Investment Banking Analyst Interview Questions - 2

9. What do you mean by unlevered beta?

Beta is a measure of market risk.

Unlevered Beta also called as Asset Beta is a risk measurement metric which compares the risk of a company with no debt to the risk of market. You can also say that it is the beta of a company when you don't consider its debt.

10. Why would you unlever beta?

Unlevering beta removes the debt effect in capital structure which let's you notice the risk of a company's equity compared to the market.

Secondly, while trying to make a market comparison with a company that has no beta or is not on the market, you can consider a comparable company and unlever its beta as a proxy for the unlisted company's beta.

11. What are the major reasons for companies to get into Mergers & Acquisitions?

Well, there can be various reasons for Mergers and Acquisitions. Some of the major ones being:

i.) Developing synergy - Merging the two companies leads to an overall improvement in performance as both companies are able to take advantage of each other's resources & strengths.

ii.) Growth oriented - Acquiring a competitor's business allows you to quickly grow your market share without doing a lot of work in setting up everything. You just buy the business for a certain price. This is also called horizontal merger.

iii.) Increase your supply chain power - When a business decides to buy its supplier or distributor, it is called vertical merger. Buying a supply chain partner helps you improve the price aspect of your product.

Buying a supplier allows you to save upon the margins that they were earning from you while buying a distributor allows you tap the market and take more cost-effective products to the customers.

iv.) Eliminate competition - You buy a close competitor to eliminate the competition that you might have to face in future. In this case the premium you pay is high because the company and its shareholders know their value and it is difficult to convince them.

The deal between Facebook and WhatsApp was one such deal.

12. What is the purpose of LBO?

LBO stands for Leveraged Buyout. The purpose of Leveraged Buyouts is to allow companies to make large acquisitions without needing to commit a lot of capital. The larger part of cost of acquisition is met through borrowed money.

The concept of LBO is pretty simple -

i.) Buy a company

ii.) Fix up the problems

iii.) Sell it off

13. How is LBO different from Mergers and Acquisition?

The major difference between LBO and M & A is that in an LBO you assume that the buyer would sell the target in the future.

14. What are the different steps you follow in Leveraged Buyout Analysis?

The major steps involved in the analysis of Leveraged Buyout are as follows:

i.) Assumption of Purchase Price

ii.) Creating sources and uses of funds - Sources tell us from where the money will come and Uses tell us where it will be spent.

iii.) Financial Projections - Of statements like Income Statement, Balance Sheet, Cash Flow mostly for a period of 5 years.

iv.) Making Balance Sheet Adjustments - to accommodate new debt and equity

v.) Making Exit Assumptions - Usually to be sold off after 5 years.

vi.) Calculating IRR (Internal Rate of Return) on initial investment - This helps you understand what you can expect to earn on your investment in this deal.

15. What can be your sources of funds in a Leveraged Buyout transaction?

The sources of funds in a LBO transaction could be:

i.) Revolving Credit Facility

ii.) Bank Debt

iii.) Mezzanine debt

iv.) Subordinated or High-Yield Notes - also called as Junk Bonds

v.) Seller Notes

vi.) Common Equity