergies Leverage for maximum equity returns

Hard synergies - cost synergies

Soft synergies – revenue synergies

Rival bidders

The vast majority of acquisitions are competitive or potentially competitive.

Companies normally have to pay a “premium”.

Companies normally have to offer more than rival bidders

To pay more than rival bidders, the company needs to be able to do more with the acquisition than the other
bidders.
Leverage and financial buyers

ABC Co. XYZ Co.

Net income = $10 Net income = $10
Return on equity = 20% Return on equity = 50%

Debt
$50 Debt
Assets Assets $80
$100 $100
Equity
$50 Equity
$20
Acquisition valuation process

1. Value the target as

2. Value synergies
stand-alone

Enterprise value • Sales (volume & price)

• Sales growth • EBIT margin
• EBIT margin o Product mix
• Operating tax o Overhead reductions
• Movement in • Operating tax
working capital o Tax efficiency
• Capital expenditure o Tax losses
• Working capital
• Capital expenditure
o Fully invested
Best practice acquisition analysis
1 2 3 4 5 6 7

Financial Transaction
synergies costs
Soft
synergies Value created
Net
Hard synergies
synergies

Consideration
Stand-alone (price paid)
enterprise Stand-
value alone value
Issues to consider when structuring a deal

Contract Antitrust
Transaction
environment
Business Market
plan conditions
Structuring
environment

Accounting Deal Securities

Transaction Preferred
character finance

Tax Corporate
Law

Competing
bidders
Financing for mergers, buyouts, & acquisitions

Senior debt

Subordinated debt

Equity
Debt repayment profiles

Mezzanine finance – high yield debt

Equal Balloon Bullet Bullet

amortizing repayment repayment repayment

5 years
Debt Financing
Session objectives

Describe different types of debt financing

Outline the impact of leverage on returns

Explain various debt repayment structuring options

Assessing debt capacity

Assessing debt capacity Balance sheet measures Cash flow measures

Level of EBITDA Debt to equity Total debt / EBITDA

Volatility and hence stability of EBITDA Complications include Senior debt / EBITDA

Acquisition
entry
cyclicality technology adjustment to goodwill Cash interest cover
barriers
assets

EBITDA-Capex interest cover

Capital stack

Senior debt

Subordinated debt

Equity
Senior debt overview

Revolver Typically represents 50 percent of funding

Senior debt
Term loan A 2.0x to 3.0x EBITDA

Term loan B
2.0x interest coverage

Term loan C
Typically provided by

Commercial Credit Insurance

Subordinated banks companies companies
debt

Equity
Leverage and return

Senior debt
Senior debt Three to five years

Equity
Equity IRR = 28%

This amount of equity invested up front delivers an adequate return

There is a funding gap to fill

This is filled with the subordinated debt.

Types of subordinated debt

Increasing Increasing
subordination return

Senior debt

High yield bonds

Subordinated debt

Increasing
Mezz warrantless dilution

Mezz warranted

PIK notes Subordinated

Vendor notes debt is used to
fill the funding
gap.
Equity
How much subordinated debt?

Subordinated debt holders will only supply so much debt.

Total debt / EBITDA ~ 5 to 6 times

xEBITDA / Cash interest ~ 2 times

Equity funding ~ 30% to 35%.

The appropriate financial structure has to be constructed within these constraints.

Credit ratings and high yield debt
Moody’s S&P Fitch DBRS

Aaa AAA AAA AAA

Aa1 AA+ AA+ AA (high)
Aa2 AA AA AA
Aa3 AA- AA- AA (low)
Investment grade
A1 A+ A+ A (high)
• Low risk
A2 A A A
• Low return
A3 A- A- A (low)
• Low fees
Baa1 BBB+ BBB+ BBB (high)
Baa2 BBB BBB BBB
Baa3 BBB- BBB- BBB (low)

Ba1 BB+ BB+ BB (high)

Ba2 BB BB BB
Ba3 BB- BB- BB (low)
High yield B1 B+ B+ B (high)
• High risk B2 B B B
• High return B3 B- B- B (low)
• High fees Caa1 CCC+ CCC+ CCC (high)
Caa2 CCC CCC CCC
Caa3 CCC- CCC- CCC (low)
- D D D
Mezzanine debt characteristics

Mezzanine is non-traded debt, which is subordinated to senior debt.

Bullet repaid

Pays a cash and accrued return

Can have equity warrants attached

Debt with warrants Convertible loan stock Convertible preference shares

Mezzanine returns

Warrants
3% to 10%
of post exit
value

Total
Accrued return
(IRR 14%
Contractual

interest
to 20%)
return

Cash pay
interest
Equity Financing
Session objectives

Outline the various types of equity finance

Explain the role of private equity funds

Design an appropriate exit strategy for a private equity firm

Types of equity

Senior debt
Typically represents 30 to 40 percent of funding

Private equity has 4 to 7 year exit strategy

Subordinated
Private Subordinated Investment
debt Management
equity funds debt holders banks

S/holder loans
Pref. shares Equity

CCPPO shares
Ordinary shares
What are private equity funds?

Private equity funds are pools of capital that invest in companies that represent an opportunity for a high rate
of return.

Private equity funds invest for limited time periods. Exit strategies include IPOs, selling to another private
equity firm, etc.

Private equity funds are typically split into two categories:

Buyout of LBO funds typically invest in more mature

Venture capital funds typically invest in early stage or businesses, usually taking a controlling interest and
expanding businesses that have limited access to leveraging the equity investment with a substantial
other forms of financing amount of external debt. Buyout funds tend to be
significantly larger than venture capital funds.
Exit considerations

Is the business
strategy
appropriate?
Is the structure What IRR will be
appropriate? achieved?

How soon does

exit need to take
place?

Is the
management What exit routes
team amenable are available?
to exit?

Who are the

potential
acquirers?
Typical exit routes for private equity
Trade sale

Total exit IBO

Share
repurchase

Flotation

Private
placement

Corporate
Partial exit
venturing

Corporate
restructuring
Shareholder loans

Shareholder loans are a means for private equity houses to invest sufficient equity into a buyout
situation, whilst still allowing management a significant equity stake.

Max debt
$30m

Enterprise
value $50m
Shareholder
loan - PIK
Equity $16m
$20m
Private equity $2m
Management $2m
Preference shares

The ‘norm’ is for private equity to subscribe for preference shares which are:
Terms
Have restricted voting
Redeemable Attract a fixed dividend
rights.

Preference shares are becoming less attractive as:

Issues
Change in tax Even if company has cash,
Not tax deductible like
credits on payment may not be made if
interest
dividends lack of distributable reserves.
Equity ratchets

actual versus
projected Used to increase or decrease private equity or
performance management's shareholding

repayment of
debt or
redemption of
preference
shares
Often used to
bridge
expectation gap
between investor
and investee.
Corporate Finance Careers
Career map Investment
Banking Private
Equity
Equity
Research
Portfolio
Management

Sales &
Trading

Banks Institutions Research

(‘Sell side’) (‘Buy side’)
Commercial
Banking

Corporate
Public Development
Corporates
Due Accounting
Diligence

Treasury
Transaction
Advisory

Audit FP&A
 Roles at banks

Banks Public Institutions

Corporates
(‘Sell side’) Accounting (‘Buy side’)

• Client facing / sales
component
• Capital Markets hire from
schools
• Retail hires at various points
• Long hours
• Competitive
• Quick career progression
• Mix of client or inward focus
• Hire from schools or from
other accounting firms
• Long / medium hours
• Competitive
• Clear career path
• More internally focused
• Hire from banks
• Hire grad schools students
• Long hours
• Competitive
• Quick career progression
• Internally focused
• Hire from banks, accounting
firms, institutions and
schools
• Hire across all entry points
• Less hours
• Competitiveness varies by
company
• Career progression varies
Prepping for a finance interview

You’re telling a story about yourself that will lead the interviewer to visualize you working in
their firm. Be clear on your story. Prep for your interview by identifying:

The people and firms that you’ve researched and/or spoken to

The stocks you are following

The specific classes you’ve taken which relate to the job you’re interviewing for

Any related activities (case competitions, investment competitions, investment banking competitions, conferences)

Any related awards or prizes you’ve won

The top 3 things that get you excited about this job
 Top five finance interview questions

Technical Questions Behavioral Questions

Walk me through the three financial statements Why do you want to work at this company?

How would you perform a valuation of a business?
Explain the time value of money to me in simple terms
How would you build a financial model?
Describe a time you worked as a team / leadership /
what’s one of your weaknesses?
What makes you a good fit with our corporate culture?

corporatefinanceinstitute.com/resources
Top five career hacks

1 Basic Advice

Join an investment club (at university, or outside)

Career Hack

Start your own club

Students: Ask the school to fund you

Alumni: Use Meetup.com

Top five career hacks

2 Basic Advice

Network with finance professionals, alumni,

LinkedIn etc.

Career Hack

Enroll in the CFA so you can attend CFA events and

see CFA job board
Top five career hacks

3 Basic Advice

Follow the markets – subscribe to Bloomberg,

Google Finance, Seeking Alpha etc.

Career Hack

Publish articles on SeekingAlpha.com

Free or Paid articles

Top five career hacks

4 Basic Advice

Participate in case competitions

Career Hack

Students: Enter NIBCC

Alumni: Attend ModelOff

Free exercises or attend the World Championships

Top five career hacks

5 Basic Advice

Take online financial modeling and courses

Career Hack

Build a model for the company you want to work

for

Use the templates and knowledge from the online

courses
www.corporatefinanceinstitute.com
Meet with people from the company to discuss, or
use it in an interview